Business Insurance Guide
Anyone who thinks business insurance is an unnecessary expense need only look at the plight of thousands of business people in northern England, whose premises suffered from flooding in the summer of 2007.
Just one week after the worst of the flooding in Yorkshire in June 2007, almost 7,000 businesses had submitted claims for an average of £100,000 of damage, according to a Financial Times report (9 July 2007).
Not only were factories, shops, offices and warehouses hit by physical devastation, but the cost of business interruption in many cases will be significant.
So if you already run a business, or are thinking of starting one, insurance isn’t just a legal requirement, it’s clearly eminently sensible. But as with any type of insurance, it’s only when you have made a claim that you find out just how good, or not, the policy and the insurer standing behind it is.
If they’re not up to scratch, by the time you make a claim it’s too late, which is why it’s vitally important to have the right cover from a reputable insurer, not just for the compulsory elements, but for other contingencies that it’s wise to insure against.
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Legally required insurance
The minimum insurance required by law is insurance against risks to third parties. These fall into the following categories:
Employer’s liability
Once you take on even one employee your company is required by law to have Employer’s Liability Insurance. The prescribed legal minimum is currently £10m of cover against bodily injury, illness or disease sustained in the course of employment. Exceptionally, companies where the only employee is the owner of the business are not required to buy this insurance.
Public liability
This covers your liability to pay damages if any member of the public (including a customer or client) sustains an accident resulting in injury, contracts an illness or disease, or suffers loss or damage to their property for which you or your company are deemed to be responsible.
Product liability
This protects you against claims by anyone, other than an employee, for injury or damage to their property caused by any product, from software to machine tools, that you have manufactured, supplied or repaired.
This includes the supply of products to other businesses. Although, generally speaking, it is the manufacturers of a product who are liable if things go wrong, you could face a claim as a supplier, if the maker of the product goes bust. This type of insurance could also cover legal expenses and the cost of complying with any judgements or enforcements.
Professional indemnity
Possibly fuelled by attitudes across the Atlantic, we seem to live in increasingly litigious times. Businesses can be sued for damages over a wide range of complaints, from financial advisers giving poor advice, to surveyors failing to spot a serious flaw in a property. Professional indemnity insurance (PI) provides protection against any action by clients who believe you were negligent or gave poor service, as a result of which they have incurred losses. It isn’t always compulsory, but in many cases it is, for example, all businesses offering investment advice in any shape or form must have PI.
For other professionals, it is advisable and may be essential, if you wish to be a member of a relevant professional body. For example, the Institute of Professional Will Writers requires all members to have a minimum of £2m PI as a condition of membership.
Basically, anyone who supplies advice or services, such as consultancy should consider professional indemnity insurance. Some professional bodies even recommend individuals continue this cover beyond retirement, in case they are sued for work completed years earlier or for advice that later proves incorrect.
Motor vehicles
Any company vehicles must have as a minimum, third party cover. If any of your members of staff use their own vehicles for business (other than simply driving to and from work), then it is your duty as their employer to ensure that they have adequate insurance under their personal policies. Similarly, if you begin to use your own private vehicle for business purposes you should alert your insurer.
Other important cover:
Directors' and Officers' Liability
Even though the very nature of running a limited company 'limits' claims against its directors, in some cases (for example, for negligence), directors of limited companies can be sued.
Indeed, there are over 200 areas of statutory liability that directors and officers are personally exposed to which leaves them potentially vulnerable to unlimited personal claims for actions and decisions they take on behalf of the company. D&O insurance covers the legal costs of defending an action and reimburses individuals for personal liability arising out of a ‘wrongful act,’ or compensates the company where it has stumped up the cost on the individual’s behalf.
Smaller-sized businesses can be just as vulnerable to D&O claims as the big multi-nationals, but with potentially more ruinous outcomes, where the reliance on one or two key individuals is all the greater. D&O insurance is not legally compulsory, but it is highly recommended that you buy it.
