There's a myth that if you’re a Limited company you don’t need to have professional indemnity insurance because of the protection operating as a Limited company gives you.
Being a Limited company means that your business is considered a separate legal entity from you—the owner of the business. The advantage of this is that you won’t be personally liable for any financial losses, keeping your personal assets safe should the business become insolvent.
Sounds good, right? So if it’s safer when operating as a Limited company then you don’t need to consider insurance, correct?
Whether you’re a Limited company or a sole trader, your responsibilities to the client remain the same. You have to;
- work to a project scope
- deliver work on time
- provide work to a certain standard
Falling short with any of these responsibilities can lead to a client making a claim against you. Whether Limited or not you still need to defend that claim.
This is where insurance comes in.
There’s no difference in how insurance works whether you’re a sole trader or a Limited company. If a client threatens legal action or tries to recover damages from you, you’ll need to find the most effective and affordable way to stick up for yourself.
Let’s look at one of the most common claims we see at With Jack. You’ll notice it isn’t relevant how the company is structured. What matters is the accusation and how you're able to respond to it.
Freelancer and client agree on statement of work. Contract is signed, deposit is paid and work begins. Freelancer underestimates the workload and this leads to them delivering their work late. The client is unhappy about it and claims they’ve lost income due to the project delay. They look to recover their lost income from the freelancer, including costs incurred for hiring other freelancers to help meet their deadline.
This is a really common story and there’s no relevance to the freelancer’s company structure. They were hired to do a job, deliver work on time and meet the client’s expectations. Limited company or not, the freelancer needs to find a way of handling the situation that means they're not at a financial loss. That’s what your insurance is for.
If the freelancer did have to pay the client damages for loss of income and hiring extra freelancers, they would have to find that money from somewhere irrespective of their company structure. Unless they have insurance, of course. But my point is—when it comes to your responsibility to clients, there is no difference between being a Limited company or a sole trader.
Yes, incorporating your company means you have some extra protection if the business runs into financial difficulty, but if we want to be in the best position possible to stand up to difficult clients or atone any mistakes we make then we must consider professional indemnity insurance.