As one of our most popular articles we have updated this for 2016.
Okay, so this article won’t really fit in a nutshell (unless you print it really, really small). But we hope that you will find some useful information about the main types of business insurance covers, crammed snugly into these pages in an ‘easy-to-get-it’ format.
Insurance is one of the most important expenses your business might incur, yet often the most misunderstood. Every person is different and so is every business, and as such each individual business’ insurance needs will vary accordingly. That’s why it’s hard to provide a fully comprehensive guide to the business insurance world. However, we can certainly cover the basics, giving you the right knowledge to make sure that you’re buying the right insurance for your business.
So whether you’re a handyman working on your own, a boutique perfume shop with a few employees, or a multi-million pound international fashion company trading in different currencies and time zones, we’re sure you will find something useful in this guide to business insurance.
Public liability insurance
First let’s tackle public liability insurance. This is probably the most purchased business insurance and is essential for any business which interacts with the general public or meets their clients face-to-face – which is almost every business!
Public liability insurance is there to compensate a member of the public (i.e. anyone who is not associated with your business) should you or an employee accidentally injure them or damage their property. A good example would be a window cleaner who is cleaning a two storey window on a busy high street and drops his bucket. I’m sure you can think of many different things that could be hit and damaged or injured by the bucket.
Or perhaps a plumber leaves a piece of pipe lying around in their client’s home while they pop out to get some lunch and the client slips on it and injures themselves.
On top of this, we sadly live in a world where fraudulent claims are not unheard of and as a business owner you may well find yourself a target of one. If there is a claim against you of this nature your insurer will still protect you against it in the same way, so you aren’t spending money on legal costs just because you’ve been targeted.
If you ever receive a claim which you believe is fraudulent, make sure you notify your insurer immediately as the sooner it can be investigated the better. In fact, you should notify your insurer as soon as an incident has occurred, whether you believe it will lead to a claim or not, and even if you suspect it isn’t a ‘legitimate’ incident. The sooner your insurer has the information, the better the job they can do of protecting you.
How much public liability insurance should you buy?
Insurance companies offer a range of cover levels, commonly starting from £1,000,000 although sometimes lower. With certain business types such as shops, this will often start at £2,000,000. In some cases you may find a contract requires you to hold £5,000,000 or even £10,000,000, which is often the case if you’re working on a local council or government contract.
If you don’t have a contract specifying an amount, you will need to assess your own risk and level of exposure to the public. Perhaps you have a small jewellery shop with a low number of customers every day, but all your customers are celebrities – consider how much it could cost should a celebrity trip over in your shop and miss a concert performance.
Conversely, you may be running an online shop, selling goods without a shop premises. Perhaps you see a customer once a month who is coming to collect something rather than pay the postage. In this case, your public liability needs may be lower – although in this case you will most likely need to consider product liability insurance.
Product liability insurance
Product liability insurance provides the same type of insurance as public liability, in that it covers you for injury caused to a member of the public or damage to their property – the difference is that it covers damage caused by a product that has been supplied, installed, maintained, or manufactured by you.
It’s important to note that this isn’t the same as a warranty cover – this insurance does not cover you if the product you sold stops working or doesn’t work as it was supposed to. Product liability covers you should your product cause damage or injure someone.
For instance, an online shop may make and sell battery-powered toys. Because of bad wiring in the toys, they overheat and catch fire. In this case, the product liability cover would be there to provide compensation should a fire cause damage or injury.
Many insurers combine product and public liability insurance into a single product.
Employers’ liability insurance is the only business insurance cover required by law. It provides insurance for employees who are taken sick, or who have an accident, whilst working for you.
For employers’ liability you need to check to see if anyone you have working for you are considered “employees” as defined in the Employers’ Liability (Compulsory Insurance) Act 1969. For instance, a teaching school who 'pays' their students to clean the school by giving them a discount on their classes would be required to have employers’ liability insurance, as the student is technically an employee through the terms of the Act.
We’ve listed out the main details of the Act below. In my experience, the most prudent course of action when it comes to deciding whether or not to buy employers’ liability is 'if in doubt, get it'. Even volunteers working for you can be covered under employers' liability, so even though you may not be required to have it by law, you can buy it knowing that you’ll be covered in the event that they try to make a claim against you. As always, make sure you check your insurance policy to see who is and isn’t covered.
As with all insurance, every case is different, but there are substantial fines if you are found to not have employers' liability when you should – so it helps to err on the side of caution when considering whether someone working for you qualifies as an employee or not.
To make things simple, we’ve copied out the relevant section of the Health and Safety Executive Handout below. (The full copy of the handout is available here http://www.hse.gov.uk/pubns/hse40.pdf)
You need employers’ liability insurance unless you are exempt from the Employers’ Liability (Compulsory Insurance) Act. The following employers are exempt:
- most public organisations including government departments and agencies, local authorities, police authorities and nationalised industries;
- health service bodies, including National Health Service trusts,
health authorities, primary care trusts and Scottish health boards;
- some other organisations which are financed through public funds,
such as passenger transport executives and magistrates’ courts
- family businesses, ie if all of your employees are closely
related to you (as husband, wife, civil partner, father, mother,
grandfather, grandmother, stepfather, stepmother, son, daughter,
grandson, granddaughter, stepson, stepdaughter, brother, sister,
half-brother or half-sister). However, this exemption does not apply
to family businesses which are incorporated as limited companies;
- companies employing only their owner where that employee also owns 50% or more of the issued share capital in the company.
Further exemptions from the need to have employers’ liability insurance are listed at section 3(1)(a) and section 3(1)(b) of the Employers’ Liability (Compulsory Insurance) Act 1969, and Schedule 2 to the 1998 Regulations.