Material damage
This is basically buildings and contents insurance. It covers you against damage to, or complete destruction (by fire or flood, say) of your premises. Buildings should be insured for the full rebuilding cost, including site clearance and relevant professional fees, for example, employing an architect. If you lease your premises, it is up to the landlord to arrange the building insurance and collect a share of the premium from each tenant.
Material damage also covers you against damage or theft of equipment, which can be insured either as ‘new for old replacement’ or on an ‘indemnity’ basis, meaning a deduction will be made for wear and tear. Stock should be insured for cost price, in other words without the addition of your profit margin.
Generally speaking, contents cover against theft requires a forcible break-in to qualify and excludes dishonesty on the part of an employee. This can be covered under a separate ‘fidelity’ policy. You can also arrange cover for ‘goods in transit’ which protects you if anything is lost or damaged while being transported in company vehicles or by independent carriers on your behalf. If you are transporting goods abroad you may need additional cover.
‘All risks’ sections can also cover cash and other negotiables such as postage stamps, though there will be upper limits on the amount insured, which may vary depending on whether they are lost or stolen from your premises or while in transit.
Normally linked to ‘material damage’ policies is a further optional policy covering ‘consequential losses’ – the risk of losing profit or business interruption as a result of the original problem. For example, you might have to cease or curtail trading temporarily if, say, your premises were flooded.
Other insurance policies you may need for your business
Even if your business runs on a tight budget, there are other types of insurance cover that you might like to consider. Employment Practices Liability Insurance (EPLI) - protects employers against costly discrimination claims brought by employees. The past few years have seen a number of high-profile legal discrimination cases, while new employment legislation has led to increased discrimination claims being brought against companies for religious, sex, age, disability and sexual orientation discrimination.
Legal expenses
This covers the cost of either bringing or defending a legal action and may also give you access to legal advice from the insurance company’s specialist lawyers. It may be included under the cover for other contingencies, such as product liability, so you may not need to buy standalone legal expenses cover.
Equipment
If like many businesses you rely on computers or any kind of machinery you might consider a policy that covers breakdown or malfunction, and even general servicing and maintenance. Some things must be regularly inspected by qualified engineers, including lifts and central heating boilers.
Credit insurance
This insures your business against any of your debtors going bust – you can either insure a proportion of your turnover or an individual account.
Life insurance
This is essential if, for example, your business supports your family. If you were to die you would want them to be provided for and to ensure that funds were available to pay off any business debts and enable the business to continue trading without you.
Permanent health insurance
Also known as ‘income protection’ insurance this covers you against long term loss of income through illness or disability.
‘Key man’ insurance
In small companies, success or failure often depends on the skills of one or two key personnel. This insures you against losing a vital member of your team through illness or death. You may even find that banks, financial institutions and private investors will demand this insurance as part of their security if they are going to invest in your business.
Where and how to buy business insurance
Most major insurance companies, including household names such as Axa, Norwich Union, Cornhill and Zurich offer business insurance as well as specialist companies such as Hiscox. Many offer ‘package insurance’ for small businesses that cover most of the main contingencies in a single policy. Others allow you to ‘pick ‘n mix’ cover, selecting from a range of options from the list above which virtually gives you tailor made cover.
You could also consider a policy designed for your particular business sector, for example the Association of British Insurers (ABI) offers an online premium comparison service on ‘packages’ for various groups, for example tradesmen, retailers, office businesses and commercial enterprises. (www.abi.business-insurance.co.uk)
If you are a member of a professional or trade body then, you might also find they offer good value insurance policies exclusively for members. There are also online insurers offering business insurance, for example, www.premierlinedirect.co.uk If you buy packaged insurance make sure it contains all the elements that are relevant to your business needs.
If you have a complaint
Insurance is regulated by the Financial Services Authority. Complain first to the insurer and ask for a letter of deadlock if the company cannot settle your grievance as you will need this in order to take a complaints to the FSA.
Last edited July 2007
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