One of the most important, but probably least exciting tasks on any contractors ‘to-do list’ is what insurances do I need? Professional Indemnity, Public Liability, Employers Liability and IR35 insurances to are just a few.
All contractors, be they just starting out or with decades experience, need to remember that if they are working via their own limited company, they will, 99.99% of the time, be required to insure against the financial risk that they face. They will also be required to evidence such before they meet the terms of the end client/agencies contract.
What insurances do I need?
The main insurances required will be Professional Indemnity (PI), Public Liability (PL) and Employers Liability (EL). These three insurances are all ‘liability’ insurances which protect the business against the costly allegations of negligence in one form or another. PI is the main insurance, which protects the business against the legal costs and compensation arising from allegations of errors or omissions in the service and/or advice provided to end clients i.e. poor code programmed into a system, or poor advice, that causes the end client financial loss. PL protects the business against the legal costs and compensation arising from claims made by a member of the public or their property i.e. injury to a colleague or breaking a valuable piece of equipment. EL protects the business against the legal costs and compensation from claims made by your employees (if you have any) for bodily injury, which worse case can include death.
What insurances are required by law?
In terms of what is required by law, only EL insurance is legally required, and for a minimum of £5m. However, there are exclusions, one of which is that if you are the only employee/director of the business and own 50% or more of the shares, as a result you are exempt and are not required to hold EL. If you are required to legally hold EL insurance and do not, and get caught by the Health & Safety Executive (HSE), they can fine the business £2,500 per day that it is uninsured. It is always recommended that you hold EL if you do employ anyone else. Furthermore this is especially true even if that person is your spouse or partner.
Why do I need business insurances?
Holding business insurances will almost all of the time be required by the end client and/or agency. Without doing so you will likely be unable to commence the contract. In addition, by holding business insurances it improves your IR35 status as you can evidence that you are in business on your own account and that you face financial risk (which you insure against). It is also excellent business practice to insure away the risk and provide yourself with complete peace of mind. Doing so even if the risk of a claim occurring is minimal is best practice.
What levels of these insurances do I need?
The most common levels of insurance requested are £1m for PI, £1m or £2m for PL and £10m for EL. The required minimum levels required will be clearly stated in your written contract, which the agency/end client will provide. You should always consider the risk that the business faces. This includes what industry you work in, do you work around people, and what equipment you have. The risk appetite of the business owner(s) will always play a part. That said, you should think long and hard as to if they need to insure for a higher amount. Underinsurance can finish a business just as easily as being not insured at all.
What other insurances should I consider?
Contractors often look to insure against other common risks that they face and which they have little control over. The main risk is HMRC investigations, including IR35 status enquiries. This can be protected against by taking out an IR35 Tax Investigation Insurance, and can be extended to include cover against the back tax, interest and penalties applied by HMRC at the conclusion of their IR35 status enquiry, as provided by our IR35 Tax Investigation & Liabilities Insurance. Contractors often also choose to protect against a range of commercial legal disputes via a Contractor Legal Protection insurance. Additionally they may choose to insured against a physical accident or illness via an insurance of the same name. Further insurances include protection against their business property and contents, likewise business interruption, something which is often bundled together and available via an Office Combined insurance.
Whilst not an insurance, a contractor would be wise to understand their IR35 position. They should know and be able to evidence if they are inside or outside IR35. This can be done not by an insurance, but by an IR35 contract review. This will advise you on your IR35 position and where to improve it. Not only that, it gives you valuable evidence if HMRC come calling.
How much do the insurances cost?
For the low price the insurances are available at, and the huge sums faced in the event of a claim, it therefore makes complete sense to insure against those risks. The precise premium you will be charged primarily depends on your trade. Another key rating factors is what level of insurance you decide to take out. For a professional contractor whose turnover is under £200,000 per year and takes out PI, PL and EL they should be paying around £250 to £300 year.