For contractors, insurance is very important. Many argue that a professional indemnity insurance policy is an essential contractor purchase and it's unwise to operate without it. But why is this the case and is contractor professional indemnity insurance really needed?

There are various things to consider when answering these questions, which we will later explore. But first, let’s have a look at what contractor professional indemnity insurance is and what it actually covers.

Contractor professional indemnity insurance will cover the cost of legal fees where it is alleged that a client has suffered a financial loss as a result of a contractor's error, omission or negligence. It also extends to provide further cover for compensation and/or damages payable to rectify those errors. Put simply, this insurance is a contractor’s safety net. It protects them from business crippling claims if things happen to go wrong.

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You may now be asking yourself ‘Will things actually go wrong?’ Hopefully, they never will. But as we all know, nothing in life is guaranteed. Contracting is a high-risk occupation, with ever increasing possibilities for professional error. Invariably, mistakes will be made, and disputes will arise. Contractors should therefore understand the risks they face, how their business may be affected, and insure accordingly.

Contractual requirement

For many contractors, PI insurance is a contractual requirement anyway. It is not uncommon for clients to insist that insurance is held for at least the duration of a contract. Clients don’t want to become vicariously and financially responsible for their contractors’ negligence.

Over the years, there have been instances of contractors being prevented from starting a contract until they have provided proof that they have insurance in place. So before starting your contract, we suggest a thorough check of the written terms and conditions. You need to ensure that the necessary cover is in place – don’t risk being in breach of your contract!

In addition to the benefits above, PI insurance looks positive in the eyes of the HMRC with regards to IR35.  By holding a PI policy, a contractor is demonstrating to HMRC that they are prepared to cover their mistakes. In addition, the outlay cost of business insurance could be considered a financial risk, one of the key IR35 tests.

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In effect, contractor professional indemnity serves to bolster a contractor’s position as a bona fide contractor operating via their own limited company, therefore aiding their IR35 status. Contractors who've taken the time to look at IR35 legislation in detail will appreciate just how important this could be. Being proactive with regards to IR35 can put you in a strong position in the event of an IR35 investigation.

Is professional indemnity insurance really needed?

This leads us nicely on to the question – Is contractor professional indemnity insurance really needed? There will always be differences of opinions, arguments for and against whether PI is something that a contractor should buy. What is clear is that no matter what professional field a contractor works in, a claim can always be made.

Insurance is important in all forms of business. In professions such as contracting, a PI policy is necessary in order to provide peace of mind and a safety net for the contractor should the worst happen. It is imperative that the importance of PI insurance to the modern-day contractor is not easily dismissed.

At Larsen Howie, we provide Professional Indemnity Insurance tailored specifically to contractors. If you have questions or would like to discuss taking out cover with us, get in touch today, or click here to get your instant quote.