The Essential Guide to Business Insurance For Freelancers & Contractors

Understand what type of insurance you need to protect yourself & your business

Written by 
James Morgenstern
Updated on
May 28, 2024

Working as a freelancer or contractor brings freedom, but also a fair amount of risk. Unlike employees, this means you don't benefit from employer-provided insurance cover - and let’s face it, things can go wrong. 

Therefore many clients will require that you have specific insurance policies in place, such as professional indemnity insurance, as a prerequisite to work with you - giving you both protection against unforeseen loss.

The type of insurance cover you need will depend on your business, so let’s jump in and explore the most common types of insurance you might need.

Key Types of Insurance for Freelancers & Contractors

Professional Indemnity Insurance

Professional indemnity insurance (often called PI insurance) is essential if your business provides services or advice as it protects you against claims of negligence, misrepresentation, or mistake in the provision of professional services.

Often these mistakes happen without you realising it, and in such instances professional indemnity insurance covers the cost of defending any allegations or claims made against you. If you’re in the wrong, the insurer will either pay to fix your mistake or compensate your client if that’s not possible.

Because of how often these incidents happen and the damage they can cause, many clients will insist you have in place in order to work with them. You can learn more about Professional Indemnity Insurance here

For example: 

Software developer: A freelance software developer creates a custom application for a client’s business. After delivery, a critical flaw in the code leads to significant data loss for the client. The client sues the freelancer for negligence and loss of data. Professional indemnity insurance would cover the legal fees and any compensation that might be due to the client if the freelancer is found liable.

Graphic Designer: A freelance graphic designer creates a logo for a client, but unknowingly uses a design element that is similar to an existing trademarked logo. The client is then sued for trademark infringement and takes legal action against the graphic designer. The designer’s professional insurance could cover legal fees and damages that arise from this claim.

Public Liability Insurance

Public liability insurance (PLI) is another crucial type of insurance for many freelancers and contractors, though it covers different risks compared to professional indemnity insurance. 

Public liability insurance protects against claims of personal injury or property damage that third parties (such as clients or the public) suffer as a result of a freelancer's business activities. It's particularly important for those whose work involves physical interaction with clients or the public, or use of public or client spaces. 

For example:

Photographer: During a photoshoot in a client's home, a freelance photographer accidentally knocks over a valuable sculpture. The sculpture is damaged beyond repair, and the homeowner sues for property damage. Public liability insurance would cover the damages owed to the homeowner as well as legal expenses.

Personal Trainer: A freelance personal trainer conducts a class in a public park. During the session, a participant trips over the trainer's equipment and breaks an ankle. The participant sues the trainer for injuries sustained. Public liability insurance would help pay for the trainer's legal defence and any resultant damages.

Depending on your profession, many clients will insist you have PLI in place in order to work with them. You can learn more about Public Liability Insurance here

Employers' Liability Insurance

Employers liability insurance is a type of coverage that protects employers from financial losses if an employee becomes ill or injured as a result of their work.

You do not need employer’ liability insurance if you are the sole shareholder and director of your limited company. However, if you have multiple directors or employ staff, no matter how infrequently, employers' liability insurance is a legal requirement. 

If you do not have employers' liability insurance (and are legally required to do so), this could result in a fine of up to £2,500 for each day you operate without it. Additionally, failing to produce your employers' liability certificate if asked by the Health and Safety Executive (HSE) could lead to a fine of up to £1,000. You can learn more about Employers Liability Insurance here

Other types of insurance

Other types of insurance that you may want to consider include: 

Business Interruption Insurance

Although major disruptions are rare, their effects can be catastrophic. For instance, a flood could severely damage your home office. Business interruption insurance is designed to help you recover lost income due to such property damage, ensuring you remain financially stable during recovery periods.

Cyber and Data Risk Insurance

Cyber threats are a significant risk for anyone online, but freelancers and contractors who handle personal data are particularly vulnerable. Cyber and data risk insurance helps cover the expenses related to data recovery, loss of income due to cyber incidents, and compliance with regulations like GDPR.

Equipment Insurance

Freelancers often depend heavily on specific tools and equipment to perform their work efficiently - whether at home or on the move. Equipment insurance is crucial because it covers the replacement costs of essential gear, from laptops to mobile phones to cameras. Likewise, if you have an office, then you could protect your chairs and any other furniture.

HMRC Investigation Insurance

This type of insurance provides financial protection and peace of mind in the event of an HMRC tax inquiry, including those related to IR35 compliance - a regulation that affects freelancers operating as limited companies but working in a manner similar to employees.

It is important to note, that even if all of your accounting and IR35 policies have been conducted correctly, the time taken up by an HMRC investigation can be extensive and companies are often chosen at random for investigation. 

Mighty’s software and service fee does not include support in the event of an HMRC enquiry, so this insurance ensures you are protected for the assistance, expertise and cost an HMRC investigation could impose on your business. You can learn more about HMRC Investigation Insurance here.

Legal Protection Insurance

Freelancing comes with its own set of challenges, including potential disputes with clients such as them failing to pay an invoice. Legal protection insurance supports freelancers by covering legal costs, helping you handle such conflicts without bearing the financial burden alone.

Personal Accident Insurance

As a freelancer, you carry a heavy burden, especially since there's no sick pay to fall back on if you injure yourself. That's where personal accident insurance becomes invaluable. Should you be incapacitated, this coverage can kick in to cover your medical bills and provide weekly payments until you're able to work again.

How much coverage do you need?

There’s no universal rule for the level of insurance cover you need. It's contingent upon your business's turnover, the industry you operate within and the type of clients you service. 

Factors like the monetary value of contracts you handle and the scale of projects you undertake play a significant role in deciding your insurance coverage. Consider the worst-case scenarios, evaluate the costs and decide the level of risk you're willing to assume. The extent of this coverage should align with the potential financial losses you, your clients, your employees or the public could face in the event something goes wrong.  

Beyond Insurance: Minimising Risks

While insurance offers a crucial safety net, proactivity in risk management is invaluable. Establishing clear project parameters, following health safety rules, maintaining open lines of communication, and ensuring mutual agreement on all deliverables strengthens your business and reduces the risk of claims. 

Insisting on client approval and sign-off at each project milestone and meticulously recording all meetings and agreements provides an important paper trail, should disputes arise.

Mighty: Empowering Your Financial Management

Whilst Mighty can’t help with the operational risks you face by operating a business, we can help with your accounting. Mighty offers an all-encompassing SaaS platform that supports your bookkeeping, tax calculations, and ensures compliance with HMRC submissions. 

Mighty is designed to empower freelancers and contractors like you, providing the financial clarity and security that allows you to focus on what you do best – delivering exceptional service to your clients.

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