Contractor insurance

Insurance provides protection for both contractor limited companies as legal entities and for the directors who work for them and own shares in them. There are multiple types of contractor insurance available which we consider in this article.

Do I need contractor insurance cover?

Yes. If a contractor limited company has no insurance policies to protect it, it (and its directors) could, depending on the agreement covering the work, be liable for compensation, losses, client costs, client legal costs, and claims for damages.

Professional indemnity insurance for contractors

Contractor professional indemnity insurance covers against claims made by a client as a result of work carried out. Clients are entitled to approach a contractor for costs and damages if a mistake is made where the mistake causes financial or reputational damage. These claims can be made for up to 6 years after sign-off of work.

As most clients appreciate that contractor limited companies lack the funds to pay damages and other costs, they will normally insist on the presence of a professional indemnity insurance policy with cover of up to £1m (or higher, depending on the nature of the work).

To be covered for any claim, a policy must have been in place when the work that has given cause to a complaint was carried out.

Public liability insurance for contractors

Contractor public liability insurance provides cover in case someone working for a contractor limited company (including its director) accidentally injures someone else or damages their property.

Contractor public liability insurance is not compulsory. However, contractor limited companies and their representatives have a duty of care towards any other person and any property which may be affected when work is being carried out.

To be covered for any claim, a public liability insurance policy must have been active at the time when the injury or damage was caused. Cover is normally for £2m although some clients may insist on a higher amount prior to the commencement of work.

Employer’s liability insurance for contractors

Contractor employer’s liability insurance provides coverage for contractor limited companies if one of their staff (for example, a substitute) is injured or becomes ill during or because of the work they have been tasked to complete. Contractor employer’s liability insurance is not needed if the only employee at a contractor limited company is the director who owns more than half of the share capital.

Director’s liability insurance for contractors

If the director of a contractor limited company is accused of not acting conscientiously, competently, or honestly during the execution of their duties, then they run the risk of being subject to claims made by regulators, creditors, shareholders, or any other affected person or organisation.

Director’s liability insurance provides cover if this type of claim is made.

Income security insurance for contractors

If the income of a contractor limited company is substantially or wholly reliant on one person and that person becomes unable to work, an income security insurance policy may provide cover in these circumstances.

However, many contractors believe that income security insurance is as reliable as the now widely-discredited payment protection insurance and that investment in an income security policy does not always represent value for money.

Prior to taking out a contractor income protection policy, a contractor should check:

  • the level of income they will receive if unable to work,
  • that dividends are included in any calculation of those payments,
  • that an insurer will not refuse to pay out if another type of contract work can be entered into, and
  • that the policy is both inflation-proofed and provides cover until retirement.

Personal accident insurance for contractors

Contractor personal accident insurance provides weekly pay outs to contractors unable to work because of an accident at work. After all, if you’re unable to perform your contract the chances are you will loose it. Contractor personal accident insurance policies will generally pay a lump sum on death or permanent disability caused by an occupational accident.

How to get contractor insurance

Many contractor limited company directors will often enlist the support of their accountant, solicitor, or financial advisor in finding suitable policies in the first case. Prior to entering any insurance agreement, the Key Facts document provided by a potential insurer should be checked over by an advisor to check for efficacy.

Who should pay for contractor insurance

Policies covering the contractor limited company should be paid by the limited company. Policies covering income security and personal accidents can be paid either by a director personally or via the company. Contractors should check with their accountant on a case-by-case basis however, in most circumstances, policies covering income security and personal accidents are an allowable business expense and should be paid by the limited company rather than using a director’s post-tax salary.

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