Are contractors legally obliged to take out business insurance cover?

Many contractors are contractually obliged to take out business insurance cover, whilst others take out tax protection or business liability insurance for their own peace of mind.

However, are you legally required to have business insurance cover as a contractor?

Which insurances must you have?

Many contractors think that they must take our PI, employers’ and public liability cover. This is not the case, although there are compelling reasons why contractors do take out cover, even if it is not a legal requirement.

  • Professional indemnity insurance, which covers you for negligence, unintentional intellectual property breaches, and loss or damage to client data, is often required by end clients before you sign up for a contract. It is not always a requirement, however, but with highly competitive premiums available, many contractors opt for PI cover – often as part of a broader business insurance package. Also read our guide to retroactive and run-off PI cover.
  • Public liability insurance will cover you against claims from third parties for any property damaged during the course of your work. Again, there is no legal requirement to take out this type of cover, but some clients may insist on it.
  • Employers’ liability insurance will cover a business if any of its employees become ill, or are injured in the workplace, due to the negligence of the employer. 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, you are no longer legally obliged to have cover.
  • Tax investigation insurance (often referred to as IR35 insurance) will cover you in the event of an HMRC tax investigation (typically a PAYE compliance visit or enquiry). This will cover the costs of professional representation. For a more substantial premium, you can also get cover for any tax liabilities you are found to owe as a result of the inspection. Again, taking out tax investigation insurance is not compulsory.

So why take out cover?

Clearly, if a client requires you to carry adequate insurance cover before starting a contract, you must do so for obvious reasons. There are other reasons why taking out insurance is generally thought to be a good idea for contractors:

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

2. A ‘real’ business would typically have insurance cover. Employment status experts have always said that having business insurance cover is one (of many) indicators of ‘self-employment’ (in the IR35 sense).

3. Having adequate business insurance cover in place is now considered best practice by agencies, clients and other service providers.

4. Although employers’ liability insurance is not legally required for many contractors, many commentators point our that you need EL cover in place in case you use a ‘substitute’. The right of substitution is key factor in determining the IR35 status of a contract.

5. And finally, if you’re working via an umbrella company, chances are you will receive automatic professional indemnity and business liability cover as soon as you sign up.

Further information

You can find out more about the key business insurance types within our insurance section, with further information on income protection, life cover, critical illness and private medical insurance.

For quotes, try our long-term insurance partner, Qdos.

About the Editor

  • James Leckie

    James is an experienced business and finance writer. He studied economics and worked for large companies including British Airways, Citi and JP Morgan before working as a data analyst IT contractor in the late 1990s and 2000s. He founded Contract Eye in 2006 and also writes widely for a number of popular business sites. Connect with James on LinkedIn.

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Last updated: 12th August 2023