Liability insurance for business
Most insurance is a matter of choice but some is required by law; some to comply with membership of a trade association; some in order to follow certain trades or professions (solicitors, accountants, doctors, vets and so on); some just plain good business practice. Business liability insurance falls into six basic categories:
Employers’ Liability: Essentially, if you can “hire, fire or direct the labour of” someone, that someone is your employee and you are legally required not only to insure against death or bodily injury caused by negligent act but to display a Certificate of Employers’ Liability Insurance where staff can clearly see it and also to retain expired certificates in a safe place for as long as possible. The penalty for failing to do have the correct insurance is a minimum fine of £1,000 per day. The penalty for failing to properly display the certificate is up to £1,000 per day. There are very limited circumstances in which Employers’ Liability insurance is not compulsory, the most common of which are:
- family businesses, i.e. if all of your employees are closely related to you (husband, wife, civil partner, father, mother, grandfather, grandmother, stepfather, stepmother, son, daughter, grandson, granddaughter, stepson, stepdaughter, brother, sister, half-brother or half-sister). However, this exemption does not apply to family businesses which are incorporated as limited companies;
- companies employing only their owner where that employee also owns 50% or more of the issued share capital in the company.
The cover is typically for £10,000,000 but for larger businesses or those carrying out hazardous work, higher limits are available. There is an inner limit of £5,000,000 for claims arising from terrorism.
Claim example 1: In a silversmiths’ workshop, an employee threw an unfinished small silver box to a colleague instead of handing it to him. This resulted in an injury to wrist tendons and a claim of £120,000.
Claim example 2: Despite being provided with a hard hat, an employee refused to wear it and received a serious head injury while working under a lorry chassis. Because the employer did not insist on the hard hat being worn and also failed to remove the worker from the danger, a claim for in excess of £100,000 was successful.
There is often confusion regarding use of sub-contractors. Someone who works without providing tools or materials is a Labour Only Sub-Contractor (LOSC) and is treated as being an employee. An individual or company that provides tools and materials AND who is registered with HMRC is a Bona Fide Sub-Contractor (BFSC) and is not treated as an employee for the purposes of Employers’ Liability insurance.
Public Liability: This is about personal injury or property damage that can be caused by your physical presence or the existence of property that you own or control.
Generally, the level of cover (indemnity limit) is a matter of commercial consideration but for businesses that work on premises other than their own a particular limit may be required. £1,000,000 per claim (unlimited in any one period of insurance) used to be the norm but £2,000,000 or even £5,000,000 is now often required. Some local government authorities can require up to £10,000,000 and work in some areas of airports or nuclear facilities may require up to £50,000,000. Recent changes to the way in which personal injury awards are calculated by the Courts has led to considerable increases in those awards. Our recommendation is for a minimum indemnity limit of £5,000,000, especially for construction trades where the risk of personal injury is higher.
Claim example 1: A computer engineer visited a client at home, placed his briefcase on a Louis XIV side table and scratched the surface badly. Claim for renovation: £12,000.
Claim example 2: A retail manager washed the steps at the entrance to the shop but failed to display a warning sign. An elderly lady slipped on the wet step and broke her hip. Claim for injury and inconvenience: £15,000.
A question often asked is if Public Liability cover is needed if the only workers are BFSCs. There are two reasons why a business in this situation does need to be covered:
- If there is a contract to do work between a business and a customer, that business will be the first port of call in the event of a claim. Even if the matter is subsequently handed off to the BFSC’s insurer, there will still be an implication for the business in respect of time and money.
- Even if the BFSC does have their own insurance, this is no guarantee that a claim against them will be successful. For example, a claim recently occurred when a BFSC caused a considerable amount of damage due to a water leak after installing a dishwasher. Their policy only provided cover for their declared trade as a carpenter, not for plumbing. Another example is where a BFSC obtained insurance but then defaulted on a premium instalment arrangement, causing the policy to be cancelled but leaving them with the original policy schedule which suggested that they were correctly insured.
Products Liability: This is commonly provided as standard with Public Liability, the difference in indemnity limit is that the “per claim” and “per period of insurance” figure will be the same. We sometimes hear from small businesses, particularly in the retail trade, that they do not need the cover as they only handle the items, not manufacture nor alter them. However, legally the retailer is the first port of call for someone with a complaint and, whilst the issue may ultimately end up with a manufacturer, such matters inevitably cost much time and potential legal cost. Every entity in the supply chain needs products liability insurance.
Most insurers are reluctant to provide cover where goods are exported to some countries, especially USA & Canada and doing so without informing your insurer in advance may cause a claim to be rejected.
Claim example 1: A butcher makes burgers and sausages which are sold to wholesalers, supermarkets and hotels. A child broke a tooth on a piece of plastic that was in a burger, sold via a major retailer. Claim settled for £1,000 (gone are the days when a child could swap a tooth for sixpence).
Claim example 2: An antique shop sold a sofa. The purchaser received a serious stab wound to the leg due to a defective spring. In this case, the insurer declined the claim as the policy specifically excluded sale or supply of second-hand goods despite the policy being issued in the name of ****** Antiques. This is one of many examples of a policy purchased over the internet being unfit for purpose.
