Contractor insurance is an essential element of running a contracting business and comprehensive insurance cover can mitigate the impact of events such as thefts, an investigation by HMRC or even the threat of legal action and compensation arising from client accusations of negligence.
Umbrella company contractors are normally covered by their umbrella company employer's policy, but limited company contractors must make their own arrangements to ensure they have adequate cover in place to satisfy business and client requirements.
Insurance types to consider
There are three main categories of insurance that contractors should consider:
- Professional indemnity
- Tax investigation.
A comprehensive office policy would normally include public liability and employee liability, legal requirements for trading limited companies, plus home office contents and portable equipment cover for business equipment, such as laptops and mobile devices.
Professional indemnity insurance, also known as 'PI', will provide the funds to cover legal advice if a client levels accusations of negligence against a contractor, and may also cover any payouts for compensation. Most clients, particularly those in the public sector, require that a contractor limited company has at least £1m in PI cover.
Tax investigation insurance covers the cost of accountants and other expert assistance in the event of an investigation by HMRC. A routine compliance visit by an inspector may only cost a few hundreds of pounds in an accountant's time, but if the investigation develops into a full-blown IR35 case, the cost of an expert defense can run to tens of thousands of pounds, which could financially ruin a contractor who does not have insurance.
Choosing the right policies
Not every contractor's insurance needs will be the same. Some contractors may have requirements unique to their sector, or could have business premises, such as an office or workshop, that require specialist cover.
A specialist small business insurance broker will usually assess a contractor's insurance requirements as part of their service and then actively seek out the most appropriate policies for the contractor's specific needs from the market.
Alternatively, it is possible to obtain a comprehensive package of insurances directly from an insurance company, but contractors should ensure the insurer understands the contractor marketplace and has a track record in providing contractor insurance products.
Contractor insurance costs
As most policies will be individually tailored to a specific contractor's needs, each policy is priced accordingly. Buying insurance in a bundle direct from an insurer or via a broker is usually more cost effective than buying different policies direct from different suppliers.
As a rule of thumb, a comprehensive office policy costs a few hundred pounds, PI insurance from a few hundred to several thousands, depending on the amount of cover required and the type of services the contractor provides.
Tax investigation insurance comes as a benefit of PCG membership. If bought separately, it can cost a few hundred pounds a year, and compared to the potential cost of an investigation, it is generally a worthwhile investment.
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