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Why PI insurance is necessary for freelance consultants

With flexibility, power and a greater potential for earning, freelancing is a highly appealing career choice. It gives individuals greater responsibility and ownership, as well as allowing for sole business decision making.

However, like any job, there are always less positive elements that one must consider. Job security and stress comes to mind for most, yet risks that can be mitigated by implementing an insurance program are often overlooked.

When a freelance consultant offers a specific service or specialist expertise, they owe a duty of care to those relying on them for that particular advice or job. Dissatisfied clients or those claiming to have suffered a loss on account of the freelance work could hold the individual financially liable.

To safeguard both a freelance business, as well as the freelancer’s personal assets, it’s crucial to secure Professional Indemnity (PI) insurance, which offers protection against client claims.Despite this, it is commonplace for freelancers to question the necessity of this insurance, and only take up cover if contractually required. As a risk-adverse insurance professional, I would encourage anybody providing specialist expertise to carry PI, if only for peace of mind. Understandably, costs and other factors influence the decision, however, I would recommend the following processes when considering taking out insurance.

The first step is to determine whether your client/s’ insurance provides you with indemnification. For example, where you contracted to a single company, and you are providing services in areas in which the company is experienced but has a lack of resources, it could be reasonably argued for your work to be coveredPI Insurance - Protecting Financial Assets under their insurance arrangements. Often this would require negotiations with your client, however, it may be cheaper for cover to be incorporated in their policy, rather than you taking out your own insurance and passing on the cost. Where a client’s policy does extend to cover you as a contractor, it is advisable that you obtain proof of insurance including confirmation the policy indemnifies your company or you as a sole trader.

A company that has engaged you to provide expert advice is unlikely to expose themselves to any financial implications resulting from an error in your judgement. This is because they are paying you to undertake work with a high level of autonomy and decision and, presumably, in an area they are lacking in knowledge or experience. Where, in the event of an error, your services could result in a catastrophic impact on your clients business, it is probable that your client will insist that you have your own professional indemnity insurance.

Where your client/s do not require you carry your own insurance (unless you a member of professional body where it is required that you hold cover) it is not legally compulsory to maintain PI insurance. Thus, the choice will come down to a personal decision in respect to mitigation of risk.

If you decided not to acquire PI insurance, any claim against you, either from a mistake or an alleged mistake, means you would be sued and would need to fund your defence costs, as well as any ultimate settlement or damages awarded against you. While you may be confident you will always provide accurate advice and submit work without error, if a company has suffered financial loss due to something your work was anyway related to, you can almost guarantee that you will be sued directly or joined in a legal action for compensation. A successful claim could result in the bankruptcy of your company as well as the possibility of directors being personally sued, or the loss of your personal assets, potentially leading to personal bankruptcy if you are a sole trader. Regardless of the outcome, you would need to pay legal fees, which can be a hefty expense for freelancers.

Whether you purchase insurance or not, it is prudent that you build a limit of indemnity in your service contracts. This should be limited to the value of the agreement, and ideally limited to the maximum fees paid under the contract in a 12 month period. This approach helps limit the degree of liability which may even reduce your insurance costs.

Whatever your eventual decision, I’d highly recommended at least obtaining quotes for PI insurance, so you are able to make an informed decision. It may also be useful to refer to our previous PI Insurance Basics article, which provides an overview of some key areas to review when comparing policies.

If you would like more information, please drop us a comment, email or call Intuitive on (02) 9493 6111.

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