Usually not in the way contractors expect. A firm’s professional indemnity policy protects the firm, and many wordings extend to a contractor only for work done under the firm’s name and direction. Where the contractor is not an insured, the insurer that pays the client can seek to recover the loss from the contractor whose error caused it. A consultant trading under their own ABN is generally expected to hold their own policy, which is why professional indemnity insurance for contractors is written into most consulting agreements.
Whose policy answers when a contractor gets it wrong
The client’s claim normally lands on the firm that signed the engagement. If that firm passed part of the job to a contractor, its professional indemnity policy still has to deal with the claim, because the firm is answerable to its client for work done in its name.
What happens next turns on one definition in the wording: who counts as an insured. Wordings fall into two broad groups.
- Contractors included as insureds. Some policies bring consultants, subcontractors and agents inside the definition of the insured, but only for work done for the firm and under its direction. A contractor in this group is protected on that job and nowhere else.
- The firm’s liability only. Other policies cover the firm for claims arising from a contractor’s work without protecting the contractor. After paying the client, the insurer can step into the firm’s shoes and pursue the contractor who made the error.
The tax system starts from the same place. In its guidance on telling employees from contractors, the ATO lists risk as one of the markers: a business bears the commercial risk for costs arising from a defect in an employee’s work, while a contractor bears that risk personally. The feature that makes you a contractor for tax purposes is the one that leaves you exposed when a client loses money.
Three working arrangements and how each is usually treated
| Arrangement | Policy that usually responds | What to check |
|---|---|---|
| Employee, including fixed term staff | The employer’s policy | Nothing to arrange yourself |
| Contractor working under the firm’s name and direction | The firm’s policy, if its wording includes contractors as insureds | The definition of insured, in writing, and whether the insurer keeps a right of recovery against you |
| Consultant with your own ABN, brand and clients | Your own policy | Limit, retroactive date and a description of services that matches the work you do |
Most disputes come from the middle row. The contractor assumes the firm’s policy has them. The firm assumes the contractor carries their own. Nobody reads the wording until a letter of demand arrives.
Labour hire and agency placements add a third party. The agency agreement commonly requires the contractor to hold a policy, or to pay into one the agency arranges.
What a consulting agreement usually asks for
business.gov.au describes professional indemnity insurance as cover that helps with the cost of legal action from claims against your professional advice or services, including mistakes, neglect or breaches of contract that cause a loss for your client. It also notes that the cover is mandatory for some professions. For everyone else the requirement comes from the contract, and the insurance clause tends to set out:
- A minimum limit of indemnity, commonly 1 million, 2 million or 5 million dollars depending on the size of the project.
- A period after the work finishes during which the policy must stay in force. Six or seven years is common.
- A certificate of currency before you start and at each renewal.
The indemnity clause sits a page or two away and gets less attention than it should. business.gov.au’s guidance on contracts says that if a contract has an indemnity clause, you should not sign it until you understand the risks you are agreeing to. The insurance reason is specific. Professional indemnity wordings commonly exclude liability you accept under a contract beyond what the law would otherwise impose, so an uncapped indemnity for all of a client’s losses can leave part of a claim with you personally.
The same guidance lists a written contract as essential where the contractor’s insurance company needs one for professional indemnity purposes. A scope agreed in a phone call is hard to defend. Written terms that describe the service and cap your liability give the insurer something to work with.
Claims made: why the cover has to outlast the contract
Professional indemnity is written on a claims made basis. The policy that responds is the one in force when the claim is made and notified, not the one you held when you did the work. Two consequences follow.
The retroactive date matters. A policy covers work done on or after that date, so a contractor who lets cover lapse between contracts and starts again with a new date has left the earlier jobs unprotected. Keep the date fixed when you renew or change insurer.
Stopping work does not stop the exposure. A report written this year can produce a claim three years from now. If you take a salaried role, retire or wind up the company, run off cover keeps a policy in place for work already delivered. Allow for it when you price a contract, because the agreement you signed may require it anyway.
This is also why professional indemnity insurance for contractors is rated mainly on fee income and the type of advice given. The insurer is pricing this year’s work plus every earlier year that still sits inside the retroactive date.
If you engage contractors: checks before they start
A firm that subcontracts professional work carries the claim first and sorts out recovery later. Before a contractor starts:
- Collect a certificate of currency showing their trading name, the limit and a description of professional services that fits the job.
- Read your own wording for how it treats contractors, and declare fees paid to subcontractors on the proposal form at renewal.
- Put the engagement in writing, including who notifies the insurer if a client complains.
- Diarise their renewal date. A claims made policy that lapses after the job is finished is no help to you.
Professional indemnity deals with financial loss from advice and services. A contractor who also works on a client’s site needs public liability insurance for injury and property damage, since professional indemnity wordings commonly exclude both. Directors who sign these agreements have a separate exposure for the way the company is run, which belongs under management liability insurance.
What FRS does: we read the definition of insured and the contractual liability exclusion in your wording against the agreements you actually sign, whichever side of the contract you sit on. For contractors, we match the limit, retroactive date and description of services to the insurance clause before you commit, and we arrange run off cover when a contract or a career ends. For firms, we check how subcontracted work is declared so that a recovery dispute does not start at claim time.
For cover sections, exclusions and how premiums are set, see our professional indemnity insurance page.
Frequently asked questions
Does my client's professional indemnity policy cover me as a contractor?
Only if the wording says so. Some policies include contractors as insureds for work done under the firm’s name and direction. Others cover the firm alone, and the insurer may seek recovery from the contractor after paying a claim. Ask the firm for the definition of insured in writing before you rely on its policy.
Do sole trader consultants need professional indemnity insurance?
There is no general law requiring it. business.gov.au notes that professional indemnity insurance is mandatory for some professions, and for most other consultants the requirement comes from the client’s contract. A sole trader has no company standing between a claim and their personal assets, so most who give advice for a fee hold their own policy.
How long should a contractor keep professional indemnity after a contract ends?
For as long as the contract requires, and six or seven years is common. The policy works on a claims made basis, so it must be in force when a claim arrives, which can be years after the work. If you stop contracting, run off cover keeps a policy in place for past work.
Can a contractor be added to a firm's professional indemnity policy?
Sometimes. Many wordings already extend to contractors working under the firm’s direction, and an insurer may agree to note a contractor by endorsement. The protection stops at that firm’s work. Anything you do for other clients, or under your own name, still needs a policy of your own.
Questions about your own cover? Call 03 7046 3766 on weekdays between 9:30am and 6pm, or send us an enquiry.
