As a business owner you’ll know that having the correct type of insurance cover in place can make the difference between your business surviving when things go wrong, or facing financial ruin. We’ve noticed that there seems to be confusion in the SME community about which insurance you need as a legal requirement and which insurance is advisable to have. We’ve created two lists that usually applies to most of our small business customers:
Top 3 on the ‘must have’ list (to be legally compliant)
- Employers liability insurance: if you employ staff you must have employers’ liability insurance. Employment in this context includes full-time and part-time employees, occasional and temporary staff.
This insurance covers the risk of claims by employees, for example due to accidents or sickness they claim to suffer as a result of working for you.
If you are a sole trader (with no employees) or if you only employ family members, you may be exempt from this requirement.
- Commercial motor insurance: if you use or own vehicles within your business, then you must ensure that you have appropriate commercial motor insurance. Personal motor insurance cover will usually not suffice for company cars.
- Professional indemnity insurance: where you are part of a recognised profession (for example a solicitor or a chartered accountant) and your governing body sets a standard that you have to comply with, you’ll need indemnity insurance. For example solicitors are required to hold professional indemnity insurance in order to practise law.
This may also affect individual freelancers, contractors and consultants as well as some small businesses or where a commercial contract requires it and it’s important not to overlook it. This type of insurance can be hugely beneficial if someone complains about the quality of your work and it looks like this will turn into a dispute that you’ll need to defend, this insurance may make all the difference to your prospects of a good defence and your ultimate success.
Top 7 things on the ‘good to have’ list (recommended but usually not legally obligatory)
- Public liability insurance: it’s probably one of the most important types of insurance that every small business should consider. This type of insurance will cover claims from third parties for personal injury, loss or damage that you may cause to someone else’s property and for causing the death of someone. Practical examples of the type of events that this insurance usually covers include slips and trips by customers visiting your business premises or the odd misplaced ladder/briefcase that may lead to a personal injury claim. Having public liability insurance is usually not a legal requirement but there are exceptions, for example if you own a horse riding establishment.
- Product liability insurance: if your business creates or handles products, there’s always a risk that your product can cause harm or damage to a third party or to property (the recent Samsung Galaxy Note 7 is a very topical example of this). Product liability insurance may be able to protect you in case that risk ever arises. But it’s not a comprehensive protection: you won’t normally be able to rely on this insurance if the cause of the damage is a sub-standard/faulty product or a poor/negligently provided service – both of which could have been avoided with proper care and attention. (So it may be bad news for Samsung as they probably won’t be able to rely on this type of insurance to help them deal with the fall-out from their recent recalls.)
- Buildings/Content insurance: if you trade from a business premises, you should consider proper insurance for the premises, the content and equipment/stock against events like flooding, storm damage and theft.
- Key person insurance: small businesses that are dependent on key people in the business, (such as highly skilled technical staff who internally built the systems or platform from which the business operates, or ‘black-book’ carrying individuals responsible for a substantial chunk of the business’ customer relationships), should consider what is called key person insurance. This type of insurance will usually provide short-term financial help to the business if certain listed events (usually death or critical illness) happen to the individuals covered under the policy and as a result, the business suffers a loss of trade or opportunity. Often a business may struggle to keep up to date with its financial commitments when a key person is not able to fulfil their duties – this is where key person insurance can make an important difference to a small business.
- Directors and officers liability insurance (D&O): directors of limited companies can be held liable as individuals (as opposed to the company) in limited circumstances. We have detailed information on this topic on our website that can be found here. Examples include accusations against the director of wrongful trading, breach of duty/trust or abuse of directors’ powers. Actions such as fraud, acting for personal gain/profit or criminal acts will not usually be covered under a D&O insurance policy.
- Business interruption insurance: another example of insurance that may be highly useful for small businesses is business interruption insurance. As the name suggests this type of insurance will usually compensate the short-fall in profit and extra costs incurred due to an unexpected event that means that you can’t trade. Examples of when business interruptions insurance normally applies is where you can't trade as a result of a fire, storm or when you’re essential business tools/equipment breaks down.
- Legal expenses insurance: last, and by no means least, we highly recommend considering legal expenses insurance. This type of insurance normally covers you for the cost of legal advice/legal action if you ever find yourself involved in a dispute. It might sound unlikely or overly cautious but this kind of insurance has often saved small businesses from being dragged under by legal, economic and reputational costs associated with trading disputes. An example of the benefit that it can have for a small business is considering that there are thousands of employment tribunal claims every year and the average cost for an employer in defending a claim is £8,500 (Figure supplied by Simply Business).
The good news is that many providers of business insurance will be able to tailor and package up an insurance proposition that is right for your business. There are often volume-related discounts where more than one type of insurance is acquired.
If you do investigate any of these types of insurance, make sure to read the small print of what exactly is covered and what is excluded.
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