Is business insurance mandatory for IT contractors?

Many contractors take out business insurance due to a contractual requirement or to provide peace of mind.

However, are you legally required to have specific types of insurance in place?

Which insurance must you have?

Many contractors think they must take our PI, employers and public liability cover.

This is not always the case in reality.

However, there are compelling reasons why contractors take out cover, even if it is not a legal requirement.

Professional Indemnity insurance

Professional indemnity insurance protects you from client claims for negligence, unintentional intellectual property breaches, and loss or damage to client data.

Although not a statutory obligation, PI cover is often a contractual requirement. You must usually provide proof of coverage before starting a new contract.

A PI policy can also provide you with cover into the future if you stop contracting—’run off’ cover. If you need cover for previous work, you can purchase ‘retroactive’ cover.

Read our guide to retroactive and run-off PI cover.

Public liability insurance

Public liability insurance will cover you against claims from third parties for any property damaged during the course of your work.

There is no legal requirement to take out this type of cover, but some clients insist on it.

Employers’ liability insurance

Employers’ liability insurance will cover your business if an employee becomes ill or is injured in the workplace due to your negligence.

This is the only type of business insurance that is a statutory legal requirement – although some businesses are exempt.

Until 2005, it was a legal requirement to have adequate EL cover; however, if you run a limited company with a sole employee who owns 50% or more of the share capital, cover is not mandatory.

Tax investigation cover

Tax investigation insurance covers you for the costs of professional representation in the event of an HMRC tax investigation.

Although often associated with IR35 investigations, it also covers all of the other types of business tax, including VAT.

For a more substantial premium, you can also get cover for any tax liabilities you are found to owe following an inspection.

Taking out tax investigation insurance is not compulsory but offers peace of mind at a competitive price.

So why take out cover even if it’s not mandatory?

If a client requires adequate insurance coverage before starting a contract, you must do so for commercial reasons.

There are also some other reasons why taking out insurance is generally thought to be a good idea for contractors:

Protect your company against financial risks

As a limited company contractor, you are responsible for protecting your business against financial risks. It is one of your duties as a company director.

Competitively priced bundles

Premiums for a business insurance “bundle”—including PI and business liability cover—are very competitive in the contracting sector. For a few hundred pounds, this provides peace of mind.

IR35 – ‘In business on your own account’

Most ‘real’ businesses have some kind of insurance in place. Employment status experts often say that having business insurance cover indicates that you are in business on your own account (in the IR35 sense).

IR35 – substitution

The right to provide a substitute is a key ‘outside IR35’ indicator. Some commentators suggest you need EL insurance in place to cover this eventuality. It all depends on your contract wording.

Umbrella contractors usually have automatic cover

If you work via an umbrella company, you should receive automatic professional indemnity and business liability cover as soon as you sign up. Ask your account manager for details of the umbrella’s group policy.