An introduction to insurance cover for businesses All businesses need to be insured against potential risks such as contractual disputes, accidental damage, fire, flood or theft and claims for negligence. Some insurance policies, such as employers' liability insurance, are mandatory while the need for other policies depends on the size and type of business you are running. This paper explains which insurance your business must have under the law. It describes some other optional insurance policies that could give your business more protection and it covers how to choose an insurance policy. It provides hints and tips and sources of further information. What insurance is compulsory for businesses? There are currently two forms of insurance that are compulsory for almost every business: these are employers' liability insurance and motor insurance. Employers' liability insurance Employers' liability insurance covers all injuries and illness that your employees may suffer as a result of carrying out their duties. You must take out this insurance as soon as your business employs someone. You are exempt from employers' liability insurance only if you are the sole employee, or your employees are direct family. However, this exemption does not apply if your family business is a limited company as a limited company, even one with just directors and no other staff must have employers' liability insurance. Employees include trainees and contract staff. By law you must have cover of at least 5 million, although most policies now automatically provide cover of 10 million. You must display a current certificate of employers' liability insurance at each place of business. It should be put on view where employees can read it easily and can be displayed in electronic form if your employees have reasonable access to computers. Failure to display or supply a certificate, or make it available to Health and Safety Executive (HSE) inspectors when asked to do so, will make you liable for a fine of up to 1,000. You can also be fined up to 2,500 for each day that you don't have the correct policies.
Motor insurance All vehicles - whether cars, commercial vehicles or motorcycles that are used on the road - must be insured for minimum third-party liability and must include business use as part of their cover. Third-party insurance only covers the cost of damage to other people's vehicles or property and their personal injury so you may wish to extend this cover to give you third-party, fire and theft cover. Fully comprehensive cover will also pay for repairs to your own vehicles. Insurers normally need to know who the owner of the vehicle is, who will be using the vehicle for business purposes (especially any drivers aged under 25) and what it will be used for. You will need to check the licenses and driving history of any employee who will drive any of your vehicles and disclose any motor convictions to your insurer because these may affect your policy. If your business operates more than five vehicles, you may be able to benefit from a fleet policy. If employees use their own vehicles for business purposes, you must ensure that their own policy includes business use. What other types of business insurance are advisable? There are a number of areas of risk for which insurance cover is advisable. The list below covers the most common ones: Building and contents insurance Building and contents insurance cover can be provided for specific risks (such as fire or flood) or for a wide range of risks in one package (known as 'all-risks cover). You should have cover for all your property, including contents, stock and fixtures. It is particularly important to check the building sum insured to satisfy yourself that this is sufficient to pay for the full rebuilding cost of the property (including removing debris and the cost of professional fees) should the property be totally destroyed. If you rent premises, ask to see the landlord's insurance policy and check the range of protection that is in place. As a tenant, you will not usually need to take out a buildings insurance policy, but your landlord will probably require you to pay the value of the premiums as part of your rent. You should note that most business insurance policies no longer automatically cover damage caused by terrorist attacks. However, you can normally arrange for this in a separate premium.
Business equipment Computer insurance policies cover you for breakdowns and loss of information. Check that your insurance covers the computer environment, including the e-mail and Internet access system. Different types of insurance policies are available for machinery, including breakdown and statutory inspection cover. This type of insurance can be included as part of your contents cover. Business interruption Business interruption insurance (also known as consequential loss insurance) protects your income and overheads. Depending on the wording of the policy it may also compensate for the extra costs incurred and trading profits lost if your business suffers serious disruption after, for example, a fire. You are usually covered for an interruption period of up to 12 months from the date of loss or damage, although cover for a longer period is often available and might be desirable depending on the circumstances of your business. For example, if damage to your office would increase the cost of working, you can claim added expenses such as the cost of fitting out temporary offices, removal costs and expenses and additional rent and rates, provided this is covered under your policy. Public liability Public liability insurance covers your business against accidents to members of the public or damage to property that occurs as a result of your business' negligence. It also covers any related legal costs and is normally linked to employers' liability insurance in policies for small businesses. Product liability It is common for insurance companies to offer product liability cover to manufacturing and supply businesses as part of a complete public liability package. Generally product liability insurance will not cover you for recalling faulty items. Product recall cover may be obtained through your insurance broker, in which case it will be insured under a separate policy. Professional indemnity This insurance covers you against being sued for giving poor advice or acting negligently in some way. It is mandatory in certain professions, such as law, accountancy and financial services. It is also now common in areas such as management and computer consultancy, engineering and design. Cover usually includes breach of professional duty, breach of copyright, breach of confidentiality, libel, slander and loss of documents.
