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A Guide To Liability Insurance For Small Businesses

The SME sector of the business community is a vital part of the UK economy yet often these business are not adequately Insured against their exposure to claims for injury or damage for which they may be deemed to be legally liable. In the event of a claim where there is no or inadequate insurance the very survival of the business is severely threatened and individuals who operate as sole traders or are in a partnership have the whole of their personal wealth at risk.

There is a popular misconception surrounding liability, which is: “if I don’t do anything wrong, then why should I have a claim made against me?” Unfortunately, when an accident occurs the circumstances are not always that clear cut. Throw into the mix the contractual obligations imposed on a business (particularly in the contracting and allied trades) and the laws that govern us everyday in our work, particularly Health and safety legislation and the exposure to claim rapidly increases. It should also be remembered that claims are made not because the business is legally liable for injury or damage but because a third party believes that they are!

If a claim is made against a business, sole trader or partnership, there is an immediate need to defend the claim or incur costs in establishing the correct amount of a claim. These defence costs are incurred regardless of whether or not there is subsequently found to be a liability on the part of the business. Such costs can easily run into thousands of pounds. All Liability policies will meet costs incurred in the defence or handling of a claim. Without Insurance, these costs would have to be met by the businesses concerned which would impact considerably and most probably resulting in the closure of the business.

The core Liability Insurances that all businesses should consider are as follows:

  • If you employ anybody or use the services of somebody who is self employed (Labour only sub-contractor) for their labour services only, then there is a legal requirement for you to hold Employers Liability Insurance and failure to do so will result in prosecution. This type of Liability Insurance protects the business from claims from any person defined as an employee (including labour only sub-contractors), made against them for injury sustained as a result of that employment.
  • Although not a legal necessity, a major exposure to claims for the business relates to claims made against it in respect of injury or damage to other parties (other than employees) or their property. This can be dealt with by arranging Public Liability Insurance. It is our recommendation that cover be arranged with a minimum Limit of Indemnity of £2,000,000; however, when considering the limit of indemnity care should be taken to ensure that the limit chosen reflects the degree of total exposure in the event of a claim.
  • If your business supplies a product, either as a retailer, wholesaler or manufacturer, there is a definite need for Products Liability.  This cover protects you for claims made by other parties for injury or damage resulting from products sold, supplied, serviced or repaired. This can usually be arranged by extension of the Public Liability Insurance mentioned above and again we recommend a careful consideration be given to an adequate Limit of Indemnity.
  • If your business is like many emerging businesses and provides design, advice or consultancy services, then there is a definite requirement for Professional Indemnity Insurance. This type of Insurance protects the business in respect of claim made by another party relating to losses resulting from your professional advices and services. Again, care should be taken to ensure that the limit of indemnity reflects your exposure to risk.
  • If your business operates as a Limited Company, many people believe that as Directors they are personally secure as all claims for injury or damage will be made against the limited company, providing a higher degree of security than if the business was run by a sole proprietor or partnership. However, there is already a trend to pursue claims against individual Directors, where the protection of the Company Policy would not apply and we therefore recommend Directors & Officers Liability.  This cover provides protection for the individual directors and officers of the business for claims brought against them in respect of their legal liability resulting from their position in the company.

The importance of arranging correct and adequate Insurance to protect the business and personal assets of those involved with the business cannot be over emphasised.

The Policy should cover specifically ALL the business activities of the company and have an adequate level of indemnity to safeguard the business and the individual persons involved .

Stephen Greenfield is a Partner at Greenfield Insurance Services.  Greenfield are independent insurance brokers who take their time to understand your business and will develop an Insurance Programme that protects the future of your business. We will explain the Insurance covers available and obtain competitive quotations for you, at the same time explaining what the Insurances will do and the options available. This will allow you to make an informed decision about how to proceed with your Business Liability Insurance arrangements.