I'd better begin by saying that I'm NOT trying to sell insurance! But to my mind, PI (Professional Indemnity) insurance is a worthwhile investment for the Contractor, and I continue to be surprised by the relatively large number of Contractors who don't carry it. PI insurance will generally protect you, to a greater or lesser degree, against any liability you may have to third parties as a result of mistakes you make in the course of your business as a professional. Essentially, against failure to do what you have contracted to do, to the required standard.
The process of taking out PI insurance begins with completing the proposal form. Whilst often long and daunting, you should bear firmly in mind that insurance law has its own peculiarities: an insurance policy is essentially a contract; and it's a contract of a special kind - one which requires the 'utmost good faith'. As the law sees it, before an insurer can be expected to quote a premium for insuring against particular risks, it has to be put in a position from which it can make a proper assessment of those risks. And if you are not scrupulously honest and frank in completing the proposal form, to the point of volunteering potentially relevant information even if it hasn't been asked for, then if it ever comes to a claim, the insurer may be within its rights in disclaiming liability, even if the point that was concealed is totally irrelevant to the claim itself.
Most other insurances (eg motor) operate so that where you have a policy for a period, it covers you against incidents occurring during that period. PI isn’t generally like that, and instead works on a 'claims made' basis - it covers you against claims notified to you during the period of the policy. So you can take out PI insurance today, and expect to be covered against a claim you learn of tomorrow, as a result of something you did wrong yesterday (provided, of course, that you told the insurers in your proposal form if you had any reason to suspect that such a claim might be made!). The downside of this is that to ensure you remain covered against claims for today's mistakes, you need to maintain PI insurance for at least the next 6 years, since it could be that long (and in some circumstances, longer) before you are notified of a claim.
Having taken out PI insurance, the next thing you need to do is to read the policy carefully. Almost every policy is different, and it's important to understand it, its in- and exclusions, and its conditions. You'll certainly find a term requiring you to notify the insurers as soon as you have grounds for believing that there might be a claim against you.
I see three good reasons for having PI insurance:: peace of mind; credibility; and IR35-friendliness.
Peace of mind
First, none of us set out to make mistakes. Indeed, we probably spend most of our lives trying to get things right and to avoid them. But we are all human, and from time to time we do make them. Sometimes we are lucky and there are no adverse consequences, but sometimes we are not. Our culture is becoming increasingly litigious. If we may mistakes in the course of our business and if someone suffers loss as a result, then they may well make a claim against us. Their losses, even from a simple mistake, could be large.
Where the mistake is made by an individual who trades through a one-man company, it may be naïve to assume that he is fully protected simply by virtue of the fact that his liability as a shareholder in the company is limited. Often there may be grounds for bringing the claim not just against the company which has contracted to perform the services, but also against the individual responsible - even if there is no contractual relationship with that individual. In these circumstances, a PI policy will generally cover both the company and the individual. So the first thing you're buying is a degree of peace of mind.
Credibility
Secondly, many agency contracts nowadays require the Contractor to carry PI insurance - and if the contract requires it but you don't have it - well, ask yourself, how you can reasonably expect the agency to honour their part of the contract, if you don't honour yours?
And if you're one of the increasing number of contractors looking for direct contracts, ask yourself why clients often prefer to deal with agencies; to my mind there are three reasons - first, ease of finding someone suitable fast; secondly, ease of administration; and thirdly, the security of knowing that there is someone potentially worth suing if things go wrong. In my experience, most clients engaging Contractors direct expect to see a willingness to accept liability for mistakes, backed by PI insurance. And the lack of this can be a deal-breaker - or can even prevent the deal from being negotiated in the first place. Having PI insurance adds a degree of credibility, which can make all the difference when it comes to marketing yourself.
IR35
Finally, IR35. Now, carrying PI insurance won't of itself conclusively put you outside IR35, particularly where you have a contract which is little more than an employment contract. Certainly some employees in certain professions will often carry their own PI insurance. But, bearing in mind that part of the IR35 test is painting an overall picture, and then asking whether the individual is (1) carrying on his/her own business, and (2) performing the services in the course of that business, then one can see that being seen to accept the risks of loss resulting from claims made against you, and taking steps to safeguard those risks by insurance, is certainly capable of being a significant plus factor. Put the other way round, it may be difficult to credibly maintain a stance of 'I'm carrying on my own business' if you don't even have such insurance.
In my view, every Contractor who is seeking to present him/herself as an independent professional, carrying on his/her own business, should carry at least some level of PI insurance.
1st
June 2001
I'd really appreciate your feedback on this FAQ - so mail me and tell me what you think of it, if it's been useful to you, or let me know of any specific problem you have where I may be able to help.
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