The following paragraphs may help give you some indication of whether or not a person is an employee under the Employers’ Liability (Compulsory Insurance) Act. However, it is for you to satisfy yourself of the status of the persons working for you and if you have any doubts, you should seek legal advice.
You may need employers’ liability insurance for someone who works for you where:
- you deduct national insurance and income tax from the money you pay them;
- you have the right to control where and when they work and how
they do it;
- you supply their work materials and equipment;
- you have a right to any profit your workers make although you may
choose to share this with them through commission, performance pay or
shares in the company;
- you require that person only to deliver the service and they
cannot employ a substitute if they are unable to do the work; or
- they are treated in the same way as other employees, for example,
they do the same work under the same conditions as someone else you
You may not need employers’ liability insurance for people who work for you where:
- they do not work exclusively for you (for example, if they operate as an independent contractor);
- they supply most of the equipment and materials they need to do
- they are clearly in business for their own personal benefit;
- they can employ a substitute when they are unable to do the work
- you do not deduct income tax or national insurance. However, even
if someone is self-employed for tax purposes they may be classed as an
employee for other reasons and you may still need employers’ liability
insurance to cover them.
If you are required to buy employers’ liability, the law requires you to be insured for at least £5 million, although many insurers offer a minimum cover of £10 million. You are required to display a certificate of the insurance where your employees can see it (printed or online).
Do you need professional indemnity insurance?
Professional indemnity insurance protects you from mistakes you make at work that result in a financial loss to your client, specifically after you’ve provided them with a service or advice.
An architect designs a house. Their client then spends money on building the house, only to find that it collapses as the design was faulty. The client will sue the architect for the money that he has lost as a result of the architect’s negligence, and the architect’s professional indemnity insurance will cover the costs plus any legal fees that are required (up to the limits of the policy).
On the other hand if a builder has simply built a house badly and it falls down as a result, professional indemnity insurance will not provide any cover, as it’s not the same as a warranty. It also isn’t providing a guarantee of work carried out badly (what insurers call “faulty workmanship”).
So in the two examples above, the architect has given advice to the client on how they should build a house; this advice has proven to be wrong as the house has fallen down, so professional indemnity covers the losses from the negligent advice. The builder however, has just done a bad job – the builder hasn’t advised the client how they should build the house, so professional indemnity insurance does not provide coverage as the loss was a result of “faulty workmanship”.
Some of the most common professions requiring professional indemnity insurance are:
Insurance coverage can start from £50,000 or sometimes lower, and can go as high as £5,000,000. It’s important for you to determine your own level of risk. One rule of thumb is to think how much it would cost to financially pay back your client if you make a mistake. So if you’re an IT contractor working on a large call centre telephone system and the whole system goes down due to your mistake, the potential loss would most likely be much bigger than an accountant whose only clients are small charities with low budgets and turnovers.
Business property insurance
So what about your computer, specialist tools, and equipment? Or even your own office? These can be covered too. An insurance policy that covers both your liability exposures (public liability, products liability, employers' liability, and professional indemnity) and also your property is typically called a comprehensive business insurance policy, and of course that’s what we offer. Some insurers will provide a discount for comprehensive policies, so it’s worth making sure you ask for quotes for everything rather than thinking it will be better to buy from different insurers.
Business property insurance is generally split into the following:
- Buildings insurance (this may be your shop or office)
- Fixtures and fittings insurance (if you haven’t already bought buildings insurance)
- Contents insurance (desks, chairs, printers etc)
- Portable equipment insurance (laptops, mobile phones, etc)
- Tools cover (any specialist tools, such as a carpenter’s tools)
- Stock cover (building materials, items to be sold, etc)
With all property insurance, particularly buildings, it’s important that you don’t ‘underinsure’. Underinsurance commonly occurs when someone insures a lower value than the total, thinking that ‘my whole house won’t blow away,’ or ‘my tools will never all be stolen together’ so they will never need to claim for the full amount.
If you haven’t insured the correct total value then you will be ‘underinsured’ and most insurers will impose the Principle of Average on your claim. Not sure what this is? Take a look at the definition below:
The Principle of Average
If a florist insures their building for £100,000 but the total cost of rebuilding would be £200,000 then they have only insured 50% of the shop. This means that the insurer has the right to impose average, meaning a penalty of 50% to any claims that they make. This could apply in the following scenario:
A tree outside the florist’s blows over and falls through the shop roof causing £50,000 worth of damage. Because of the Principle of Average that’s already been imposed, the insurer considers only half of this damage to be insured, so will only pay out £25,000 to the owner (minus any excess) – obviously a big short-fall and an unhappy florist!
This isn’t the insurance company being unfair – it’s a principle of insurance that you can only be paid for what you’ve physically insured. If you’re underinsured, they can only match the same. If a company is looking to insure 10 £1,000 laptops, but only insures them for £5,000 (thinking they will never all be stolen), how does the insurer know which ones are covered and which aren’t? And even if they’re never together there is still roughly 10x the risk of one of them being stolen, which the insurer must account for.
Contents, fixtures and fittings
We often see people confused by the difference between ‘contents’ and ‘fixtures and fittings’ cover. Imagine you were to turn a building upside down; everything that refused to budge (fitted cupboards, sinks, etc) would be fixtures and everything that fell out would be contents. Buildings insurance will usually cover you for the fixtures and fittings, so when buying buildings insurance you will probably only need to add on your contents – but if in doubt it’s always better to check with your insurer.
Finally, your portable equipment and specialist tools are pretty self-explanatory. However, it’s important to always remember the Principle of Average so make sure that you read your policy carefully as many insurers will impose restrictions. An example would be an insurer that doesn’t cover tools when left in a vehicle overnight. In some cases, often for an extra premium, these restrictions can be altered or removed.