A guide to professional indemnity insurance for contractors

While professional indemnity insurance isn’t a legal requirement, it’s a must if you’re a contractor.

Most clients won’t let you anywhere near a project if you don’t have a professional indemnity insurance policy in place, because it protects them should something go wrong.

More importantly, though, professional indemnity insurance protects you.

So how does professional indemnity insurance work? And why should you buy a policy, even in the very unlikely event that you work with clients who don’t require it?

Contents

• What is professional indemnity insurance?
• How does PI insurance work?
• Who needs PI cover?
• How PI protects your business
• IR35 and PI insurance
• How much cover do you need?
• Retroactive and run-off cover
• How to pick the right PI policy
• Nobody makes mistakes on purpose
• How to get a PI quote

Professional indemnity insurance for contractors

You can take out industry-leading PI insurance from just £13.50 per month via Qdos. We’ve worked with the Qdos team at Contract Eye for over 17 years.

How does professional indemnity insurance work?

Professional indemnity insurance pays your legal costs if a client sues you because your work didn’t meet their expectations. It covers your solicitors’ fees, court costs, and any compensation the court orders you to pay if your client wins the lawsuit, including:

• Your client’s solicitors’ fees and court costs
• Direct damages — the money the client lost as a direct result of a mistake you made on the job
• Wider damages, such as compensation for harming their reputation or future earnings the client will lose out on as a result of your mistake

What does PI cover in practice?

Professional indemnity insurance policies primarily cover negligence. This is when you make a mistake on the job, such as giving inaccurate advice or installing the wrong software.

That said, many policies also cover you if the client sues because you:

• Lost their data or documents
• Broke confidentiality, for example by copying someone you shouldn’t have on an email
• Said something that the client feels has harmed their reputation
• Missed a deadline or broke some other condition of your contract

Who is professional indemnity insurance for?

If you work through a good umbrella company, you should already be covered by a professional indemnity policy. But if you contract through your own limited company, you’ll need to arrange cover yourself.

Professional indemnity insurance is especially useful if your job involves an element of subjectivity, for example, because you give your clients advice, or produce designs or other creative assets. This is because subjectivity makes it more likely that you might not see eye to eye.

Client disagreements can happen on any project and in any job. So, as a rule, if you sell professional services through your own limited company, having professional indemnity insurance is probably a good shout.

How does professional indemnity insurance protect my business?

• Firstly, it ensures you don’t end up in a financial black hole if a client sues.
• Secondly, it helps show HMRC that you’re outside the scope of IR35.

A small price to pay for peace of mind

While not as common in the UK as the US, malpractice lawsuits can and do happen, and the financial fallout can be devastating.

Courts can award direct damages in excess of £1 million. Throw solicitors’ fees, court costs (yours and your client’s, if the client wins), and wider damages like loss of future earnings into the mix, and there’s no way the average small business could ever possibly recover.

Even if you win the lawsuit, you still need to hire a solicitor and may have to pay some court expenses up front. Your case may take several months or even years to be decided, so you may be out of pocket for quite some time.

With professional indemnity insurance, you needn’t worry about where you’ll find the upfront money or what will happen should you lose the case. Your insurer will take care of it in exchange for a small yearly fee.

IR35

Whether IR35 applies to you or not depends on many factors, but having a professional indemnity insurance policy can help strengthen your case for being legitimately self-employed and outside its scope. This is because the fact that you need insurance shows that, unlike an employee, you’re taking on some financial risk.

Seb Maley from Qdos says that not having professional indemnity insurance may work against you:

…we have had cases before where, during an enquiry, the inspector identified that the contractor didn’t hold PI insurance… Because of that, the inspector suggested that the contract wasn’t a true representation of the reality of the arrangement, and so would need to delve deeper …

Following the introduction of the ‘Off Payroll’ (IR35) changes in April 2021, taking the small, relatively inexpensive step of having a professional indemnity policy in place could save you a lot of grief and money down the line.

How much professional indemnity cover do I need?

Nine times out of ten, your client will specify how much you’ll need to be insured for. This could be as low as £250,000 per claim or as high as £5,000,000 per claim or more. If your contract doesn’t specify how much you should be insured for, think about the following:

• How big is your fee?
• What’s the project worth overall? Beyond your fee, your client may also ask for wider damages, including loss of future earnings.
• If you made a mistake, how much would it cost to set things right, in the worst-case scenario?
• The cost of solicitors’ and court fees. Bear in mind that, alongside your court costs, you may have to pay some or all your client’s costs too if you’re sued and you lose.

Retroactive and run-off cover

Professional indemnity insurance does not just protect you against claims arising from your current contract. Claims can also arise years after work has been completed, which is why retroactive and run-off cover are so important.

Retroactive cover

Protects you against claims relating to work you carried out in the past.

This is particularly relevant in roles where problems may not surface right away, such as IT consulting, engineering, or financial services.

When you switch insurers, it is important to ensure your new policy includes backdated cover so earlier work remains protected.

Most contractor policies include this as standard, but it is always worth checking, especially if you have had gaps in cover.

Run-off cover

This applies once you stop contracting. Even after you retire or take a break from contracting for a while, previous clients may still bring claims.

Because PI insurance operates on a claims-made basis, you must have an active policy in place at the time the claim is made.

Run-off cover provides continued protection after you stop working, typically for up to six years, either as a one-off premium or a reducing annual policy.

Read more in our guide to retroactive + run-off PI cover.

How to pick the right professional indemnity policy

Buying insurance can be a strange experience, because you’re paying money for something you hope you’ll never need. For this reason, it’s tempting to go with the cheapest possible option.

This is a false economy. You don’t want to pay premiums only to be told you’re not covered when it matters.

List your requirements

What kind of cover do you need? And how much? Do you need an employers’ liability or public liability add-on, or other add-ons like equipment breakdown or office contents cover?

Choose a specialist

If your insurer understands contractors and how they work, they can advise you better on the type of cover that suits you best. They’ll also be able to give better guidance if you need to claim.

Flag up any concerns

If you have special requirements, for example, highly specialised work, it’s best to raise these early. Your insurer will let you know whether it fits your policy or if you need custom wording.

Shop around

While it’s never worth making it all about price, it pays to compare like with like. Read what’s covered and what isn’t. If a policy is extremely cheap, there may be trade-offs, such as a very high excess or broad exclusions.

You will typically find that contractor insurers bundle together PI with employers’ liability and public liability cover.

Nobody makes mistakes on purpose

Mistakes happen, often when you least expect them. By buying a professional indemnity insurance policy from a good insurer, you can set your mind at rest that you won’t end up with a substantial legal bill that could put you out of business and jeopardise your future.

How to get a PI insurance quote

You can get a business liability and PI insurance quote via our partner of 19 years, Qdos.