Insuring your business
Business insurance: an introductory guide
Adequate insurance is fundamentally important for a business. And in many cases, it is actually a legal obligation.
What follows is a brief guide to the types of insurance a business must have and the types of insurance it might consider desirable.
Mandatory and optional
Essentially, business insurance falls into two categories: the compulsory and the optional.
There are three types of mandatory insurance. Any business that employs staff must have employers' liability insurance. Any business that runs company cars or vehicles must have motor insurance. And any business that operates in certain professions, such as the law, must have professional indemnity insurance.
Of course, a business will also want to look at protecting itself with other, non-compulsory insurance. These might include cover for property, contents, equipment, interruption to business, goods kept in stock, goods in transit, money, loan repayments, public liability, product liability, partnership protection, health, critical illness and legal expenses.
All businesses that employ staff must take out employers' liability insurance. This will provide cover against any claims that an employee makes for any injury or illness sustained while working for the business.
Any company that has vehicles that are used for business purposes will need to have motor insurance. The minimum requirement here is third-party insurance since that will cover personal injury to others and damage to property. Comprehensive insurance will additionally cover for any damage to or theft of the vehicles themselves. In those cases where the car or van is used for private as well as business purposes, the insurance must cover both.
Some businesses - lawyers, financial consultants - offer advice as part of their service, and they will require professional indemnity insurance. This will protect them against clients who bring an action against them on the basis that the advice offered was wrong or negligent. As well as being a mandatory requirement for legal, accountancy and financial firms, professional indemnity insurance is often taken out by other types of business such as management consultancies and designers.
Basic business insurance
Most businesses have physical assets that need to be insured in case of damage or loss. These include premises, stock, equipment, tools and even money.
Exactly what sort of general insurance a particular business requires will depend on the type of business it is, the extent and nature of its physical assets, and the level of risk it faces.
Invariably, a business will operate from premises of some description, be it an office, a factory or a retail outlet.
A good, standard building insurance policy should offer insurance against damage caused by fire, floods, storms, lightning, vehicles, vandalism, explosions and riot.
It is possible for a business to choose an all risk policy. This will provide protection against any other sort of damage or loss mentioned in the policy, although it will not cover daily wear and tear, electrical failures or general deterioration.
Calculating the insurable value of a business building is not the same as simply placing a market value on it. The insurance should cover the cost of completely reconstructing the property. This is called reinstatement. To arrive at the reinstatement value of a building, a business should consult with a chartered surveyor in order to get an accurate figure.
If the property is rented rather than owned, the business should check with the landlord who is responsible for insuring the building before any lease is signed. This duty normally falls to the landlord.
Even if a business isn't responsible for insuring its building, it will need to insure the contents such as computers, plant, equipment and stock.
There are usually two sorts of contents insurance: replacement as new and indemnity. With indemnity cover, the wear and tear to which the item has been subject is deducted when calculating a claim. But whether it is at full value or allowing for wear and usage, the policy must cover fire, flood and theft.
Business interruption insurance covers a company for any costs or loss of profits that arise from an event - fire or flood or major theft - that threatens to interrupt its ability to carry on trading. The costs should include having to re-locate to temporary premises and renting emergency replacement equipment.
Additional insurance cover
The nature of a firm's business will dictate if it needs to take out special types of additional insurance. There is a range of specific policies available, some of which will have more relevance to certain businesses than others.
Laptops and mobile phones can be expensive and vulnerable, so they must be insured against fire, theft and accidental damage whether on or away from the business premises.
Goods in transit
Any business that transports its goods should invest in cover to protect them against damage, loss or theft while in transit. The policy ought to cover road hauliers, couriers, the post or one of the company's own vehicles, and should include door-to-door deliveries.
Stock that is susceptible when in storage - food items kept in a freezer, for example - should be insured against accident or damage.
Cash, cheques, stamps, normally to a set limit, can all be covered against loss or theft. The premium will be priced on whether the money is on the business premises, in a safe or in transit.
Businesses whose employees regularly travel abroad will need travel insurance.
Expenses insurance will provide a business with compensation if it should experience a financial loss.
Businesses that are unable to meet their commitments on loans and overdrafts, either though accident or sickness, can take out insurance to protect the repayments.
