Put simply, Professional Indemnity Insurance (PI Insurance) is designed to cover claims made against you for professional negligence.
For example, if an error or omission in coding work causes your client’s system to go down meaning they suffered a financial loss, they could sue you. Your Professional Indemnity policy would react and cover the defence costs and then any damages should you eventually be found liable.
Of the three common business insurances, it is probably the most likely to actually be used by a contractor. PI Insurance will most often be stipulated in contractual arrangements so failing to hold this insurance could be a breach of contract, but generally protects your business and yourself from expensive legal procedures. In addition, with respect to the IR35 legislation, holding relevant business insurance policies including Professional Indemnity Insurance, can suggest that you are operating as a genuine business and subject to some financial risk. Seb Maley from IR35 advisory, Qdos Contractor, adds “we have had cases before where, during an enquiry, the inspector identified that the contractor didn’t hold PI insurance, but it was stipulated in the contract. Because of that, the inspector suggested that the contract wasn’t a true representation of the reality of the arrangement, and so would need to delve deeper – i.e. the speak with the end client, and ultimately prolonged the investigation.”
You can purchase various limits of indemnity, from £100k to £5m, but £1m is pretty standard in the white-collar contracting industry, particularly for IT contractors.
There are a number of specialist providers for contractors in the UK. Qdos Contractor sell a £1m policy for IT contractors for just £162 per annum, or £13.50 per month. (Prices correct as of 21st September 2017)