Professional Indemnity: Sometimes known as “professional negligence” or “professional malpractice” or “professional liability”. You need this cover if any part of your work involves giving advice or providing services or designs. Whereas other types of liability cover are about physical activities, professional indemnity is about failing to meet the standards of work that might reasonably be expected of someone in your area of expertise – although for medical and veterinary professionals this can involve physical activities. Most claims are about financial loss but occasionally there can be special damages for mental distress – imagine a wedding planner making a complete mess of the brides’ big day – plus the inevitable legal costs. Cover generally also includes loss of client documents or data; unintentional breach of copyright or confidentiality; defamation or libel. The amount of cover that you need may be dictated by your trade or professional association or by the terms of a client contract. Consider the worst-case scenario if you or a member of your staff were to make a major error and work out what it would cost to put it right.
Claim example 1: Incorrect measurements on plans drawn up by an architect caused a house to be built incorrectly and the Planning Enforcement Department had to ask for a part to be demolished and rebuilt to the correct specification. The builder was awarded damages amounting to £61,000 + legal costs which took the total to well over £100,000.
Claim example 2: A bookkeeper was late in preparing documents that an accountant needed in order to complete company accounts within the time allowed by HMRC. The company received a fine for late submission and claimed recompense from the accountant who, in turn, claimed from the bookkeeper. A modest fine morphed into an insurance claim of over £10,000.
Directors & Officers Liability: Company directors and charity trustees used to be protected by law from being personally pursued by claimants but that has not been the case for some years now – largely thanks to the actions of one Robert Maxwell. The policy is intended to protect directors and officers against allegations of wrongful conduct when they are acting as company executives. Claims can be brought by the company’s stakeholders (owners, investors, lenders, employees). Claims can also be brought by customers, consumer groups, competitors, business partners (vendors, suppliers) and government enforcement or regulatory bodies.
Claims are comparatively rare but when they do occur, a director or trustee is risking their entire personal fortune if not insured.
Claim example 1: An employee was dismissed from her employment for gross misconduct on the grounds of her failure to pass a test essential to her work. She subsequently sued her former employers together with a number of her former colleagues, one of whom was deemed to be an officer of the company due their management responsibilities, alleging sexual discrimination and sexual harassment. The complaint was ultimately settled for £50,000 plus legal costs.
Claim example 2: A factory fire led to total destruction of the property. It was found that the director responsible for insurance matters had failed to keep the sums insured up to date despite written advice on a number of occasions from an insurance broker, leading to a severe shortfall between the amount paid by the insurer and the actual rebuilding cost. The other board members – which included close family members – sued the director responsible. Without Directors & Officers insurance, the £500,000+ claim could have cost that director his family home and his personal fortune.
Cyber Liability: Cyber attacks have replaced physical theft as the major cause of acquisitive crime. The requirements on companies who store customer information are quite detailed and any failure to keep that information safe can be costly.
Claim example 1: Employee ‘A’ of Company ‘X’ was unable to access any documents on their work computer. Having reported this to their IT supervisor and on investigation, it appeared that one of Employee A’s drivers had been affected by the Cryptolocker virus. (*Crypotlocker source is a spoofing email with an attachment containing the malicious malware). Coincidentally at the same time, a customer of Company ‘X’ received 3 telephone messages from an individual claiming to be an employee of Company ‘X’. Company ‘X’ stores their data via a third-party cloud provider and includes large amounts of sensitive personal identifiable information including passport details, customer & employee information, credit card details etc. On investigation of Employee ‘A’s account, it appears that access had been made to this data using Employee ‘A’s credentials. Company ‘X’ immediately took the following steps on advice from their insurer:
- Notified the insurers’ data breach response service.
- Changed Employee ‘A’s password & suspended Employee ‘A’s account
- Restored the affected driver from the last back up (5 days prior to the incident)
The insurer paid out £27,000 for the costs involved.
Claim example 2: An accountancy firm undertook tax consultancy work for its clients. An unsecured laptop belonging to a partner was lost including details of all client and tax avoidance schemes in place. The firm was threatened by the culprits to publish data online unless a ransom of £250,000 was paid.
Spurious claims: A sad reflection of current times is that spurious claims are on the increase, sometimes as an excuse to avoid or defer payment for services rendered. Also, there is a tendency for people not to accept responsibility for their own actions. We had an example of this recently where the tenant of a house let by our client fell down the stairs and claimed for injury. On examination, there were no signs of loose carpet or any lack of maintenance. The handrail was secure and the lighting adequate. The tenant was adamant that something caused them to fall. The “something” proved to be an excess of alcohol. Our clients’ insurer had to spend considerable time and nearly £1,000 in investigating and repudiating the claim.
Unreasonable expectations: Another sad reflection of the times is that claims are often made purely because something has happened, regardless of whether there is any negligence. For instance, very high winds caused a tree branch to fall and damage a car. The owner of the land where the tree grows had a recent report from a tree surgeon confirming the health of all the trees on his land. The report was confirmed by an independent tree surgeon so there was no negligence but still there were costs involved. It only takes a suggestion or allegation of some failure on your part to cause considerable waste of time and money.
All of the types of policy described above can take that burden from you, dealing with all correspondence and legal defence costs. Insurance is all about transferring risk. You pay a relatively small amount of money to an insurance company for them to take on your risk and provide peace of mind.