IT Contractor Professional Indemnity Insurance: If you’re starting as a contractor, you’ll probably need to get some form of business insurance as a condition of your contract.
You don’t often hear of IT contractors being sued for malpractice. But if it does happen, the costs run the risk of going bankrupt.
In the UK, claims for direct damages resulting from professional negligence can exceed £500,000. And that excludes consequential damages, such as lost future profits, legal costs, and attorneys’ fees.
Unfortunately, there’s not much you can do to prevent customers from suing you. Sometimes customers aren’t happy even if you try your best, and even sue if their case is weaker than the point-to-point tunneling protocol.
That said, you can take steps to protect yourself. IT Contractor Professional Indemnity Insurance comes into play.
What is Professional Indemnity Insurance?
Professional Indemnity Insurance covers you when a disgruntled customer claims that your professional advice or services were not up to par. Pay for:
- Your legal costs. This includes attorney’s fees, court fees, and other costs, such as the cost of hiring an expert witness.
- Any fees the court imposes on you if the client successfully sues. You must at least refund the money that the customer lost as a direct result of your mistake. However, courts often award damages as well. For example, you may have to pay the customer for lost revenue in the future
- Umbrella companies often offer you this type of coverage as part of their service. But if you work through your own limited liability company, you must take out professional liability insurance yourself.
How do IT Contractor View Professional Indemnity Insurance?
Professional indemnity insurance is necessary for IT contractors and it should be noted that because of the reliance many companies place on IT systems, the potential losses incurred by companies can far exceed the cost of the project. a fee. to be determined accordingly. IT companies and the services they offer are not easy to categorize, largely due to the wide range of business and industrial environments in which IT professionals work.
In general, the work of IT companies falls into one or more of the following areas:
- Delivery of packaged hardware/software
- Development of custom solutions
- Consultancy/project management
- IT Recruitment
- Internet service providers
What does IT Contractor Professional Indemnity Insurance?
Professional liability insurance generally covers you when a customer claims:
- Negligence. This would happen, for example, if you gave the customer the wrong advice or installed buggy software.
- Violation of Copyright or Confidentiality. This is generally covered even if the breach is unintentional, such as because you left a confidential document on your desk and someone looked at it without permission.
Loss of data or documents
- Gossip. This is where a customer claims you said or did something that damaged their reputation.
Another breach of your contract, such as a missed deadline
Many insurers also offer additional coverage for an additional fee. The most common add-ons for IT contractors are:
Cyber Liability Coverage
This covers you if the customer claims they were hacked by you or suffered some other type of data breach. Many policies also cover your losses if a data breach affects your own business.
This plugin is worth buying if you work on location or meet clients in your office. It covers you if:
Someone gets hurt or damages your property in your office
Someone gets hurt or damages your property while working at your client’s office. This can happen, for example, if you accidentally spilled coffee on someone’s laptop.
Office Content Cover
This is useful if you own expensive equipment. It covers accidental damage (including when traveling to and from your office), loss, and theft. Your office furniture, accessories, and documents (both physical and electronic) are also covered.
Equipment Failure Coverage
This covers the cost of repair or replacement if important equipment, such as your laptop, is not working properly.
Why should contractors buy IT Contractor Professional Indemnity Insurance?
There are three main reasons why you should purchase professional contractor liability insurance:
- For your peace of mind
- To fulfill your contractual obligations
- To help you out of range of IR35 to stay
IT Contractor Professional Indemnity Insurance for peace of mind
This is the most compelling reason to purchase professional liability insurance. If you have professional liability coverage, you don’t have to worry about the financial consequences if a client sues you for professional negligence.
Unfortunately, many contractors underestimate this risk. As Jim Gaskin, Zurich UK financial lines manager points out, “…many contractors don’t recognize that they have an exhibition, or maybe they think it’s a once-in-thousand-year event that isn’t worth the cost. “
But Gaskin continues, “…it takes only one complex problem to take up all the management time of a small SME, which typically lacks the sophisticated resources or legal and compliance departments that large companies have, and that can pose a threat.” the company .”
Why take the risk when you can be covered for a small annual fee?
Fulfill your contractual obligations
There is a good chance that clients as contractors will include professional liability insurance as a condition of the contract.
Many customers won’t let you start your job until you’ve shown their proof of insurance. And if they find out you never bought it, they can terminate your contract.