Legal actions can be very expensive. Legal expenses insurance will cover the costs involved in conducting or defending a legal action and, depending on the policy, employment disputes, tribunals and tax audits.
Should a customer be unable to pay a bill as a result of a business failure, the loss can be made good, wholly or in part, with a credit insurance policy.
Some machinery is specialised or expensive enough to require its own insurance policy. In some cases, and depending on the type of machinery involved, insurers will insist on inspecting the machinery involved on a regular basis.
Data processing insurance
Businesses that handle large amounts of electronic data can get insurance to protect their processing equipment.
The law stipulates that all business vehicles must have insurance cover.
However, a business must also make sure any vehicles that belong to its employees but which are used for business purposes are also covered for business use. The same applies to the business owner's vehicle or vehicles; any private insurance policy will have to be extended to include business use.
A business should also consider the type of business use to which the vehicles are to be put. This is because varying types of business use require different sorts of cover. A sales employee who is constantly on the road will not be treated for insurance purposes in the same way that an employee who only rarely drives on company business.
Businesses with more than five vehicles may be able to get discounted fleet insurance.
A business must inform its insurers if any of the employees who drives for the firm has been convicted of a serious motor offence in the past five years. Failure to do so could mean that the business will not be insured.
Normal household insurance policies are not sufficient to cover those people who run their business from their homes.
They will need to extend their household policies to include any office or business equipment. If clients visit their home to discuss business projects, then, as with other business premises, a home-run business will also need to take out public liability cover (see our liability insurance guide).
To make sure it has the right type and the right level of general and specialist insurance, a business should consult with an authorised and regulated insurance broker or provider. An insurance provider should be a member of the General Insurance Standards Council; a broker should be chosen through the Institute of Insurance Brokers.
Under the law, a business has certain duties towards its employees as well as to its customers and the general public. If it neglects its responsibilities or ignores its duties, then the business could be deemed legally liable as a consequence for any injury or illness sustained by either a member of staff or of the public. Liability insurance is designed to cover the legal costs and the compensation that might be incurred were the business to be sued and judged at fault by a court or tribunal.
Employers' liability insurance
Employers' liability insurance is compulsory for any business that employs staff. The aim is to provide the employer with cover to pay for any compensation or legal costs that arise as a result of a workplace injury or illness suffered by an employee that is deemed the fault of the employer.
For the purposes of employers' liability insurance, a worker is regarded as an employee if the business takes tax and national insurance from their salary; if the business is able to dictate when and where and how they work; and if the worker is unable to employ a stand-in when they themselves cannot do the work.
The law on employers' liability insurance says that an employer must be insured for a minimum of £5 million, although most policies offer cover of £10 million. The Health and Safety Executive has the power to fine a business up to £2,500 for every day that it lacks cover.
Only authorised insurers can provide employers' liability insurance. A copy of the policy must be displayed prominently in the workplace so that staff can read it; each copy must be retained for a minimum of 40 years.
Businesses should take care to offer their employees the protection that the law demands. They should also follow and implement the instructions of their insurers. Failure to do either could mean that the insurer may withhold payment in the event of a claim.
Public liability insurance
Many businesses have regular contact with customers or members of the public. Customers might visit the business, for example, or the business might need to visit its customers. Public liability insurance is intended to cover any awards that are made against a business for any personal injuries or damage to property for which it might be responsible. The insurance also covers the legal costs and expenses involved in defending a business in the case of any claims for an award.
Public liability is by and large voluntary, although a few types of business must take out cover.
Businesses that visit clients should make sure that their policy provides both on- and off-site protection. As well as businesses that operate from a shop or office, those that are run from home might also need public liability insurance if clients are in the habit of visiting.
The cost of the premium will be determined by the nature of the business, the turnover and the number of staff employed.
As with all policies, it is wise not to under-insure, since legal fees and compensation awards can be high. Any policy should be kept under review so that it adequately reflects any changes in the business and the scale of risk that those changes introduce.
Product liability insurance
The law regards a product as any item that is sold or offered to people by a manufacturer or a supplier.
