Fractional roles are a growing trend, especially in industries where rapid change and innovation are crucial. The rise of gig economy platforms, freelance marketplaces, and consultancy networks has made it easier for businesses to find and hire fractional professionals. This trend is particularly prominent in tech, finance, and marketing sectors where the demand for specialised knowledge and agile work arrangements is high.
If you are thinking about working in a fractional role, or you are already working in a fractional role, have a read of the key insurance considerations for you. Getting the right insurance is potentially trickier than expected. It could be that due to the type of services you provide, you may fall into a gap of insurance coverage.
First and foremost, as a fractional worker, you need to ensure your roles and responsibilities are clearly defined. Fundamentally, you need to define whether you provide advice, whether you make decisions for the company, or both. This distinction is important as it determines what sort of insurance cover needs to be in place to protect you.
Professional Indemnity (PI) Insurance
PI insurance covers the legal defence costs that arise from lawsuits due to errors or omissions in professional services. This insurance is bought by the service provider company and usually covers subcontractors. This means, if you work as a contractor, you need to make sure that the company representing you has a PI policy in place. Note that PI policies are taken out by entities and not individuals. If you are an individual independent contractor you may need to register a business entity in order to get PI insurance coverage.
PI policies are only meant to cover claims related to providing professional services, i.e. CFO, CTO, marketing or HR expertise. It does not usually cover claims related to making management decisions. There is often a management liability exclusion for this. An example being that you serve as a fractional Head of HR who not only sources the candidates for recruitment but also makes the decision on key hires. The founder has a disagreement with a key hire you made and sues you because they claim that they never gave you the approval to make that hiring decision. That lawsuit would not be covered by the PI policy if there is an exclusion for management liability claims.
For those acting as fractional CFOs, here is a specific consideration for you. PI policies generally have exclusions related to providing investment advice. This is particularly important for fractional CFOs working for startups that are actively fundraising. The common exclusions in these policies exclude claims related to performance guarantees, forecasting and predictions on profits. This means that if investors sue you for allegedly misleading them about the startup’s potential of achieving certain profit, this would most likely not be covered by the PI policy.
Another important insurance policy for your consideration is Directors & Officers (D&O) Insurance. It is also known as a Management Liability policy. This is because it protects the company’s management from the liabilities they face, i.e. protecting management from lawsuits and investigations related to errors in managing the company. This is paramount for fractional workers to consider if you make decisions for the company. As mentioned previously above, PI policies usually have a management liability exclusion, so it is important that fractional workers check that a D&O policy is in place for the company that they work for and that it extends to cover them as an individual contractor. Most D&O policies have exclusions for subcontractors so you need to work with a knowledgeable broker to get this coverage.
As you can see, it can be quite tricky to adequately cover the risks of fractional workers depending on the nature and type of work you provide. Getting sued for an error can be extremely costly. Moreover the risk of errors may be heightened when working as a fractional worker across multiple clients and industries. It is important to have a discussion with an experienced broker like Anapi who can talk to you about your specific situation, the types of services you provide and to which types of companies you provide your services to. Whilst this article has highlighted the common relevant exclusions of the PI and D&O insurance policies, we have experience in structuring policies to cover the risks in these grey areas.
