What is liability insurance?

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There are three main types of liability insurance. Each has a slightly different focus and will protect you from different potentially costly scenarios in working life. We look in-depth at which are right for your business.

For example, depending upon what type of liability insurance you have you will be protected should you, in the course of carrying out your work, cause injury to a member of the public, another employee or be accused of not completing work to a satisfactory standard. Liability insurance also covers you for accidental damage caused whilst carrying out your work. For example, if a member of the public trips over some of your equipment while you're working, or if you knock over an item of value while working in a customer's home, then public liability insurance will cover the legal fees should the member of public wish to make a claim against you. It will also cover you for any compensation should you need to pay out.

The types of liability insurance we will cover in this article are -

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    Employers liability insurance

    As a small business, whether you own commercial property or run a business from home - you will need Employers liability insurance if you have one or more employees. It's for your own business' safety as well as your employees. What is Employers liability insurance?

    The Employers' liability (compulsory insurance) act 1969 states that employers are responsible for the health and safety of their employees whilst they are at work. This is in case your employee becomes injured at work, or through the course of being under your employment in the UK. If they make a claim for compensation and you are found responsible, the Employers' liability (compulsory insurance) act 1969 makes sure that you have enough insurance to cover you against such claims - which could run into hundreds of thousands of pounds.

    Having Employers liability insurance will enable you to meet the cost of compensation for any injury or illness suffered by your employee - whether it occurred on or off site. Even former employees can make a claim against you, if it's found that their injury or disease/illness resulted from their work whilst under your employment.

    So by law, as an employer, you must have Employers liability insurance and you must be insured for at least £5 million, which should give you an indication of how damaging a claim by an employee can potentially be to your business if you didn't have this insurance in place. You are also required by law to post details of the insurance certificate for staff to see. The Health & Safety Executive (HSE) is the body responsible for enforcing the law on Employers liability insurance and can fine you as a business up to £2,500 for every day that you don't have this insurance in place, a cost that many small businesses can not afford to lose.

    How do you define an employee?

    An employee is defined as someone who works for you and:

    • They are under a contract of service

    • You deduct national insurance and income tax from their salary when you pay them

    • You control when, where and how they work for you

    • You supply their work materials and equipment

    • They can't employ someone else as a substitute to do their work for them if they're unable to work

    The employers liability database

    It's imperative that you keep a record of your Employers liability insurance cover in case an employee does make a claim. Remember even former employees can make claims against you years after they've left, therefore in the event of this happening you've covered your bases and can turn to the insurer that was covering you at the time.

    On 1 April 2010, the Association of British Insurers announced that the Employers' Liability Tracing Office would be established, to help anyone suffering from a disease or injury caused at work, to find their former employer's Employers liability insurer. The Employers' Liability Tracing Office would manage an electronic database to help people track down Employers' Liability insurance policies.

    But from April 2012, it will be compulsory for insurers to update the Employers' Liability Database with information relating to the Policyholder (you) and all their subsidiaries covered. The database will work by linking each policy with the policyholders (your) Employers Reference Number (ERN). HM Revenue and Customs have been issuing businesses with one or more employees with an ERN, therefore check to find out what your Employers Reference Number is and keep those details in a safe place.

    Could I be exempt from having employers liability insurance?

    You'll only be exempt from having to have Employers liability insurance if:

    • your business is not a limited company

    • you are the only employee

    • you only employ close family members

    • you are a limited company with one employee and that employee owns 50 per cent or more of the issued share capital in the company

    • your employee can employ a substitute when they are unable to do the work themselves

    • your employee supplies most of the equipment and materials they need to do the job

    • your employee doesn't work exclusively for you (for example, if they operate as an independent contractor)

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    Public liability insurance

    If your business has any interaction with the public whatsoever, you'll want to consider public liability insurance. This type of liability cover is not a legal requirement however, it is highly advised in order to avoid potentially costly legal action should your company's actions have a negative impact on a member of the public.

    Do I need public liability insurance?

    While not a legal requirement, having public liability insurance is an important consideration for any business that comes into contact with members of the public or other businesses. And without it you could find your business at serious risk of being sued for large amounts of money. Plus, you may also find that you won't be awarded certain business contracts unless you can show that you have adequate public liability insurance in place. So having it could not only give you the peace of mind to know that if the worst was to happen you are covered - but it could also open your business up to new opportunities. What level of cover will I need?

    The level of cover provided by public liability insurance ranges from £1million up to £20million and your insurance premiums will vary depending on the level of cover you take out and the nature of your business. To help bring your premiums down, you may want to consider taking out Small Business insurance - an insurance package that includes employer's liability, public liability and other business essentials, such as cover for your tools, etc. And remember that some specialist insurance companies will offer discounts if you are a member of a professional body. So shop around and find the best deal for you.

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    Professional liability insurance

    Especially if your business is involved with giving your clients advice or knowledge, you'll want to have professional liability insurance. Professional liability insurance also covers your business should you be accused of failing to complete a job to a satisfactory standard.

    What is professional liability insurance?

    Professional liability insurance, also called professional indemnity insurance, covers any advice you give to a client in your professional capacity and protects you should a client believe you have failed to produce work to a professional standard. For example, if you are an architect who has designed a building and in the course of the development it is found that the plans cannot be carried out and the work has to start again, or if you are an accountant, who gives your client financial advice which leads to them making a loss, then professional liability will protect you against professional negligence claims.

    Do I need Professional liability insurance?

    Professional liability insurance is not relevant to all businesses. However, if you are in the business of selling your skills or knowledge then it may be prudent to take out professional liability cover. Many professions are required to have professional liability as part of their professional authorisation, including solicitors, accountants, architects, mortgage intermediaries, insurance brokers and financial advisers. Many consultants, advertising and PR agencies and designers also choose to have this type of insurance as it's often a condition of their contract. In addition, if you write articles for trade journals or magazines, then you may want to consider taking out Professional Liability Insurance to protect you should anyone want to sue you for libel or slander.

    What level of cover do I need?

    Professional Liability Insurance can be taken out on an ad hoc basis to cover you for the length of a particular contract or it can be provided on a year-by-year basis. The features of each Professional Liability Insurance scheme will vary depending on your profession and what professional body you may or may not be a member of. So you may need to go to an insurer who specialises in Professional Liability so you can that you can tailor your policy to your precise needs. Only you can decide whether Public Liability or Professional Liability is essential for your business. But if you are unsure, why not speak to a specialist insurance provider, such as Towergate Insurance. They will be able to help advise you on the merits of each type of cover. And if you're asking yourself whether you can afford it, the real question might be - can you afford not to have it?

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