Products must be made to a standard that suits their purpose. If, however, a product causes personal injury or damage to property because it is faulty or defective, then the company that made or supplied it is legally liable.
Product liability insurance will provide cover for any awards that might be made against a manufacturer or supplier for any injury or damage that is the outcome of a defective product.
If the business that supplied a faulty product is separate from the business that manufactured it, then the supplier might actually find themselves more exposed than the manufacturer since it is often they who will be claimed against first.
Ideally, the policy ought to protect the holder against safety claims, spoilage and indemnity costs like medical bills. There is, however, an important pre-condition. Product liability insurance only covers against unforeseen circumstances; it cannot be used to defend a business that makes or supplies an inferior or substandard product or that is responsible for poor quality workmanship.
Policies usually offer cover of between £0.5 million and £5 million. The cost of the premium will in part be affected by the level of risk posed by the product. This will be judged according to the use to which it is put, the circumstances under which it is used, and the people by whom it is used.
However, a business can help reduce the premium by implementing an effective quality control programme, of which the insurer should be made aware.
Professional indemnity insurance
Professional indemnity insurance offers cover for those businesses that deal in knowledge or particular skills.
If such businesses make a mistake or are negligent, then it safeguards them against any claims for compensation from clients that might arise.
Many professional businesses, like architects and management consultants and designers, opt to take out professional indemnity; but for some - lawyers, accountants and financial advisers - it is compulsory.
One of the peculiarities of professional indemnity insurance is that it must be held at the time that the claim is lodged as well as when the mistake was made. This is because there is often a substantial time lag between the two. To ensure that they are protected for long enough, anyone who either retires or shuts down their business will therefore need some form of continuation or 'run-off' cover.
In the event of having to defend itself against a claim, a business should always see that meticulous records are kept of all projects or commissions, and that contracts contain detailed and clear definitions of duties and responsibilities.
Directors' liability insurance
The position of a director of a company brings with it special responsibilities in a number of areas. Directors can be held liable, both as individuals and collectively, over such matters as health and safety, data protection, keeping adequate accounts, fraud and negligence.
Directors' liability insurance covers company directors for compensation, settlements and legal costs should a claim be brought against them. To qualify for cover, however, the directors must have acted inadvertently in breaching their duties; deliberate actions may mean that their liability is not met by the policy.
Property owners' liability insurance
Were any members of the public to injure themselves in an accident while visiting business premises, then property owners' liability insurance will pay for any damages that they might win as a result.
Sometimes such cover is included in a business or contents insurance policy. For businesses that rent rather than own their premises, it often the case that, while the business takes responsibility for insuring the contents, the landlord insures the building. The business must therefore check that at least one of the policies includes property owners' liability insurance.
The issue of the cost of business insurance has become a thorny one in recent years, with premiums reportedly rising by significant amounts each year. The volatility of the stock markets and, more importantly, the apparent growing willingness of employees to bring claims against their employers have, insurers say, added to the expense of putting together a viable policy.
Insurers will normally cost a premium by estimating the risk faced by a business. To do this, the insurer will consider the sector or type of industry in which the business trades; it will assess the actual level of risk; and it will review the claims record of the business.
A business is not entirely helpless when it comes actively to influencing an insurance estimate. If it can demonstrate that it has implemented a rigorous risk management policy, and if it has a good health and safety record, then the insurer will be more inclined to offer a cheaper premium.
A particular gripe - one that is now being addressed by the insurance industry - is that most premiums still involve a general calculation of risk taken across a number of similar businesses in the same or similar sectors. No distinction is made between businesses with an efficient health and safety policy and those that perform badly. The effect is that diligent firms end up paying higher premiums in order to subsidise those that are less attentive to their duties and obligations. While this is still the case, the good safety record of an individual business can have a bearing on the cost of the premium they will be charged.
The right advice
The numbers of claims being made against businesses are on the increase as employees and consumers are more prepared to go to law. With claims, and the costs of defending them, capable of reaching substantial amounts, the importance of adequate liability cover has never been more urgent for businesses.
To get the best advice on how to insure themselves in line with both the law and the risks facing them, a business should consult with an insurance broker. The broker should be a regulated by the Financial Services Authority, or should be sought through the British Insurance Brokers' Association.