Many contractors take out business insurance due to a contractual requirement or for peace of mind. But which policies are you legally required to have, and which are simply recommended?
Many contractors think they must take out PI, employers and public liability cover. This is not always the case in reality.
The only policy that is a statutory legal requirement in some circumstances is employers’ liability insurance.
Public liability and professional indemnity are not legally required, but clients often insist on them in contracts.
In practice, some clients will require all three: PI, public liability and employers’ liability.
There are still compelling reasons to take out cover even where it is not a strict legal requirement. The sections below explain each type in turn.
Employers’ liability insurance
Employers’ liability insurance protects your business if an employee becomes ill or is injured in the workplace due to your negligence.
An insurer will pay medical costs and damages, as well as the legal fees associated with any claims made against you.
If you intend to employ anyone via your company (rather than purely on a business-to-business basis), you must take out EL cover. This obligation is contained in the Employers’ Liability (Compulsory Insurance) Act 1969.
All businesses must have £5m of cover in place, although most insurers provide £10m as standard. If you are not adequately covered, you could be fined up to £2,500 for each day your business remains uninsured.
Importantly, most professional contractors are excluded from this provision. Following a change to the law made in 2005, some businesses no longer have to take out insurance:
Limited companies with a sole employee where that employee owns 50 percent or more of the share capital.
Sole traders who do not have any employees, or only employ close family members.
Despite the lack of a legal requirement in these cases, many limited company contractors choose to take out employers’ liability cover anyway, and some clients will ask for it in the contract.
Public liability insurance
Public liability insurance covers you against claims from members of the public for property damage or personal injuries caused as a result of your trading activity. The official definition is: the insurance of liability for accidental bodily injury or damage to the property of third parties.
Specifically, it will cover the costs of:
Legal fees
Compensation claims
Cost of repairing any damage
What scenarios does public liability protect you from?
A public liability policy protects your company from claims for third party injuries or property damage that result from its operations and the actions of its employees.
Examples where public liability insurance does apply:
A potential customer suffers an injury by tripping over cabling in your company’s premises.
One of your company’s employees accidentally damages a client’s server while working on-site.
You run an IT training course. An overhead projector falls on an attendee, causing an arm injury.
Public liability covers members of the public and third party property. It does not cover you, the business owner, or your employees. For example:
Your employee injures himself while working for your business. Employers’ liability insurance covers this type of claim.
You damage your own computer. You need equipment cover for this type of eventuality.
Is public liability a legal requirement?
No. There is no legal requirement to have public liability cover. However, it offers peace of mind, is inexpensive for low-risk occupations, and clients often stipulate that cover is needed as a contractual condition.
The ICAEW notes that PI and PL are common requirements across professional services – if you’re an accounting contractor, for example.
How much cover do you need and what does it cost?
Insurers typically quote £1m or £2m of cover, with options up to £10m. Premiums depend on your claims history, the nature of your work, headcount and turnover.
IT contractors are generally considered low risk, so premiums are typically competitive.
If you are an umbrella contractor, make sure your provider has comprehensive business insurance in place. Ask your account manager if you are unsure.
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 usually a contractual requirement for professional contractors.
You will usually need to provide proof of cover before starting a new contract.
A PI policy can also provide protection into the future if you stop contracting via run off cover. If you need cover for previous work, you can purchase retroactive cover.
Tax investigation cover (IR35 and other HMRC enquiries)
Tax investigation insurance covers the costs of professional representation in the event of an HMRC enquiry.
Although often associated with IR35, it can also cover other business taxes, including PAYE and VAT. HMRC regularly conducts compliance checks, and enquiries can be time-consuming and costly.
Understandably, many contractors purchase IR35 insurance to protect themselves in case HMRC challenges their status.
Over the years, a specialist market has developed. The leading provider is Qdos, which offers cover for representation costs during enquiries and, at higher tiers, the potential tax, NIC, interest and penalties if a liability is found.
Some IR35 Insurance FAQs
I’m an umbrella employee. Do I need cover? If you contract via an umbrella company, you already pay full employment taxes, so IR35 is not an issue. If you have worked via your own company recently, cover may still be worth having, as HMRC can look back several years.
I’m not affected by IR35, so why consider tax investigation insurance? You may still want protection for enquiries into previous tax years and for other HMRC checks beyond IR35.
So why take out cover even if it is not mandatory?
If a client requires adequate insurance coverage before starting a contract, you will need to comply for commercial reasons. There are other reasons why taking out insurance is generally 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, typically 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 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 that employers’ liability insurance is necessary to cover this eventuality. It 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 when you sign up. Ask your account manager for details on the umbrella’s group policy.
Client contracts often require insurance. Even where the law does not mandate it, many clients will insist on PI, public liability and sometimes employers’ liability as standard conditions before you start work.
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