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As a limited company contractor it’s your responsibility to protect yourself and your business – but does your contractor insurance really offer the complete protection you need if something goes wrong?
Not having the right policies in place can mean exposing yourself and your limited company to risk – and many policies out there will include limits and exemptions in the small-print that you might not have been aware of.
This handy checklist will help you understand what to look out for when arranging cover as a contractor.
Usually the contract with your agency or client will state that you need insurance in place before starting work – even if you aren’t asked to provide proof of this.
Depending on the project and client there may be specific levels of cover that you’re required to hold. The most common types of insurance you’ll be asked to have in place are Professional Indemnity (PI), Public Liability (PL) and Employers’ Liability (EL).
Most UK businesses with at least one employee are legally required to have at least £5 million Employers’ Liability cover. An exemption to this rule is if you employ only yourself and you own 50% or more of your share capital.
Employers’ Liability is also particularly worth thinking about if you have a ‘substitution clause’ in your contract.
In this instance Employers’ Liability would provide cover for your replacement. It will also help in an IR35 investigation as it acts as a key indicator to HMRC that you’re a legitimate business and not a disguised employee.
Many companies will try to save money by opting for cheap Professional Indemnity-only products.
Whilst Professional Indemnity provides cover for the services you carry out, as a director of a limited company you’re of course also responsible for the safety of yourself and any employees.
There are other types of cover you need to consider:
Having Public Liability insurance will make sure you’re covered for any damages or injury you cause to third party persons or property, for example leaving a bag in your client’s office which causes a member of their staff to trip and injure themselves. A Public Liability policy will cover legal fees and compensation paid to the claimant.
In addition, taking out occupational Personal Accident insurance is worth considering. Although it’s not contractually required, it’s the most claimed upon insurance cover. If you were injured whilst working or commuting and were unable to work, then you could claim a weekly amount to put towards your living costs.
If you were a PAYE employee then your employer’s insurance would cover you for any accidents you had while working as a result of the employer’s negligence. As director of your own limited company you must ensure you have the same protection in place for your business.
If you employ anyone in an admin or clerical role you need to ensure they’re protected as well. If this is the case for you, then it’s important that you have appropriate Employers’ Liability insurance in place.
If you’re contractually required and have put in place Professional Indemnity cover for up to £1 million ‘in the aggregate’, this means you’re only covered for an accumulated total of £1 million across the whole policy year.
This is fine if your claims are, altogether, worth less than that amount. Say you make three claims during your policy year, with each individual one amounting to £300,000. That’s a total of £900,000, leaving £100,000 ‘in the pot’ should you need to make another claim.
It’s worth bearing in mind as well that claiming those amounts would technically leave you in breach of your contract, given that you need £1 million in Professional Indemnity cover for its duration. If your policy is any one claim, this means your level of cover applies to each and every claim you make.
Any one claim actually gives you, as a contractor, more protection than in the aggregate since there is no risk of you using up your ‘pot’ of cover in any one policy year and ending up with a shortfall. It also ensures that you remain contractually compliant.
A small number of accountancy businesses and professional bodies will offer ‘block policies’ to their contractors. In a block insurance policy, limited company contractors are not normally individually named but are referenced on the policy as “Additional Insured” and this could mean there may be a considerable number of contractors who share the stated limits within a block policy.
Block policies will often not comply with agency terms as the contractor isn’t the individual named on the policy. In some cases, this can put a contractor at risk as a large claim by one contractor on the policy could wipe out the limit for others in the same scheme and place other contractors on the scheme in breach of their contractual terms.
The contractor doesn’t have control over the terms of the insurance policy – meaning they have no say when it comes to the policy renewal, the cover limits or the policy terms.
If you’re unsure whether you are part of a block policy or not, then there are a few things that might appear in your documentation which should help determine whether it’s a block or individual policy. An example of this would be if the policy is issued in the name of your accountant or professional body and not you as an individual. Also, it might not be an annual term, but instead have a common anniversary date with other holders.
A block policy will only cover you while you’re a client/member of the named insured. For example, if your policy is provided through your accountant and you then choose to stop using their services, the cover will cease.
Unlike many other types of insurance, Professional Indemnity insurance will normally operate on a ‘claims made basis’. This means that in order for your cover to protect you it must be in place at the time a claim is actually made – not at the time of the incident. It’s important to check that your insurance contains ‘retroactive cover’ i.e. cover for previous work you’ve carried out in respect of the policy terms.
If you aren’t contractually required to have insurance in place or are working on a project that is of considerable value to your client, then you might need to make a judgement on whether to increase your limits of cover to ensure you’re suitably protected.
If a Professional Indemnity claim is made against you for an error or omission, then you may be liable to not only pay for the cost of rectifying a mistake but the cost of delays to the project as a whole – not to mention legal fees.
For projects of considerable value this could stack up to large sum, enough to easily put you out of business if you don’t have insurance in place.
Even if you’re comfortable that your policy meets your requirements, it’s also worth checking your documentation for any inner limits within the policy. For example, if you have a Professional Indemnity limit of £1 million, this may be reduced to £250,000 for certain industries such as offshore or nuclear work.
Alternatively, your cover might be altered from ‘any one claim’ to ‘in the aggregate’ for the same reasons.
In the same way a car insurance policy works there’s always an excess to pay if you need to make a claim. This is no different for your business insurance, however it’s important that you check your excess amounts to make sure that you’d be able to pay them in the event of a claim.
If you’re offered a significantly low premium it’s always worth checking that your excess doesn’t run into the thousands.
If you’re a freelancer, contractor, or small business owner, Crunch can provide business insurance tailored to you. Get more info or an instant online quote today.
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