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Freelance Insurance Essentials -
Employers Liability Insurance

Employers Liability Insurance for Contractors
When working freelance insurance for certain categories of risk is essential. One of the most onerous requirements is for employers liability insurance. Failure to have appropriate insurance cover in place can put you out of business, or even worse result in personal bankruptcy depending on the scale and nature of the claim.

The law in most countries including North America, the United Kingdom and most of Western Europe requires all employers to maintain employers liability insurance underwritten by an approved insurer to provide cover in respect of claims brought by employees for any sickness or accident caused through their work.

The main exemption in the UK is for owner managed limited companies where the only employee is the majority shareholder i.e. that individual owns more than 50% of the equity of the company.

In the UK based on legislation as at October 2007, there is a mandatory requirement for employers to hold minimum cover for £5 million. In practice a significant proportion of policies offer a minimum cover that is greater than this figure.

So you think you don't employ anybody?
Often when contractors are working freelance insurance considerations are not high on their list of priorities. It is not uncommon for a contractor to make the fairly reckless assumption that because the business is small and often relationships are informal then certain key pieces of legislation do not apply.

A freelance consultant or contractor will be at pains to ensure that contracts with clients are structured in such a way as to avoid the requirements of IR35. One key element of demonstrating this will be to have a 'right of substitution' clause in the consulting contract.

Some Contractors have found to their cost that the existence of this clause implies that the consulting practice has employees who could be substituted for the principal should the need arise, therefore, it follows that there is a requirement for employers liability insurance to be in place.

Furthermore, you should take legal advice on whether your subcontractors are likely to be judged to be self-employed according to the criteria and laws surrounding employers liability insurance.

The law will look through and beyond any contractual details with the objective of ascertaining the true nature and essence of the relationship between the lead contractor and his subcontractors - applying the principle of 'substance over form'.

If your consulting practice is investigated to establish whether you should have employers liability insurance, then factors such as the degree of direction and control you exercise over the day to day work of your subcontractors can be central to the decision. Very simply, individuals who you assume are self-employed can in fact be deemed employees even if they work for your practice on a part time or interim basis.

If you are judged to have been trading without employers liability insurance when in fact you should have had this cover in place, then you are exposed to substantial fines which can be in the order of £2,000 per day that you were illegally operating on an uninsured basis.

Freelance insurance requirements can be onerous and some would claim overly bureaucratic with the potential to stifle initiative and collaborative working.

The smart approach is to invest in obtaining advice from an appropriately qualified professional to ensure that your consulting practice operates within the law.

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