2019 signals many changes for the self-employed. With the likes of Making Tax Digital, the IR35 reforms launching in the private sector, and Brexit in plain sight, it’s a time of uncertainty and apprehension for contractors and freelancers.
It’s natural to ponder the mortality of your business in such tumultuous times, no matter how healthy your income is. Knowing what insurances you need as a contractor is the first step towards peace of mind.
No matter if you’ve just braved the jump to being self-employed or you’re a veteran of 20+ years in your profession, the contractor landscape is constantly shifting and it’s imperative you stay up to date.
Read on to find out what insurances you should have in your arsenal.
Professional Indemnity Insurance
Professional Indemnity insurance, often referred to as PI, is one of the fundamental types of insurance for contractors.
PI cover protects you and your business should your client allege that you’ve made an error or omission in your services. This can include sub-standard advice given, professional negligence, flawed designs and loss of client data. It also covers legal expenses when defending the claim, and any compensation needed to fix the problem.
Time for an example:
You advise certain efficiencies as a Business Consultant on a huge project to save costs, but the shortcuts you suggest actually triple expenditure, causing your client to have to choose between taking a catastrophic loss or charging their end-client at least double the quoted fee.
Neither of those are viable options for anyone with a shred of business sense, so they would opt to file a PI claim against you, the provider of the services and cause of the loss, instead.
The professions most likely to benefit from PI cover are ones that handle sensitive data on a daily basis, so it’s essential for software developers and accountants. Their mistakes have the potential to cause far-reaching financial repercussions.
Other, less obvious high-risk professions are business or management consultants, architects, and media professionals. Each of these could cause their clients huge losses if their advice or designs are not up to industry standard.
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. It also protects against fictitious claims that, while unpleasant to consider, would still have to be defended.
Public (and Employer’s) Liability insurance
Public Liability (PL) insurance covers the cost of a claim made by a client or a member of the public that has suffered injury or property damage as a result of the work you’ve done. While this may not seem necessary if you’re a home-based freelancer, it’s worth having even if you only hot desk once or twice a year.
All contractors should consider having a minimum amount of PL cover, but those working in manual professions especially – like construction, the energy sector, and any kind of forensic science – will almost certainly need it.
That said, there’s still a risk of a claim in office-based jobs too. A clumsy moment whilst handling heavy server equipment, for example, could cause both property damage and injury.
Some context for when having PL cover would come in handy:
You’re working as an IT contractor and someone trips over your laptop bag, causing them to break their arm and their laptop (which they were carrying) in the fall. You would be liable to pay compensation for the injury and replace the broken hardware, both of which would amount to a large out-of-pocket expense.
While it’s not illegal to work without Public Liability cover, many clients will include it as a condition in their contract; having some form of PL insurance in place is widely regarded as contractor best practice.
Often, PI cover will be packaged with Employer’s Liability (EL) insurance included. Although PL isn’t a legal requirement, EL is if you have two or more people working for your company. EL cover pays for compensation costs and legal fees if an employee or ex-employee sues for illness or injury caused by the work you assigned them.
IR35 Tax Investigation Insurance
IR35 Tax Investigation insurance protects you from the potentially devastating effects of a tax investigation carried out by HMRC.
IR35 legislation has been reintroduced to challenge possible avoidance of tax and NI contributions. In particular, HMRC is looking for so-called ‘disguised employees’ who gain and carry out work via partnerships and limited companies. This makes freelancers and contractors prime targets for investigation; the legislation is already in full swing in the public sector and is soon to be implemented in the private sector too.
If you find yourself being investigated under IR35, HMRC will ask you to prove that you’re NOT an employee. This can mean extensive court fees and loss of work while the often notoriously drawn-out investigation takes place, which is what IR35 cover protects from. It allows you to stay afloat so you can concentrate on defending your business. The policy should also provide a tax expert for your defence, so make sure you check the wording before taking out cover.
Many IR35 insurances will also include protection from HMRC Section 660A enquiries. These are separate investigations into a contractor’s financial arrangements, where income is diverted to a family member to reduce or avoid tax liabilities. HMRC has been known to segue between these types of enquiries, so it’s not unlikely that you could be investigated for both.
While IR35 insurance is priceless in the event of an investigation, there are steps you can take to considerably reduce your risk of being targeted in the first place. Some insurance providers offer a comprehensive IR35 contract review as well as a working practices review to help you be prepared, which almost all contractors would benefit from.
Other advisable contractor insurances
While we’ve covered the main three, here’s a list of further insurances that could prove useful:
- Contractor Jury Service
- Contractor Legal Protection
- Contractor Personal Accident
Some may be more relevant to certain professions – manual workers are much more likely to have a personal accident, for example – and many clients and/or professional bodies will set certain insurances as prerequisites before any work is even offered.
While self-employment allows you many benefits like choosing your own clients, cherry-picking projects and managing your own time, it also comes with weighty responsibilities when things go wrong. It’s in your best interest to make sure you’re covered for all eventualities so you can keep doing what you love.
If you’re in need of insurance then visit our Insurance Partner page over at Larsen Howie – click here.
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