What is Liability Insurance?

What is liability insurance?

There are three main types of liability insurance. Each has a slightly different focus and will protect your business from different, potentially costly, scenarios. If you've ever asked yourself "What is liability insurance?" then look no further - our guide explains what these different covers offer.

Liability insurance is designed to cover businesses protect themselves against the risk of liabilities imposed by lawsuits and claims made against them.

This guide helps businesses to understand the several different types of liability insurance, including: public liability insurance, product liability insurance, employer's liability insurance and professional indemnity insurance (also known as professional liability insurance).

Do I need public liability and professional indemnity cover?

Read our guide on 'What is the difference between professional indemnity and public liability insurance?'.

What is employers' liability insurance?

Employers' liability insurance is one of the three main types of business insurance. It can cover compensation costs and legal fees if an employee or ex-employee sues for illness or injury caused by their work, 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.

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. You should be insured for at least £5 million - an indication of how financially damaging a claim by an employee has the potential to be to your business, if you don't have cover 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 businesses for every day that they do not have this insurance in place - a cost that many small businesses can not afford!

Read our full guide to employers' liability insurance.

What is the definition of an employee?

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

  • Is 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

About the author

Mike Stephens is a respected senior industry professional and Fellow of the Chartered Insurance Institute (CII) with well over 40 years’ varied experience in the commercial insurance sector as a director, underwriter, and operational improvement manager.

The employers' liability database

It is 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 have left.

On 1 April 2010, the Association of British Insurers announced that the Employers' Liability Tracing Office (ELTO) 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 ELTO would manage an electronic database to help people track down Employers' Liability Insurance policies.

But from April 2012, it has been 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) Employer 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 Employer Reference Number is and keep those details in a safe place.

Do I need 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.

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)

What is public liability insurance?

If your business has any interaction with the public whatsoever, you'll want to consider taking out 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.

Read our full guide to public liability insurance.

Do I need public liability insurance?

While not a legal requirement, having public liability insurance is an important consideration for any business that interacts with members of the public or other businesses. Without it, your business may find itself at serious risk of being sued for large amounts of money. A Another issue you could potentially face should you decide not to take out Public Liability Insurance is missing out on business contracts which may require proof of Public Liability cover.

The level of cover provided by public liability insurance ranges from £1 million up to £20 million 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 Employers' Liability, Public Liability and other business essentials, such as cover for your tools and equipment. Remember: 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.

What is professional indemnity insurance?

Professional indemnity insurance, also sometimes called professional liability 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 indemnity will protect you against professional negligence claims.

If your business is involved with giving clients advice or knowledge, you'll want to have Professional Indemnity Insurance. Professional Indemnity Insurance also covers your business should you be accused of failing to complete a job to a satisfactory standard.

Read our full guide to professional indemnity insurance.

Do I need professional indemnity insurance?

Professional indemnity 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 indemnity cover. Many professions are required to have professional indemnity 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 indemnity Insurance to protect you should anyone want to sue you for libel or slander.

How much professional indemnity insurance do I need?

Professional indemnity 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 indemnity insurance scheme will vary depending on your profession and what professional body you may or may not be a member of. You may need to go to an insurer who specialises in professional indemnity so you can that you can tailor your policy to your precise needs.

Only you can decide whether public liability or professional indemnity is essential for your business. But if you are unsure, why not speak to one of our advisers?