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 Professional Indemnity insurance really needed?

We speak to Pete Willcocks, ex-Qdos insurance industry veteran and MD of Larsen Howie, about why Professional Indemnity insurance is such an essential cover for the self-employed. 

What is Professional Indemnity insurance, exactly?

“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,” Willcocks explains. “It also extends to provide further cover for compensation 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.”

“Obviously, a lot of people ask themselves ‘but will things actually ever 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,” he continues. “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.”

Is there ever a contractual requirement for Professional Indemnity insurance?

“For many contractors, PI insurance is a contractual requirement anyway,” Willcocks says. “It’s 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 – which is entirely understandable.”

“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 a contract, I suggest a thorough check of the written terms and conditions. You need to ensure that the necessary cover is in place – definitely, don’t risk being in breach of your contract!”

Can having Professional Indemnity insurance affect a contractor's IR35 status?

“Definitely! 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.”

“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 as essential as it’s made out to be?

“There’ll always be differences of opinions, arguments for and against whether PI is something that a contractor should buy,” Willcocks says. “What is clear, however, 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.”

Professional Indemnity insurance for contractors

No matter how scrupulous you are in your practice, Professional Indemnity not only offers peace of mind but also makes it much easier to attain new clients. Find out about the Professional Indemnity insurance we offer here.

For more information on how Professional Indemnity insurance can help your business, take a look around our dedicated PI guides for contractors on the Knowledge Hub. Alternatively, you can call us on 01163 800 400 or email us.

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