Professional indemnity insurance for contractors: what it covers and how much you need
The Reality
Professional indemnity (PI) insurance is one of the few insurance products most contractors will be required to have before they can start a contract. Clients — particularly in financial services, IT, and consulting — typically specify minimum PI cover levels in the contract, often £1m, £2m, or more.
Unlike income protection or critical illness cover, PI is not primarily about protecting you. It protects your client against financial loss arising from errors, omissions, or negligence in your professional work — and in practice, it protects you from the legal and financial cost of defending a claim.
What professional indemnity insurance covers
PI insurance responds when a client claims you caused them financial loss through:
Professional errors or mistakes in your work
Negligent advice or guidance
Breach of professional duty
Intellectual property infringement (covered in some policies)
Defamation or libel (covered in some policies)
It covers the cost of defending the claim — legal fees and expert witnesses — and any damages or settlement awarded. Without PI, a contractor defending even a modest claim faces potentially significant legal costs before any judgment is reached.
What PI doesn't cover: bodily injury or property damage (that's public liability), deliberate acts, fraud, or claims arising before the policy inception date unless retroactive cover is included.
Why most contractors are required to have it
Clients engage contractors to deliver professional services. If a contractor's work causes a financial loss — a flawed system, an incorrect analysis, advice that leads to a wrong decision — the client may seek to recover that loss. PI insurance is how contractors demonstrate they can meet that liability.
In regulated sectors — financial services, healthcare, legal — PI cover may be a regulatory requirement for the end client's own compliance, not just a commercial preference. IT contractors working on financial systems, data projects, or regulatory implementations are particularly likely to face high minimum cover requirements.
How much cover do contractors need?
Contract-driven: check what your contract specifies and meet it. Common levels:
| Cover Level | Typical Use Case |
|---|---|
| £500,000 | Entry level; smaller clients, lower-risk work |
| £1,000,000 | Most standard IT and professional services contracts |
| £2,000,000 | Financial services, large enterprise, public sector |
| £5,000,000+ | Major infrastructure, regulated financial projects |
If your contract specifies £1m, you need at least £1m. Buying more than you need is rarely necessary; buying less than specified can void your contract.
If your contract doesn't specify a level, a working default for most IT contractors is £1m–£2m.
Claims-made vs claims-occurring
PI policies are almost always "claims-made" — they cover claims made during the policy period, not when the work was done. This has two practical implications:
1. Retroactive Date
The policy should cover work done before the policy started. Check your policy's retroactive date — a policy with no retroactive cover leaves you exposed for historical work.
2. Run-off Cover
When you wind up your company or stop contracting, you need run-off cover for a period after the policy ends, because clients can bring claims after a contract has finished. Typically 2–6 years of run-off cover is recommended.
Timeline: A client's claim can arrive years after the work was completed. Your current policy must be "in force" when the claim is made, not when the work was done. This is why both retroactive dates and run-off cover matter.
PII and IR35
PI insurance is relevant to IR35 status in one specific way: having it in place is consistent with operating as a genuine business. It's not a decisive factor, but it's part of the overall picture of legitimate business operation. A contractor without PI insurance, despite being required to have it by contract, presents a gap in that picture.
What to look for in a PI policy
Retroactive cover from your company incorporation date (or first professional engagement)
Legal defence costs included within the limit (not in addition — "costs in addition" policies provide better protection)
Coverage for your specific professional activities — check exclusions
Run-off cover option on cancellation
Right level of cover to meet your contract requirements
Specialist contractor insurance providers typically offer PI as part of a combined contractor insurance package alongside public liability and employer's liability (if you have employees or subcontractors). For most one-person limited companies, a combined policy is simpler to administer.
FAQ: Professional Indemnity Insurance for Contractors
Do contractors need professional indemnity insurance?
Most contractors are required to have PI insurance as a condition of their contracts, particularly in IT, financial services, and consulting. Clients specify minimum cover levels — typically £1m–£2m — and contractors must meet these requirements before starting work.
What does professional indemnity insurance cover for contractors?
PI insurance covers claims by clients that a contractor's professional errors, negligent advice, or omissions caused them financial loss. It covers legal defence costs and any damages or settlement. It does not cover bodily injury, property damage, or deliberate wrongdoing.
How much professional indemnity insurance do contractors need?
Check your contract — the required level is usually specified. Common levels are £1m for standard IT and professional services, £2m for financial services and enterprise clients, and £5m+ for major regulated projects. If your contract doesn't specify, £1m–£2m is a reasonable default for most IT contractors.
What is the difference between claims-made and claims-occurring PI insurance?
PI policies are almost always claims-made — they cover claims made during the policy period, regardless of when the work was done. This means you need a retroactive date that covers your past work and run-off cover when your policy ends, to remain protected for work already delivered.
What is run-off cover for professional indemnity insurance?
Run-off cover extends your PI protection after your policy ends — important when you wind up your company or stop contracting, because clients can bring claims for professional work long after a contract has finished. Two to six years of run-off cover is typically recommended.
Does professional indemnity insurance affect IR35 status?
Directly, no — having PI insurance doesn't determine your IR35 status. Indirectly, it's consistent with operating as a legitimate business. It's one element of the overall picture of genuine self-employment, alongside a well-drafted contract and independent working practices.
Related guides
Talk to an AutoBooks accountant about your contractor insurance requirements
Or see our full contractor insurance guide.