What other types of insurance should you consider? Legal expenses insurance An increase in legislation affecting small businesses, and the financial and other penalties for breaching the law, have created more demand for helplines and cover for commercial legal expenses if things go wrong. Policies available range from cover for employment disputes (including claims brought against you by employees in employment tribunals - sometimes referred to as employee litigation insurance), contractual disputes with customers and accountants' fees following tax or VAT investigations. Personal liability A director of a company can be sued personally over an increasingly wide range of matters relating to the business. The personal liability of a director is unlimited. Legally, the directors of a company and the company itself are separate entities and so may both be defendants, separately or jointly, in any legal action or prosecution. To protect the personal assets of individuals and, crucially, to cover the costs of their defence, personal liability insurance is widely used. Modern policies insure directors and senior managers and, depending on the policy, can also extend to protect other employees. Directors' and officers' insurance extends to protect the company, rather than leaving it to fund its own defence, acting as a mechanism that may also protect the value of a director's personal holding in the company. Key man insurance This form of insurance cover pays a benefit to the business on the death or incapacity of a key employee that would otherwise result in financial hardship for the business. However, this is normally appropriate only for senior members of the team such as managers or directors or others with a fundamental significance. You can buy this type of cover as a single policy but it is more often incorporated into the overall business insurance package. Income protection and critical illness As a self-employed person, you can buy insurance cover to pay out if your income ceases unexpectedly. There are several types of income protection policies. These include: Combined cover for accident, sickness and unemployment (ASU). Disability or critical illness insurance. Permanent health insurance (PHI), also known as long-term disability cover. Insurance for specific costs such as mortgage or loan protection policies to cover periods when you can't work.
These provide for circumstances like loss of income, medical fees in the event of an accident or sickness and key personnel replacement that would cover either you as an individual trader or the business itself. When considering whether or not to take out a policy, you should weigh up the policy's costs and potential benefits against the alternatives of building up a contingency fund to carry you through unforeseen circumstances or the possibility of bringing in and paying someone to run your business until you are able to return. Credit insurance This covers you against customers who are unable to pay money owed to you because they have gone bankrupt. This type of policy can also help prevent losses resulting from late payment. You can usually choose policies to protect specific invoices or your entire business. Homeworkers' insurance A growing number of businesses begin in a person's home. However, a specific homeworkers' insurance policy may be needed because most ordinary household insurance policies do not usually cover business risks such as the loss of equipment due to theft or damage and employers', public, or product liability. If you work from home or use your car for business, your household and motor insurance may be invalidated. This is often because some insurance companies assume that, because you are working from home, part of the premises and some of the contents should be covered by a form of business insurance. If you work from home you should tell your insurance company and they will advise you whether your activities are covered; most clerical work, for example, will be. Remember that health and safety regulations apply to working from home and if you are likely to have customers visit you then you will need public liability insurance. Any insurance that is tied to your mortgage may also prohibit you doing business activities at your home. If you are considering working from home you should seek the advice of your insurance company about the level of cover required. How do you choose an insurance policy? Using the services of a reputable insurance broker will help you find the best policy to suit your requirements at the best value. Ideally, you should consult insurance brokers or consultants who have experience of small businesses or your particular sector. You may be able to find a specially tailored package including a range of insurance policies appropriate to your business. Examples of specific business packages include tradesman insurance, restaurant and bar insurance and shop and office insurance.
The Association of British Insurers (ABI) provides a directory of members at www.abi.org.uk and the British Insurance Brokers' Association (BIBA) provides a directory of brokers and types of policies for businesses at www.biba.org.uk/consumerhome.aspx. Any insurance company you use should be authorised by the Financial Conduct Authority (FCA, www.fca.org.uk). Most are members of the ABI. Check an insurer is authorised by calling the FCA's enquiry line (0800 111 6768) or visit the website. Always shop around for advice and quotes. In summary Take time to assess the risks you are insuring yourself against and the amount of insurance cover you need and try to review this at least once a year. Insure stock for its replacement cost price, without any addition for profit. Plant and machinery should normally be insured on a 'replacement as new' basis. Check what excess you need to pay and that it is appropriate. Most insurance policies require you to pay an excess to cover the first part of any claim. Bear in mind that agreeing to a higher excess can significantly reduce the insurance premiums you will pay. Consider switching to a policy with a lower excess if most of your claims fall beneath the excess threshold. However, the premiums may cost you more. On the other hand you may want to avoid making claims just above the excess if this would mean increased premiums in subsequent years. Advice Disclaimer This book/article contains general information and should not be used as a substitute for taking specialist advice. It is not to be relied upon or intended to be an accurate statement of fact. No representation or warranty, expressed or implied, is made as to the accuracy of the information contained in this book/article and accordingly the information should not be depended upon for specialist advice on any particular matter. Appropriate advice should always be taken from a specialist practitioner before taking or refraining from taking any action. MBHQ are not responsible for any loss, howsoever caused, arising directly or indirectly from reliance on the information on this book/article.