Having spent a lot of time on freelance forums, sub-reddits and communities, there’s one (terrible) assumption I see over and over again. A lot of freelancers believe that you don’t need to have insurance if you have a contract.
In the latest episode of Unsure? Insure! we dispel the misunderstanding that having a contract is enough to protect you from some of the pitfalls of freelancing.
Contracts are great. Contracts give clarity to a job and relationship. Contracts remove nasty surprises. Contracts help everybody get on the same page so that expectations are aligned—this being key to happy freelancer and client.
If problems do arise, contracts can help to diffuse the situation. It's beneficial to refer to a contract to show what was agreed to by both parties in black and white.
Ultimately, contracts are useful for laying the foundation of what duties are to be expected by both parties and it's not recommended to start a project without one.
Whilst contracts are great, a lot of freelancers incorrectly assume that having one is enough to protect them. But here’s something to consider…
- Contracts can be breached, by either freelancer or client
- A contract doesn’t stop a client from making a claim against you
Even though having a contract removes some risk and outlines the duties of both parties, it doesn’t completely eliminate risk. Insurance steps into action when those duties come into question.
This is why having a contract and insurance go hand in hand. It’s not binary. It’s not one or the other. Having a contract and being insured are both complimentary to each other.
Contracts can be breached
I mentioned that contracts can be breached, so let’s touch upon that.
- If you’re unable to complete the work, a client can accuse you of breaching the contract
- If you share sensitive client data, break a NDA or something along those lines a client can accuse you of breaching the contract
These are just a couple of examples, but there are many situations where you might do something that goes against what was outlined in the contract. This leaves you vulnerable to claims of breach of contract.
Let's assume you're uninsured, what would you do if there’s a contract dispute? You'd probably do one of the following:
- Do whatever it takes to make the client happy and make the problem go away
- Ask Slack, Twitter, Facebook etc for advice and receive questionable input from people who don’t have experience in handling these situations
With insurance you don’t have to do either of those things. Your professional indemnity insurance likely has an unintentional breach of contract clause. I say unintentional because, like all aspects of insurance, you have to show that you've been mitigating risk—that you’re not running around intentionally starting fires!
If you’re accused of breaching the contract, a legal expert would help you to defend those allegations and enter into negotiations with your client.
If compensation was agreed, the compensation would—along with the legal fees—be covered by your insurer.
Clients can still make a claim against you
Another point that many freelancers seem to be unaware of is that having a contract doesn’t stop a client from making a claim against you. A lot of the situations we see at With Jack where projects go wrong do, in fact, have a contract in place.
Whilst contracts can help to outline what duties are to be expected of both parties, they don’t prevent relationships from going sour if problems arise. That's when insurance can play a part.
Having looked over the last 5 claims at With Jack, 4 of them had a contract in place. One of those claims was to do with a contract dispute, two were copyright issues, one was a mistake leading to lost client data and the final claim was a client underwhelmed with the standard of work they received.
The last 5 claims happened due to a variety of issues and only one of those didn’t have a contract in place. As you can see from the above, a client can still threaten you or ask for compensation if they’re unhappy or deem you to be in the wrong—whether you have a contract or not.
To recap, here's why having a contract isn't enough to protect you:
- Contracts are excellent for laying down the foundation of what duties are to be expected of both parties, but insurance steps into action when those duties come into question
- Contracts can be breached by both parties
- Having a contract doesn’t stop a client from making a legal threat towards you or asking for compensation
- If you’re unable to complete work, accidentally breach a NDA or delete client data, a client can accuse you of breach of contract
- If you’re insured, a legal expert would help you to defend those allegations and enter into negotiations with your client
- Having a contract doesn’t prevent a client from making a claim against you. From the last 5 claims we’ve seen at With Jack, 4 of them had a contract in place
- The professional indemnity policy has a breach of contract clause and the legal expenses policy has some cover for contract disputes, too
- If you’re running a business and entering into contractual obligations with clients, being insured will help you should those obligations come into question