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I’m out of contract - what insurance should I keep in place?

Should you cancel your business insurance policies if you are currently out of contract?

If you are in between contracts you might be reassessing the business insurances you have in place. Whilst it may be a top priority in the current economic climate to conserve the resources of your business where possible, before making any decisions about cancelling or allowing your business insurances to lapse, you should ensure that you have a full account of the potential risk of doing so.

A good starting point in considering your current range of active business insurances is making the distinction between the types of policy you may have in place. When looking at your business insurance attention should be paid to how/when a policy is triggered by an insured event, and whether your policies operate on a ‘claims made’ or ‘claims occurring’ basis.

‘Claims made’- The policy will react to any claims made during the period of insurance.

‘Claims occurring’- The policy will react where the event giving rise to a claim occurs during the period of insurance.

For a more detailed distinction between ‘claims made’ and ‘claims occurring’ policies, see our article ‘What happens if your business insurance lapses?’.

 

Professional Indemnity Insurance

Professional Indemnity Insurance is designed to cover you where there is an error or omission in the services you provide that cause third-party financial loss, if said client brings negligence proceedings against you to recover their losses, the policy provides the defence and representation costs, as well as your legal liability for their losses. Professional Indemnity Insurance is an example of a ‘claims made’ insurance policy.

A ‘claims made’ insurance policy must be active in order for you to obtain the benefit, however, claims do not always arise instantly. In fact, it may be years after the incident took place that a claim is raised.

When it comes to Professional Indemnity the majority of, but not all, negligence claims are subject to a time limit of 6 years following the date of the negligent act. Because of this lengthened window during which claims may arise, there is no universally applicable timescale that you ’need’ to hold Professional Indemnity cover.

When considering whether to allow your PI insurance to lapse, it is important to check your previous contract, and whether it specifies a length of time you are required to hold insurance coverage after the contract’s termination.

If you have found yourself between contracts and are on the lookout for your next engagement, this does not mean that you are without risk of claim. If you needed to call on the policy whilst you were between contracts and had lapsed your policy, then you would be uninsured and unprotected. Not only is it in the interest of protecting yourself, but it may even be more efficient to keep your Professional Indemnity insurance in place to cover you and ensure readiness for your next engagement. It may also be more economic if cancellation charges apply.

Public Liability Insurance

Public Liability insurance provides cover on a ‘claims occurring’ basis and is designed to cover you where a third-party brings legal action against you in respect of physical injury, or damage to property, caused by you in the course of providing your services.

Because Public Liability Insurance is a ‘claims occurring’ policy, it would only need to be active during the timeframe in which an incident or claim event may occur. Even if a claim is made at a later date, if your ‘claims occurring’ Public Liability Insurance policy was in place at the time the claim event occurred, then you are likely to be covered.

If you have entirely ceased trading and your company has no business activity whatsoever, you may wish to reconsider the need for your Public Liability policy as you may not be exposed to claims. However, if you are merely having a brief pause between contracts, for the reasons mentioned above, you would be better off thinking about whether it is worth your while stopping and restarting Public Liability coverage.

Employers Liability Insurance

Just because you are not actively working a contract, that does not mean that you can lapse your Employers Liability Insurance either.

Before the decision is made to put a hold on your EL policy you need to consider whether you have any employees that are still working on internal projects or tasks. If this is the case, you would still have a duty of care to these employees and must hold an active Employers Liability Insurance policy in place to protect your business should any incidents occur during the course of their employment.

 

Tax Insurance

  • Tax Enquiry Insurance provides an expert to defend you should HMRC open an enquiry against you for a range of reasons including IR35. See a more detailed description of the coverage here.
  • Tax Liability Cover protects you should HMRC open an enquiry into your accounts and covers the tax liability due following an IR35 enquiry. It covers a broad range of HMRC’s enquiries which can be seen in further detail here.

Some people might think that insurance policies simply need to be in place alongside each contract, however, both Tax Liability cover and Tax Enquiry Insurance cover the risk of HMRC bringing an enquiry during the period of insurance, even if this is a previous tax year.

The policies are arranged on a ‘claims made’ basis and, as stated previously, a ‘claims made’ insurance policy needs to be in place at the time a claim is made. In the context of tax insurance this will be the receipt of an enquiry from HMRC.

It is known that HMRC can open an enquiry into your IR35 status at any point in time, even retrospectively up to 20 years in the most drastic of cases, more commonly up to 4-6 years in less extreme cases.

Because of HMRC’s power to investigate, it would be unwise to cancel or intentionally lapse an IR35 insurance policy if you are simply between contracts. Even after the closure of a company, a contractor may choose to continue their IR35 insurance coverage until they believe the risk of enquiry is low enough for it to be discontinued.

 

In essence, while there are no legal requirements to maintain these insurances, the consequences of lapsing may be significant should you look to make a claim and cannot. It is always important to take into account your contractual obligations and the level of risk you are exposed to. Just because you are not currently providing services, that does not mean that you are exempt from risk and dependent on the type of insurance you have in place, it doesn’t mean that you can simply cancel your insurances.

We specialise in contractor insurance products for the self-employed and our insurance policies can be quoted and purchased entirely online within minutes, see here for more details. If you wish to discuss renewing your insurance here with Qdos, get in contact with a member of our team. Give us a call on 0116 269 0999 or email us at [email protected].

By:Alice Hickling

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