We know that business insurance terminology can be confusing – our glossary will help you understand some of the key terms.
Whether you’re buying business insurance for the first time or taking out a new policy, it’s really important that you have a good understanding of your insurance cover.
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Basic business insurance terminology
This business insurance jargon buster gives definitions for some of the key commercial insurance terms. It’s organised alphabetically.
We’ll explain some of the business insurance cover types, and run through some words and acronyms that you may come across in a quote form or in your policy documents.
Please note that this list isn’t exhaustive, and these aren’t legal definitions. If there’s anything about your business insurance that you’re not sure about, contact us.
The Simply Business glossary of UK insurance terms
Bona fide subcontractors
When you’re buying employers’ liability (EL) insurance, you’ll need to tell your insurer how many employees you have. If you have any subcontractors, it’s important to understand the difference between labour-only subcontractors and bona fide subcontractors when you answer this question.
Bona fide subcontractors work under their own direction (rather than under your direction) and supply their own tools and materials. They will usually have their own insurance in place, and so you won’t have to count them as an employee for the purposes of EL. Labour-only subcontractors, meanwhile, are counted as employees.
Business legal protection insurance
Business legal protection insurance – also known as business legal expenses insurance – is insurance that can cover a range of commercial legal expenses resulting from your day-to-day business activities. For example, it could pay out to cover the cost of an employment tribunal, an HMRC tax investigation, or a civil action brought under the Data Protection Act.
Business interruption insurance
Business interruption insurance is business insurance that can cover your revenue for a certain period of time if your business can’t trade because it’s been disrupted by something like a flood or a fire. It’s important to understand that your business revenue will only be covered if the damage that your business has suffered is also insured, for example by business buildings or contents insurance.
A consequential loss is injury or damage that arises indirectly from injury or damage that’s insured (ie an insured loss).
For example, if your business premises flooded and your business couldn’t trade due to damage to your business equipment, your loss of earnings would be a consequential loss if your contents insurance covered the flood damage. Business interruption insurance can cover this consequential loss.
Contract works insurance
Contract works insurance can cover the cost of redoing construction work if it’s damaged by something like a fire, flood or theft while it’s in progress. You’ll need it if your construction company has client contracts that make you responsible for partly-completed work.
Business insurance policies all have a cover limit, which is the maximum amount an insurer will pay out for a single claim, and/or the maximum amount that they will pay out in total for claims per year.
When you’re buying your insurance, you’ll often need to choose your cover level. In the case of buildings insurance, the cover limit will usually reflect the cost of rebuilding your property from scratch (the rebuild value), while in the case of something like public liability insurance, you’ll have to choose your cover limit based on the maximum amount you think you might need to claim.
When you receive your business insurance policy documents, check your cover limits carefully.
Date of loss
When you make a claim on your business insurance, you’ll need to give the date of loss. This is the date when the injury or damage occurred. In order for your claim to be paid, your insurance will need to have been in place on the date of loss.
Employers’ liability insurance
Employers’ liability insurance (EL) can cover compensation claims made against you by employees for illness or injury that they’ve suffered as a result of their work. Under UK law, this insurance is compulsory for most employers.
The Employers’ Liability Tracing Office (ELTO)
The Employers’ Liability Tracing Office (ELTO) is an independent body that provides a database of employers’ liability insurance policies, so that employees can find the details of an employer’s or former employer’s insurance if they need to make a claim.
Employer Reference Number (ERN)
An Employer Reference Number (ERN) — also called an employer PAYE reference — is a code that’s used by HMRC and other bodies to identify your company. It’s given to every business that registers as an employer with HMRC, and you can find it on HMRC correspondence. You’ll need it when you buy your employers’ liability insurance, because your insurer will need to add this information to the ELTO database (see entry above).
Many insurance policies will include an excess, which is the amount that you have to contribute towards a claim. For example, your business is flooded and you make a £1,000 claim on your business insurance. You have to pay £100 to your insurer towards the claim.
Sometimes, a higher excess means a lower insurance premium.
Fixtures and fittings
Understanding the definition of ‘fixtures and fittings’ is important when you’re buying business buildings and contents insurance. Basically, if you turned a building upside down, anything that didn’t fall out (a fitted unit or a sink, for example), would count as a fixture or fitting, while anything that fell out (a computer or a sofa, for example), would count as contents.
Fixtures and fittings are usually covered under buildings insurance, while you need separate business contents insurance for your contents.
Plant and machinery insurance
Plant and machinery insurance can cover machinery that you own or rent in case it’s damaged or stolen. It can cover things like diggers, mixers, forklifts and cranes.
Your insurance premium is the cost of your insurance. You can usually choose to pay your insurance premium in monthly instalments or as an annual payment. Your business insurance premium is tax deductible.
Principle of Average
If you don’t have enough insurance (ie your cover limit is too low), your insurer may apply the Principle of Average when you come to make a claim. For example, if you insure your business premises for £50,000, but the cost of rebuilding it would actually be £100,000, you’re underinsured by 50 per cent so your insurer may reduce any claim payment by 50 per cent. For example, if your roof was damaged and you claimed £10,000 to repair it, your insurer may apply the Principle of Average and only pay out £5,000.
Product liability insurance
Product liability insurance can pay for compensation claims made against your business for injury or damage caused by a product your business designed, sold or supplied.
Professional indemnity insurance
Professional indemnity insurance can pay for compensation claims made by a client against your business because they believe you’ve given poor advice or made a mistake in your work. It can also cover the legal fees. It’s an important cover for businesses that give professional advice, like accountants and architects.
Public liability insurance
Public liability insurance is a business insurance cover that can pay for compensation claims made against your business for injury or property damage. It can also cover the legal fees.
When you buy business buildings insurance, you’ll need to give the rebuild value of your business premises. This is the amount that it would cost to rebuild the property from scratch, including materials and labour. If you commissioned a survey when you bought your business premises, this should state the estimated rebuild value.
When you take out an insurance policy, you’re forming a legal relationship with your insurance provider, in which you’re the ‘first party’ and the insurer is the ‘second party.’ A ‘third party’ is someone who isn’t involved in creating the contract, but could be affected by it. This is usually a member of the public who could make a claim against you.
In the case of business insurance, the third party could be a customer, a client, a supplier or a passerby. There’s more information in our article on third party liability insurance.
Underinsurance is when you don’t have enough insurance to cover the total value of what you’re insuring. For example, your business equipment is worth a total of £10,000, but you only get £5,000 of business equipment insurance, or you cover your business premises up to £100,000 when the rebuild value is actually £150,000. If you’re underinsured, your insurer may apply the Principle of Average on any claim you make (see the definition above).
Wear and tear
‘Wear and tear’ is normal everyday damage that happens to items like furniture or equipment. You can’t make an insurance claim for wear and tear. If you make a claim for damage or loss of property, your insurer may take into account wear and tear when they’re calculating how much the asset is worth and therefore how much they will pay to replace it.
Is there any other business insurance jargon that you’re struggling to understand? Let us know in the comments so that we can update the glossary.