While professional indemnity insurance isn’t a legal requirement, it’s a must if you’re a contractor.
The vast majority of 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?
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
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.
That said, 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?
Professional indemnity insurance protects your business in two important ways. 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, say, in 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 end up winning 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.
While whether IR35 applies to you or not depends on many factors, having a professional indemnity insurance policy can help strengthen your case for being legitimately self-employed and, so, 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 …”
With the way IR35 is assessed in the private sector set to change 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. So it’s important to think about what’s at stake if the project goes off the rails
- 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 too if you’re sued and you lose
Many professional indemnity policies also offer what is called retroactive cover. This extends your cover so it starts from a date of your choosing, which is handy if, for example, you’ve been contracting for a while but never got around to buying a professional indemnity policy. With retroactive cover, you can have protection even for jobs you did when you weren’t insured.
Similarly, run-off cover can keep you protected for work you’ve already done if you decide to take a break or retire from contracting.
Clients have up to six years from the date they suffered the loss or damage to sue you for professional negligence, and up to one year to sue for defamation. Paying a bit extra for retroactive or run-off cover can help you avoid nasty surprises down the line.
If you’re going to work on site, or the project will require your client to visit your premises, it’s also worth thinking about getting a public liability policy. Many professional indemnity insurance policies offer this as an add-on.
Public liability covers your legal costs and damages if someone gets hurt or damages their property and blames you for it, for example because they tripped over your equipment.
Professional indemnity insurance doesn’t cover this, so it’s important to have both in place if there’s a chance someone could slip, trip, or fall, or damage equipment either at your office or while you’re working at the client’s premises.
You can find out more in our guide to retroactive and run-off PI cover here.
How to pick the right professional indemnity policy
Buying insurance can be a strange experience, because you’re paying money for something which you hope you’ll never need. For this reason, it’s tempting to go with the cheapest possible option.
Needless to say, this is a false economy. You don’t want to pay premium after premium, no matter how small, only for your insurer to tell you that you’re not covered when it matters.
So how do you pick the right policy?
- List your requirements
What kind of cover do you need? And how much of it? Do you need a public liability add-on, or perhaps other add-ons like equipment breakdown cover 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 would suit you best. They’ll also be able to give you better guidance should the worst happen and you need to claim
- Flag up any concerns
If you choose a specialist insurer, their standard wording will probably cover most of what your business needs.
That said, if you have special requirements, for example because your work is very specialised, it’s best to bring this up. Your insurer will let you know if it fits within your policy or whether you need custom wording. Don’t leave these things to chance
- Shop around
While it’s never worth making it all about price, it pays to shop around to see what you can get. Just make sure you compare like with like — read what’s covered and, more importantly, what isn’t. If a policy is extremely cheap, there are probably trade-offs such as a very high excess or broad exclusions
Nobody makes mistakes on purpose
But these things do 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 huge legal bill that could put you out of business and jeopardise your future.
How to get a PI insurance quote
You can get a quote for business liability and PI insurance via our long-term partner, 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.