Read on for a guest blog by Martin Baxter of Kingsbridge Contractor Insurance. Kingsbridge provides insurance for contractors, with their package insurance policy including professional indemnity and public liability.
As a limited company contractor, you’ve probably already heard of professional indemnity insurance. But, what is it? What exactly does it provide cover for and why should you consider having it?
If you are new to contracting, you may have been told by your recruiter or client that you need to buy professional indemnity insurance. You may have even purchased cover before, but let it lapse between contracts. However, this could leave you unprotected and in a sticky situation if a late claim comes to light. Read on to find out what professional indemnity provides cover for, and why you should consider holding it.
What is professional indemnity?
Professional indemnity insurance is designed to give businesses, contractors and sole traders protection against claims of professional negligence. This can include things like making a mistake and giving bad advice, as well as loss of data, loss of documents, breach of intellectual property, defamation and libel.
In the event of a claim made against you, you could be liable for tens or even hundreds of thousands of pounds. When working through your limited company, you would not be protected in the same way as an employee of a company, so you should consider insurance to ensure you are protected from a potentially costly mistake. Ultimately, all insurances are there to protect you in case the worst does happen – and this is no exception with professional indemnity.
Why should contractors hold professional indemnity?
Professional indemnity is not a legal requirement, however, many clients and recruiters will stipulate that holding insurance is required as part of the contract. They may also require you to hold public liability insurance and employers’ liability cover. You should check your contract to see what cover is required. The insurance requirements are in place to protect the end client if a mistake does happen, and to not hold the required insurance would put you in breach of your contract.
While it may be tempting to only hold insurance when you are in the midst of a project, it’s worth bearing in mind that public liability insurance is usually on a ‘claims made’ basis. This means that you would only be covered if you have a live insurance policy in place when a claim comes to light. Professional indemnity claims can take time to be pursued, so it would be worthwhile considering holding cover even after the work has finished.
In addition, holding business insurance can serve as an IR35 indicator, as it is seen by HMRC as a pointer of being genuinely self-employed, thus helping to point towards an outside IR35 status determination.
Professional indemnity insurance claim example
Chris is an IT contractor, who is working through his limited company and has been contracted to work on a project for a retail firm. Whilst working, Chris accidentally put in an incorrect line of code, resulting in customer data being compromised, meaning the retailer must pay fines. The retailer claims against Chris’s company for the cost, but the professional indemnity Chris has means that the compensation and legal fees are covered.
What kind of cover should contractors look for?
When buying professional indemnity insurance, it would be worth asking yourself the following questions.
- Are the cover limits sufficient? Your contract may stipulate that you hold a certain amount of professional indemnity cover, often this is £1 million.
- Is the excess excessive? Would you be able to afford to pay it in the event of a claim? Some insurers will even offer nil excess.
- Is the cover any one claim or in the aggregate? In the aggregate means that you are only covered for the total sum insured over the policy year. So, if you had £1 million of professional indemnity cover and had a £400,000 claim, this would leave £600,000 in your pot for the rest of the term. On the other hand, any one claim means your cover limit is applied to each and every claim
- Are you covered for previous work? You should check if the cover includes ‘retroactive cover’. This means that you would be covered for claims for previous work that you have carried out.
Of course, all insurers have different limitations, so you should check the terms and cover details with your insurer. Kingsbridge Contractor Insurance includes the above cover as standard with their packaged policy.
