With nothing but news of the pandemic filling television screens and far-from-clear financial support from the government, business cover is (understandably) the last thing on many self-employed workers minds. It's trickier than ever to keep contracting. There are practical ways to retain as much work as possible during this time, but when continuing to work could affect your ability to claim the 80% salary supplement under the Coronavirus Job Retention Scheme as a furloughed employee of your own limited company (read more about that here), it’s a difficult choice to weigh up. Whether you’re currently working or not, it’s still paramount to keep your business protected with at least a basic level of insurance – the most important of which is professional indemnity.
What is professional indemnity and what does it protect me from?
Professional indemnity (PI) insurance covers 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, 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. These claims can be made years after your work with the client has ended, so it’s important to ensure consistent cover while running your limited company.
Many contractors and consultants work in high-risk occupations where handling sensitive data or offering specialist consultancy mean that a small professional error could turn into a large claim.
What does professional indemnity insurance cover?
The main things that professional indemnity covers are:
- professional negligence (i.e. making a mistake in a piece of work for a client);
- loss of documents or data;
- unintentional breach of copyright or confidentiality;
- defamation and libel;
- loss of goods or money (your own or for which you are responsible).
Even if the mistake isn’t your fault, you could still wind up with a PI claim that you have to defend. Let’s have a couple of real-life examples:
An accountant failed to inform their client that their income had exceeded the VAT threshold and they should therefore register for VAT. As a result, the client claimed against the accountant for the eventual liability. The claim was settled for £17,000.
A client purchased a company which turned out to be a bad investment. They claimed their accountants had been involved in the due diligence process and failed to warn them of certain fundamental issues. The claim was settled for £182,000.
Do I still need professional indemnity if I’m not working during lockdown?
While there are certainly more pressing concerns right now, making sure your business is protected ready for when life resumes should be a priority.
You may, like many businesses, be clamping down on expenditure, and feel that not renewing your business insurances is one way to save cash. This is counter-productive, however; most limited company contractors require at least a basic professional indemnity policy to win work from medium-large clients and it could make finding new projects harder than it needs to be if you don’t have cover in place.
Pete Willcocks, Operations Director of Larsen Howie and insurance industry veteran, attests to the importance of having professional indemnity cover in place.
“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,” he says. “Having the appropriate business insurances in place not only means that you are more likely to receive offers of contracts, but it also means that you are ready to start contracting immediately.”
“It is also important to remember that just because you are not currently working for your limited company it does not mean you cannot receive a claim against you,” Willcocks continues. “Clients have up to six years from the date of the incident to make a claim against you for professional negligence. Even if you were to close your limited company it is important to keep some form of cover in place. That is why it’s so important to cover yourself where possible, even if your company is still in operation but you are not currently providing services.”
Make sure you’re ready for work with professional indemnity
We’re confident that the tenacity of the contracting community will prevail over the COVID-19 pandemic, as it has with every other challenge in recent years. It’ll be the contractors, freelancers, and gig workers that help to get the UK economy moving again once the lockdown is over, and it’ll be the self-employed that are on-hand when businesses realise that the current situation won’t be over in a matter of weeks. This is why it’s imperative to stay prepared, even if work has slowed down for the moment.
Besides a comprehensive suite of business insurances including professional indemnity and public liability, Larsen Howie offers a range of IR35 contract and working practices reviews carried out by in-house specialists. We also offer representation from our Head of Tax Andy Vessey should it go to tribunal, as well as training and consultation for businesses that wish to continue working with their invaluable contractor workforce.
For any further information or advice, please call us on 01163 800 400 or drop us an email. Alternatively, take a look around our Knowledge Hub for more IR35 advice, industry news, and contractor guides.