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?
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.
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
Many contractors take out professional indemnity (PI) insurance to cover themselves if they are found to be negligent during their contract duties. In addition to PI insurance for current work, what about cover for advice or projects completed in the past (retroactive cover), or extended run-off cover for when you retire?
Retroactive cover
If you wish to take out cover for work done in the past, this is known as retroactive cover. This type of cover is especially important in professions where the effects of your work might not be immediately apparent, such as engineering, IT consulting, or financial services, where potential issues can emerge years after a project has gone live.
It is possible that a client could make a claim against you for work you carried out many years ago, so by adding retrospective cover to your current PI policy, you will have all bases covered.
Additionally, if you are changing professional indemnity insurance providers, you should make sure the new PI policy has backdated cover to protect you from claims on past work.
Retroactive cover is typically included by contractor insurers, assuming you have a normal claims history, but you should always check before paying for a policy.
Run-off cover
If you are about to retire, or are taking a break from contracting, what happens if a client makes a claim against you for mistakes made in the past?
Even if you no longer need PI insurance for new work, you may still be exposed to claims from past clients. According to Law Society figures, 40 percent of all PI claims are made over three years after the incident. Insurers operate on a ‘claims made’ basis, so if you don’t have an active policy in place, you will not be covered.
Run-off cover provides protection after you have stopped working. Most industry experts recommend taking out a six-year run-off policy, either as a lump sum (around half the cost of your last annual premium) or as an annual policy which reduces in cost each year until expiry.
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 a 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 if it fits within your policy or whether 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.
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.
Professional Indemnity Insurance for Contractors
Industry leading PI insurance - from just £13.50 per month via Qdos. Business liability and IR35 insurance cover also available.
