What insurance do I need for my business?
At Cheviot Insured, we often get asked by new businesses to advise on what insurance they need. I thought it would therefore be a good idea to provide a quick guide to the different types of business insurance; what is required by law in the UK; what is optional but definitely should be included and what is optional and should be considered depending on risk exposure.
First of all, business insurance is a form of risk transfer. You are essentially transferring the financial risk of something unexpected happening to your business to another party, an insurance company. Some risks are insurable such as a fire at your premises or legal action by a customer for injury. Other risks, such as loss of market and reputational risk are not insurable.
Generally insurance comes under two headings; compulsory and optional. Most insurance in the UK is optional i.e you do not have to buy cover. However, most businesses do not have a large amount of spare capital to leave aside to deal with a major catastrophe, such as a fire or a flood, so they will generally buy certain core optional covers from an insurance company. Taking each category in turn:
COMPULSORY UK COVER - LEGAL REQUIREMENT
1) Employers Liability - If your business employs people then, by law, you must have employers liability cover. This needs to be for a minimum indemnity limit of £5,000,000 but in practice most policies are set at £10,000,000. This also applies to limited companies with directors only, although sole directors who own more than 50% of share capital are exempt from the legal requirement.
2) Road Traffic Act Liability - If you operate vehicles for your business then they must be insured for third party liability arising from the use of the vehicle on the road. Generally businesses will take the option of insuring on a comprehensive basis to cover damage to the vehicle itself.
COMPULSORY COVER - PROFESSIONALS
1) Professional Indemnity - Certain types of profession will make it a regulatory or compulsory requirement that a professional indemnity policy is purchased in order to practice in the UK. Examples include solicitors, accountants, architects and insurance brokers. Professional indemnity protects a business against claims by clients/third parties for losses arising from professional negligence. Whilst it is optional for other professions, it is advisable to include professional indemnity cover as a core element of any insurance programme where the business provides advice, design or specification for a fee.
OPTIONAL COVERS - SHOULD BE INCLUDED
1) Public and Products Liability - All businesses should buy a level of public liability cover to protect themselves against claims from third parties for injury or damage due to negligence. If the business sells, supplies or manufactures a product then the cover should extend to include products liability for injury or damage caused by a defect in the product. Legal actions against the business can be expensive and therefore it is important to include insurance protection to protect the balance sheet. It is common for contracts with customers to include a condition that public/products liability cover is in place.
2) Property Damage - The business assets whether buildings, machinery, computers or stock should be protected against physical loss or damage arising from fire, water damage, theft etc. It is best to arrange cover on an "all risks basis i.e. to cover the usual potential causes of damage. There will be certain excluded causes under the policy such as wear and tear and gradual deterioration.
3) Business Interruption - If you are reliant on business premises or machinery in order to produce revenue then business interruption cover is essential. It covers both loss of gross profit/revenue and additional expenditure arising from physical loss or damage at the premises. It allows the company to survive a major incident. The property damage policy will reinstate the buildings and replace machines, but with no business interruption, or inadequate business interruption cover, the business may fail. It is therefore important to include cover as a vital part of your insurance arrangements and seek advice from a broker to make sure the level of protection is right.
OPTIONAL COVERS - CONSIDERED AND PURCHASED DEPENDING ON EXPOSURE
1) Cyber insurance - Cyber incidents are now considered by global businesses as the biggest risk to their business alongside business interruption. With the increase in ransomware and hacker attack, it is now argued that the purchase of a cyber policy is of equal importance to conventional fire, liability and business interruption policies. A cyber policy responds to hacker attack, ransomware and data breach with a combination of incident response measures and third party protection against ICO and data subject actions. It should be strongly considered for all businesses.
2) Goods In Transit/Marine Cargo - Companies transporting goods should have some cover for damage whilst in transit. This is especially important when exporting or importing goods as cover will include catastrophe cover to incorporate claims from shipowners for general average repairs and compensation.
3) Directors and Officers Liability - Protects directors and officers against claims for wrongful acts. Especially important where there are external shareholders and investors. Again, like cyber, it is now a vital purchase for many businesses and forms a key part of their insurance programme. For family firms it may be considered less important, although there is cover for defence of actions under employment, health and safety and company law.
OPTIONAL COVERS - SHOULD BE INCLUDED FOR CERTAIN SECTORS
1) Crime including employee and third party fraud, social engineering and invoice transfer fraud - There are now some common areas with cyber policies, but for comprehensive protection and higher limits a specialist crime policy is required. Particularly important for the finance sector, legal sector, charities, hospitality.
2) Product Guarantee/Recall and Product Contamination - Especially important for manufacturers of food, drink and goods supplying to the retail sector.
3) Contract Works/Plant - Necessary cover for construction sector businesses.
I hope this gives you a good idea of some core considerations. There are other policies available, environmental, legal expenses covers, machinery breakdown, personal accident, travel, key man etc. But the main thing to stress is that all businesses are different and it is important to review your risk exposures, in consultation with an insurance broker, and then fit the programme to address the exposures. Advice is still a key part of the process and I'm happy to talk to any business out there if you have any queries, or need assistance. Call on 0191 3000220.
John Baty ACII