What Is Contractor Insurance and Who Needs It?
So, what is contractor insurance and who exactly needs it?
Insurance... a necessary evil in the world of contracting the UK. Well, at least that is the view of many in the industry.
There are many contractors, both new and experienced who buy professional business insurance each year, almost 1.9 million in the UK to be precise. But how many of them actually understand what they are buying, why, and what it covers them for? If you are one them do not fear, you are not alone - the vast majority of contractors are simply told what insurances they require and have little idea of how it actually works in practice.
There are almost 1.9 million professional contractors and freelancers in the UK
What is a contractor?
What is a contractor, and how do I know if I am one? Well, contracting has been, and continues to be, an increasing trend the UK. No longer are people working for one company for life, in fact the polar opposite is true as the workforce migrates from the tail end of the industrial age into a fluid workforce focusing on short term project work and collaboration.
Contractors work for themselves, via their own limited company, in which they are often the only employee (maybe also including a partner). This structure is often referred to as a Personal Service Company or PSC, which is chosen as it offers the most protection. Contractors will work on fixed term contracts and be tasked with a specific project or projects to complete. They will work alongside employees and to the naked eye nothing is different in how they work on a daily basis. In reality there are tax differences, a lack of employment rights, financial reporting obligations i.e. accounts, and of course insurance requirements. This is an overtly confusing concept to those who do not contract or who do not work with contractors, but it is a professional way of life that exists and works well.
What is insurance?
But lets get back to the exciting bit... insurance. In its most basic form it is the transfer of risk. Businesses pay a small sum to be protected against having to pay out large or even huge sums. In addition, everyone has a risk appetite i.e. their view on the chances and frequency of the worst happening and having to make a claim - which plays a part in deciding if an insurance is worth taking out or not. The older someone gets the more risk adverse they tend to be. When an insurance is taken out, the customer receives the intangible benefit of 'peace of mind', and they will likely have a minds eye expectation of how the insurance will enact in their time of need. The difference between what is expected and what occurs sadly can only be judged should a claim have to be made. Often a claim is handled professionally and speedily to limit any damage. However, occasionally there is a difference in the expected service and what is delivered, leading to bad press and a complaint.
Do I need contractor insurance?
In the UK contracting market it is a requirement in 99.99% of contracts for insurances to be stated as a mandatory requirement, meaning the contract cannot be started until such insurances are evidence to the agency and/or end client, and money unable to be earnt by the contractor as a result - which does no one in the chain any favours. Therefore, the need for the insurance is present - there is no requirement to influence someone to buy the insurance, it has been created for them.
Contractor insurance is very important - effectively being self-employed means that any mistake, or even an allegation of a mistake, no matter how frivolous, means the business and the individual face the full financial costs associated with it. The financial cost could be massive, very few businesses can survive let alone recover from such a potentially business ending incident.
How well do you know your own insurance(s)?
Do you know the Limit of Indemnity on your Professional Indemnity policy?
So... we understand what a contractor is and what they look like, where the requirement for contractor insurance comes from and who needs it, but what insurances are required? Contractor insurances come in a range of guises. Each policy is designed to cover an eventuality that concerns contractors specifically, and each insurance cover aids contractors in different ways.
The most common is Professional Indemnity insurance. This is a policy that covers a contractor in a case of professional negligence that alleges an error and/or omission in the work they have undertaken, and which would, or has, resulted in a financial loss to the end client. This would not be necessary for an employee to have for example, as their employing company would most probably have a policy similar to employer's liability that covers any employee's mistakes. Not only is this a mandatory requirement - so that the end client is not vicariously liable for any mistakes of the contractor, but the minimum limit required to be in place is often £1m and can go up to £5m in some instances - all based on how costly a drawn out court case can be and the likely damages awarded.
Public and Employers Liability insurance covers the business against allegations of death, injury or illness (and sometimes damage to personal property) to members of the public and their own employees, and is often stipulated in the contract as a mandatory requirement, with minimum limits of £1m and £10m as standard for each.
In terms of what insurances are not likely to be mandatory in a contact, the most common would be IR35 insurances. These provide protection against HMRC enquiries and investigations, including IR35 status reviews, and can be extended to provide cover for the liabilities attached to when a contractor is deemed by HMRC to have be operating inside IR35 on a contract when in fact they were claiming and paying themselves as if they were outside IR35 - a liability that can run into tens of thousands and includes back tax, NIC's, interest and a HMRC penalty.
Other insurances include legal protection policies, cyber cover, and personal accident and sickness. Each of these, again whilst not mandatory in a contract, will provide additional protection for the business savvy contractor.
Can you risk not being insured?
As mentioned at the start, taking out insurance is the transfer or risk. By paying a little to be protected from a lot, as well as being provided with peace of mind should anything go wrong, including the worst case scenario, insurance acts as a shield to protect your limited company assets and finances. Can any business, irrespective of turnover or the number of staff it has, afford to ignore insurance and take a gamble that they won't need to make a claim?
Therefore, it's importance should not be overlooked - necessary evil or not, is it something your business can survive without?
© 2018 Pete Willcocks