IT Contractor Professional Indemnity Insurance and IR35
IR35 is a tax law that specifically targets individuals who provide services to clients through their limited partnership. The legislation obliges you to pay tax and national insurance contributions at the employee rate if it can be shown that your working arrangement resembles that of an employee.
To stay outside the scope of IR35, you must be able to demonstrate that you are lawfully self-employed. And, well, having professional liability insurance helps your case by showing that you are taking some financial risk. Seb Maley, chief executive of Qdos, points out that if HMRC is investigating, not having professional indemnity insurance could even work against you.
“…we have had cases where the inspector found during an investigation that the contractor did not have IP insurance, but this was stated in the contract. Therefore, the inspector suggested that the contract did not faithfully reflect the reality of the agreement, so it would be necessary to go deeper, i.e. talk to the end customer and eventually extend the investigation.”
When to take out IT Contractor Professional Indemnity Insurance?
At the risk of saying the obvious, the sooner you get professional liability insurance, the better. That said, if you are hired without insurance, you can still protect yourself from claims arising from past jobs by purchasing coverage retroactively.
Simply put, retroactive coverage extends your professional indemnity policy. This way you are covered even if someone sues you for work you did when you were not insured.
To buy retroactive coverage, just choose the date you want it to start. This can be, for example, the date on which you registered your BV. Or maybe another date.
Customers have up to six years from the date they suffered the loss or damage to sue you for professional negligence. And they have up to a year to sue you for defamation. This means you can be sued 12 years after the job is done. Something to keep in mind when calculating the retroactive coverage you need.
You also want to make sure you don’t have any pending claims or knowledge of potential claims, such as a client who has expressed very clearly dissatisfaction with your work. Your insurer may cancel your policy and charge you the bill if you are not informed of potential problems in advance.
What happens if you stop working or retire?
Professional liability insurance only covers you if you have an active policy on the day of the damage and the day you carried out the work that caused the damage. Let’s say you performed server maintenance in June 2017. The customer believes you did a poor job and sues you in January 2019. To cover:
You must have had a professional indemnity policy in June 2017 (or retroactive coverage from that date)
You must also have had a professional liability policy in January 2019
So, since clients can sue you for several years after you finish a job, it’s worth investing in settlement coverage if you’re considering quitting or retiring. Coverage protects you against claims against past work, but not against future work.
As we explained before, customers have up to six years from the date they suffered loss or damage to sue you for professional negligence. Which means they can even sue you 12 years later. For this reason, you should talk to a lawyer before stopping your runoff coverage.
How much IT Contractor Professional Indemnity Insurance coverage do I need?
In most cases, your contract states how much you need to be insured. This is called the insured amount and can be £250,000, £2 million, £5 million, or anywhere in between.
But what if your contract doesn’t state a specific amount?
Some of the factors to consider include:
- How much is your entire contract worth, from start to finish?
- How much would it cost to correct the mistakes made?
- How much are the legal costs for you and your client?
- How big is the project, how important is your role, and how many other people are working on it?
Of course, the higher the insured amount, the more expensive your insurance will be. Other factors that affect your policy premium include:
- The deductible. This is the amount you have to pay out of pocket to make a claim
- Accessories. You will pay more if you want liability insurance, cyber liability insurance, or any other form of additional coverage. The other side of the coin is that taking out a supplement is usually cheaper than buying a separate policy.
- Your business. Do you do risky or highly technical work? Your insurance may cost more. Your billing may also affect the premium
Top 4 Tips for Choosing the Right IT Contractor Professional Indemnity Insurance Policy
Do you need to take out a professional indemnity policy, but don’t know where to start? Follow these tips and you won’t go too far wrong:
- Find an insurer that specializes in insuring contractors. They have a better understanding of the ins and outs of contracting and can give you personal advice on the type of cover that suits you.
- Know what kind of coverage you need. If you buy your policy from a specialist insurer, their standard wording will probably cover most of the technical stuff. But if you do unusual or highly specialized work, it is best to indicate this. You may need a custom policy
- Read the policy conditions carefully. What is not covered is just as important as what is covered. Knowing this before signing on the dotted line will help you avoid unpleasant surprises later on.
- Shop around, but choose wisely. Don’t make it just about the price. Cheap insurance usually means compromises. These compromises can be broad exclusions, a high deductible, or, worst of all, poor claims service.