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Independent Contractor Liability Insurance -
Freelance Insurance Essentials



What is Independent Contractor Liability Insurance?
Professional Indemnity Insurance, sometimes referred to as Independent Contractor Liability Insurance, provides protection for independent contractors against potential liability for claims arising from clients. In order for a claim to be successful the client would need to prove that the contractor has been negligent.

Is Contractor Liability Insurance compulsory?
For some qualified professionals who choose to work on a freelance basis, Contractor liability insurance is required by law in order for the individual to be able to practice.

In this context the word practice simply means providing professional advice to third parties, which includes commercial entities and the public. As examples, these professions include accountancy, law, financial planning services, architects and surveyors.

The regulating professional body for each profession determines the categories of individual and types of professional work for which Professional Indemnity Insurance is required.

What about other Professions?
It is a sensible precaution for a freelancer to purchase contractor liability insurance in circumstances where he is giving advice and expressing professional opinions to clients. Where clients are likely to act on that advice and be influenced in their decision-making there is always the possibility that a potential liability for the contractor could arise.

Professions in this category would include IT Consultants, Management Consultants, Project Managers, Programme Managers, Design Consultants and Engineering Consultants.
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How should I decide if I need Independent Contractor Liability Insurance?
You should seek advice from the professional institute or regulating body of which you are a member. There will be technical or compliance specialists within each institute who will be able to provide guidance and information to allow you to judge whether Professional Indemnity Insurance is mandatory or optional.

Following these discussions, if your instinct is that you probably do need Independent Contractor Liability Insurance the next step is to discuss your requirements with a specialist.

Contact either an Independent Contractor Liability Insurance broker or an Independent Contractor Liability Insurance company (an underwriter) to discuss the nature of your freelance work and your potential exposure to liability in the event that negligence is proven.

How much cover do I need?
The level of cover required will vary depending on your profession, the type of work and the size and nature of the client organizations that you intend to work with. In some circumstances the client will specify the minimum level of cover that needs to be in place in order for a consultant to be considered for the assignment.

How does Professional Indemnity Insurance work?
If an independent consultant makes a mistake or is negligent in his work and the client suffers some disadvantage as a consequence of this negligence there is the potential for a claim.

The client would notify the consultant of the problem and claim and immediately the consultant should notify his insurers. Typically both sides would engage lawyers to work through the process of establishing whether there was negligence and if so whether this directly led to disadvantage or loss for the client.

If the case is proven then damages will be calculated and awarded to the client. Professional Indemnity Insurance will cover the cost of this payment up to the level of cover purchased. The insurance will also cover legal and court costs.

Professional Indemnity Insurance operates on a 'claims made' basis so it is possible that claims will be made well after the work has completed. For this reason it is important to fully understand the time periods during which Insurance cover needs to be in place.

A freelance consultant will need cover from the date when he starts to practice through to the end of a set period from the point at which he stops practicing. This latter period is referred to as the period of Run-off.

During Run-off the consultant is no longer practicing but there is the possibility of residual claims for liability arising from work which was undertaken whilst the consultant was practicing. Therefore, it is important to maintain contractor liability insurance cover for a period following cessation of trade.

The length of this Run-off period will be influenced by a number of factors including the law in the country in which the consulting work was undertaken and the nature of the consulting contract. Typically this period is six years for mainstream contracts but can be twelve years if the contract is created by deed.

This is a fairly complex area of contract law and requires specialist legal advice. In the UK the requirements are rooted in the Limitation Act 1980 with the basic requirements generally referred to as the Statute of Limitations.
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How much will the Insurance cost?
Premiums will vary considerably depending on the risk of claims and the potential exposure in the event that a claim is successful.

A consultant who is highly experienced, well qualified and has a strong track record of successful client delivery with no claims, either historic or in progress, will be judged to be a much lower risk and premiums will be lower as a consequence.

Premiums will also be influenced by the level of cover purchased. For example, if the consultant is able to cap his liability at a maximum figure say for example £1 million for any single claim then premiums will be lower than for cover which is open ended.

Furthermore if the consultant is willing to pay an excess then premiums can be reduced still further. An excess is simply the amount of any payment made under the policy which the consultant agrees to fund from his own resources. For example, the first £5,000 of any claim might be paid by the consultant with any figure in excess of £5,000 paid by the insurer up to the maximum value of the cover that is in force.

Record Keeping Best Practice
It is important to maintain a full suite of documents and contracts for each piece of work undertaken. These documents will constitute vital evidence of the work that was both intended and completed and will be required by the insurance underwriter should there be any claim.

These documents needed to be retained for a minimum of six years given that a claim of professional negligence could be initiated well beyond the date the work was completed.

For more information on the run-off period refer to the information on the Statute of Limitations.

Summary
Independent Contractor Liability Insurance provides essential protection and valuable peace of mind for a freelance consultant. You need to establish whether insurance cover is mandatory for your practice and if so ensure that you have an appropriate policy in force.

If Professional Indemnity Insurance is optional then you need to undertake a risk assessment of your intended consulting activities and take a decision based on a simple cost / benefit analysis. Ultimately the decision will be influenced by your own attitude to risk and the value that you place on security and peace of mind.


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