Insurance is an important element that everyone looking to become a contractor needs to understand fully. After all, working as a contractor comes with financial risk, as well as obligations and legal responsibilities. Taking out contractors’ insurance will not only protect you but also your business, clients and employees.
Whether you’re a locum vet, an IT contractor or a limited company owner, insurance is crucial. But, how can insurance protect you, what cover do you need and what could happen if you opt out? Read on to find out more about insurance for contractors.
Why Contractors Need Insurance
Whether you’re working as a contractor or as a freelancer, you’ve probably heard a thousand times that you need insurance – but why exactly is this such a significant element of being a contractor?
Working as a contractor can be very rewarding, given that you work for yourself, can choose the projects you wish to take on and are able to take time off when you want. However, there is always the possibility of a dispute arising between you and your client. Should this happen to you, no matter whether you’re just starting out as a contractor or have a large business, disputes will likely be money- and time-consuming. They can also be difficult to solve, be it in technical or legal terms.
Your clients can claim against you for mistakes you made or for bad advice you gave them. This can be a stressful situation to be in, especially when you just want to focus on running your business and not worry about anything.
Removing risk entirely is impossible; however, having insurance can help you to protect your business should something happen. In addition, most clients will not sign a contract with you unless you are insured – after all, having the appropriate insurance cover in place is now seen as essential by agencies and end clients.
Having insurance is also an indicator of self-employment if you’re operating outside IR35, since it helps HMRC to see you’re in business on your own account (we’ve covered the latest IR35 update in one of our latest articles if you wish to learn more about recent changes to this legislation).
Different Types of Contractors’ Insurance
There are several types of insurance you can take out, so it can be challenging to know which cover, or covers, are right for you. And, while you may think that you absolutely have to take out insurance, this isn’t the case. Still, contractors should have insurance protection, even if it’s not a legal requirement, as the downsides of being involved in a dispute without protection are many.
Take a look at the different types of contractor insurance – and what they will protect you against – to see which one is best suited for you.
Professional Indemnity
This type of cover protects contractors against claims involving professional negligence, unintentional intellectual property breaches, errors or omissions, loss or damage to client data, and giving bad advice that can result in financial loss to clients. It will also provide for legal costs and damages awarded against contractors.
This insurance cover isn’t a legal requirement, but many contractors opt for it, as it gives them peace of mind in case of a dispute. Most contractors will hold this type of insurance at £1 million, although this value can range up to £5 million depending on the sector you work in. This type of insurance will also cover lawyer and expert fees if needed.
Public Liability
Public liability insurance provides cover if someone is injured or property is damaged as a result of a contractor’s actions. Whether you’re working on your premises or your client’s, you have the responsibility to protect third parties who may be affected by your job. This type of cover is also not a legal requirement, but you’ll find that, most times, clients will insist on it and make it a condition of your contract.
Claims can arise from everyday interactions, so it pays off to be prepared. For example, if you are working on your client’s premises and accidentally spill a drink on a computer, your insurance cover can protect you. The minimum cover tends to be £1 million, but specific sectors may require you to have a higher level of cover.
Employers’ Liability
With this type of insurance cover, you are protected against claims from employees. If you don’t have people working for you, then you don’t need to worry about it. However, if you’re an employer and any of your employees become ill or injured in the workplace due to your negligence, this cover can protect you. While you must have, at least, £5 million as a minimum cover, most insurers usually offer £10 million as a standard.
Employers’ Liability Insurance is mandatory for almost all businesses in the UK, and most clients will require you to comply with a standardised contract. However, if you are the only director/employee of your business, you don’t have to legally take out this insurance.
Other Insurance Products for Contractors
While these covers are the main types of insurance you can get as a contractor, you may also want to consider taking out other insurance products that will make your life easier – and give you even more peace of mind. These can include the following:
IR35 Tax Enquiry Insurance – This type of insurance will cover costs in the event of an HMRC tax enquiry into your business, be it PAYE reviews, IR35 or Section 660a.
Sickness Cover – If you can’t work due to illness, this cover is beneficial for you. Because contractors work for themselves, having this type of insurance in place can protect you from potential issues and claims.
Relevant Life Policy – This life insurance policy can be provided as a tax-free benefit paid for by the company. This is more than just protection for the Director of the limited company, as it can also protect employees.
What If You Choose Not to Take Out Insurance?
Opting out of Professional Indemnity Insurance or Public Liability Insurance means you risk having to pay a lot of money in fees and compensation should someone make a claim against you. It’s always a good idea to be protected when you work as a contractor, no matter the sector you’re in.
For example, if you work in construction, these types of insurance will protect you against material damage to property and injury claims, as well as financial loss due to faulty design, for instance. If you’re an IT consultant, on the other hand, these covers can protect you against issues like data loss, coding errors and missing software. Independently of the type of work you do, therefore, both Professional Indemnity cover and Public Liability Insurance can help you to avoid having to pay a lot of money in claim compensation – this peace of mind is priceless when you’re going about your day-to-day life and trying to run your business.
Employers’ Liability is a little different. If you’re not exempt, then you are required by law to take out this insurance cover; if you end up not taking it, you may have to pay serious penalties and fines. You can be fined £2,500 for each day your business remains without Employers’ Liability cover, plus an extra £1,000 fine if you can’t show your certificate to the Health & Safety Executive when requested.
Being aware of your rights and of your responsibilities as a contractor can go a long way to make sure you’re prepared for any circumstance.
Self-Employed Income Protection with Gorilla Accounting
When you become a contractor, you lose the benefit and financial stability that comes with being an employee. If you’re making the transition into contracting, it’s vital that you not only research all of your options when it comes to financial protection, but also request professional advice to ensure you’re on the right track. You don’t want to wait until it’s too late.
By covering yourself and your business against accidents, sickness and even death, you’re avoiding the stress of constantly worrying about a potential eventuality.
Protect your lifestyle and avoid financial hardship with Income Protection Insurance. This cover is crucial if you don’t have sick pay and are incapable of working at any given moment, since you won’t be earning any income; paying for outgoings becomes difficult if this is the case.
With Self-Employed Income Protection, you can receive up to 70% of your annual pre-tax income as a monthly benefit if illness or injury keeps you from working. There are no restrictions to what you can claim, and you can even choose how long you want to wait before the benefit is paid. This deferred period can vary from day 1 to 52 weeks.
At Gorilla Accounting, you can benefit from Insurance Surgery, a personal life insurance cover which can benefit you greatly as the director of a limited company. Their Relevant Life Policy gives contractors and their families peace of mind should you pass away. You also save money on the life insurance premiums; contractors who are paying 40% personal income tax could save up to 52% on premiums.
In regard to how much contractors can get with this Relevant Life Policy, you’ll be pleased to know that you can cover up to 20x your annual income, with the maximum annual amount being £10 million. However, this policy will only cover contractors until they are 75 years old; it includes life cover but not critical illnesses or disabilities. The amount charged – as well as the amount received – depends on your occupation, health and lifestyle.
As contractor accountants, we know just how important it is to take out insurance, even if you don’t have any legal obligation to do so. We also understand that you have a lot on your plate already and the last thing you want is to have to research, compare and choose the right policies for you.
To make your life easier, we offer a solution that will cover every angle.
Our Kingsbridge Insurance policy has been designed to meet the needs of contractors and freelancers, and include the Professional Indemnity, Public Liability and Employers’ Liability covers. These types of insurance will help you stay protected no matter what happens, so get in touch if you wish to learn more about how we can help.
