Why Do Clients Require Their Contractors to Hold Professional Indemnity Insurance?

Professional Indemnity Insurance is the most common insurance policy purchased by limited company contractors. This policy is a basic business insurance which most companies hold as it just makes good commercial sense, yet this doesn’t tend to be the main reason why contractors obtain the policy.

The majority of contracts, particularly agency standard contracts, contain a clause which states that the contractor must hold Professional Indemnity insurance to undertake the contract. So why it is that end clients or agencies are making this policy a contractual requirement?

Like any other insurance policy, it is for protection. Your client or agency wishes to safeguard their business as much as you do, and ensuring that their contractors hold Professional Indemnity insurance is one way of doing that. By taking on contractors, they are allowing someone into their business, often to access their valuable systems, maybe make changes to them if you are an IT contractor or have some other effect on their business. This is risky for them as contractors are not subject to employment disciplinaries, your client does not have so much control over you and you are generally not subjected to as much scrutiny as employees are at the hiring stage.

So what are you buying? Many contractors purchase the insurance because they need it without ever finding out what it is for, but the insurance can be useful in more ways than simply adhering to contractual terms. In the event that you cause or are alleged to have caused a financial loss to your end client due to your negligence or error, Professional Indemnity insurance will indemnify you against the costs of such a claim. Although these cases are rare, when they occur they can be incredibly costly, so the insurance is a basic protection policy for your business.

Holding such a policy has more benefits than safeguarding your company and keeping your client happy. The IR35 legislation is a concern for many contractors, affecting all those who operate via a limited company one way or another. One of the tests used to determine your employment status is whether you take a financial risk or not. Holding insurance which protects your company financially, displays that a risk exists. It also shows that you are operating as a genuine business which is the fundamental concept of the IR35 legislation. A disguised employee is unlikely to purchase business insurances to protect their company if in reality, their client would pay for any mistakes as they would for their employees.

Qdos Contractor provide UK contractors with inexpensive Professional Indemnity insurance policies in a range of indemnity options to suit your needs. Full policy information can be viewed here.


By:Jane Hailstone

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