Insurance matters

Insurance advice for freelancers, contractors and consultants

Insurance can provide financial compensation and peace of mind when things go wrong, but even some seasoned freelance contractors are unsure as to which types of insurance they need. Very few types of insurance are compulsory for small businesses, but it can be a false economy to neglect those which really should be viewed as essential.

Included within the annual PCG membership fee

Professional Expenses Insurance

Included within the annual PCG Plus membership fee

Compulsory for most businesses

Employers' liability insurance

The Employers’ Liability (Compulsory Insurance) Act 1969 requires all employers, unless they are exempt, to have at least £5 million of employers’ liability insurance with an approved insurer to protect them against claims from employees for accidents or sickness caused through work. In practice, most insurers offer at least £10 million cover.

The law was amended with effect from 28 February 2005 to exempt very small companies that employ only their owner (see the Employers’ Liability (Compulsory Insurance) (Amendment) Regulations 2004, SI 2004/2882). In a letter to PCG, the Department of Work and Pensions confirmed that if a limited company employs only the owner, and that owner owns more than 50 per cent of the issued share capital, then the company is exempt.

As a freelance consultant or contractor operating outside IR35, however, you are likely to have a substitution clause in your contracts. Without employers’ liability insurance, you cannot fulfil this clause without breaking the law, so in practice you ought to have cover.

There are no hard and fast rules about who counts as your employee for the purposes of employers’ liability insurance. People who you may think of as self-employed may be considered as your employees for the purposes of employers’ liability insurance; what matters is the real relationship with the people who work for you and the degree of control you have over the work they do for you. Even part-time and casual staff may count as your employees.

The law is enforced by the Health and Safety Executive (HSE); its inspectors can ask to see your certificate of insurance at any time. These must be retained for at least 40 years after the insurance has expired. You can be fined up to £2,500 for any day which you are without suitable insurance. If you do not display the certificate of insurance or refuse to show it to HSE inspectors when they ask, you can be fined £1,000. The Financial Services Authority keeps a register of authorised insurers, which is available on its website.

Motor insurance

Third-party liability insurance is compulsory for all vehicles used on the road.

Comprehensive insurance includes this but also provides cover for fire, theft and accidental damage. Personal accident cover, for certain bodily injuries sustained by the driver, is usually offered as an extra option.

You should ensure that business use is specifically covered.

Insurances essential or advisable for most businesses

Public liability insurance

Public liability insurance covers you against accidents to members of the public or damage to property that occurs as a result of your business activities. It also covers any related legal costs.

Even if you work from home, you may need public liability cover. If clients visit you there, the policy will cover you if they injure themselves while they are on your premises – it could be something as silly as tripping over a computer cable.

If you regularly work off‑site, your policy should cover this too.

Property and contents insurance

You will need to insure your business property, including premises, fixtures and fittings, stock, computers and equipment. If you work from home, you need to check that equipment used for business purposes is still covered by your home contents insurance, or purchase specific business insurance.

In response to a growing trend in homeworking, an increasing number of insurers now offer buildings and contents policies that specifically include cover for business stock and equipment.

Recommended for most freelance service businesses

Professional indemnity insurance

Professional Indemnity Insurance - why bother? Professional indemnity (PI) insurance protects you against your legal liability for losses suffered by your customers as a result of your negligent advice. It is legally required in certain professions, such as law, accountancy and financial services. It is common in other areas, such as management and computer consultancy, publishing, engineering design and marketing. If you give any advice which could make you liable, or if you are working in a collaborative arrangement, you should have a suitable policy.

These examples of recent PI claims highlight the costs you could potentially incur if you don’t have PI insurance:

IT Consultant - a computer system that an IT Consultant designed and installed was unable to cope with the required number of users. Compensation awarded against him was £750,000.
Marketing Consultant – a Marketing Consultant inserted the wrong telephone in an advertisement. The result was a loss of sales and damage to his client’s brand. Compensation awarded against him was £200,000.
Consulting Engineer - a Consulting Engineer designed a roof which proved to be defective. Compensation awarded against him was £1,350,000.
Accountant – a management accountancy practice failed to alert their client to losses from an employee falsifying sales returns. Compensation awarded against them was £450,000.

Other insurances worth considering

Permanent health insurance
Income protection insurance
Business interruption insurance
Tax loss insurance
Legal expenses insurance
Key man insurance

Insurance tips

It can be more cost-effective to buy employers’ liability, public liability and equipment insurance as single package.
Premiums will depend on the type of business, your turnover and the number of employees. Don’t underestimate the level of protection you think you need and don’t underinsure your property.
Read the small print in any policy documents. Question any clauses that you don’t understand.
Be scrupulously honest with your insurance company about information relating to your business and any previous claims.