Liability insurance for your business
Liability insurance is designed to protect your business against certain legal costs.
If someone is injured or their property is damaged, the person or business responsible may be sued and held legally liable for the injury or property damage. Where legal liability is established, damages will be awarded to the claimant to compensate them for their injury or the damage to their property. Where damages have been paid for an injury, the NHS is entitled to recover costs for hospital treatment.
The person or business responsible will also need to pay legal costs, including the claimant's.
If your business has employees, it is likely that employers' liability insurance is compulsory. However, there are a few instances where this insurance is not compulsory.
This guide explains how liability insurance works and how it is sold and priced.
How liability insurance works
The cost of insurance - known as the premium - is the price the insurer charges to accept your business. The premium charged by an insurer will depend on a number of factors, such as the nature of your business and the insurer's own experience of your business sector.
For most small to medium-size risks, the insurer will use a book rate, or average rate, which is based on the claims they have paid out to similar businesses. The insurer will use this rate to calculate the premium using a factor that reflects the amount of activity undertaken by the business. For employers' liability insurance, payroll is usually used to reflect the amount of activity. For public and products liability insurance, turnover is usually used.
The insurer may adjust the resulting premium to reflect positive features such as a good claims record or good risk management, or negative features such as a poor claims record.
Legal expenses insurance
Legal expenses insurance covers the cost of pursuing legal action or defending your business against legal action where this isn't covered by your liability insurance, eg in an industrial tribunal.
The insurer will pay fees and expenses for solicitors, barristers, accountants and expert witnesses, as well as court costs and opponents' costs if you are ordered to pay them in a civil court.
Employers' liability insurance
Employers' liability (EL) insurance enables businesses to meet the costs of damages and legal fees for employees who are injured or made ill at work through the fault of the employer. Employees injured due to an employer's negligence can seek compensation even if the business goes into liquidation or receivership.
The NHS can also claim the costs of hospital treatment - including ambulance costs - when personal injury compensation is paid.
By law, an employer must have EL insurance and be insured for at least £5 million. Most insurers automatically provide cover of at least £10 million.
If your business is not a limited company, and you are the only employee or you only employ close family members, you do not need compulsory EL insurance. Limited companies with only one employee, where that employee also owns 50 per cent or more of the issued share capital in the company, are also exempt from compulsory EL insurance.
The Health and Safety Executive for Northern Ireland (HSENI) is responsible for enforcing the law on EL insurance. You can be fined up to £2,500 for each day that you do not have appropriate insurance. Read HSENI's employers liability insurance guide for employers.
Your policy must be issued by an authorised insurer otherwise it will not be valid and you risk breaking the law. Check if an insurance provider is a member of the Association of British Insurers.
Displaying your EL compulsory insurance certificate and HSENI inspections
When you take out a policy you will receive a certificate of employers' liability compulsory insurance.
You must display a copy of this document where employees can easily read it. You can display it either:
- as a paper copy, eg as a photocopy pinned to a notice board
- electronically, eg as a page on your intranet or as a document in a shared folder on your network
You also need to make these certificates available to health and safety inspectors on request.
If you do not display your EL compulsory insurance certificate or refuse to make it available to HSENI inspectors when they ask, you can be fined up to £1,000.
Public liability insurance
Think about taking out public liability (PL) insurance if members of the public or customers come to your premises or you go to their premises (including if you work from home).
What public liability insurance covers
PL insurance covers any awards of damages given to a member of the public because of an injury or damage to their property caused by you or your business. It also covers any related:
- legal fees
- hospital treatment, including ambulance costs, that the NHS may claim from you
Premiums are based on the type of business and rated on an estimate for the level of activity of the business. For most businesses this will be the turnover, although other factors may be used.
Talk to a professional
There are many conditions, exclusions and warranties that can be applied to PL policies. It is therefore important that you discuss your policy with your insurance adviser to ensure that it meets your needs. Find a broker with the British Insurance Brokers' Association (BIBA).
It is worthwhile to check if an insurance provider is a member of the Association of British Insurers.
Businesses which must take out PL insurance
Generally speaking, PL insurance is not compulsory, but horse riding businesses must have PL cover.
You will also find that many of your customers or potential customers will want to see proof of adequate insurance cover before they will let you work for them.
Product liability insurance
In product liability insurance terms, a product is any physical item that is sold or given away.
Products must be 'fit for purpose'. You're legally responsible for any damage or injury that a product you supply may cause.
If you supply a faulty product, claimants may try to claim from you first, even if you did not manufacture it. You'll be liable for compensation claims if:
- your business' name is on the product
- your business had repaired, refurbished or changed it
- you imported it from outside the European Union
- you cannot clearly identify the manufacturer
- the manufacturer has gone out of business
Otherwise, the manufacturer is liable - or the processor, where the product involves parts from multiple manufacturers.
However, you must also:
- show that the products were faulty when they were supplied to you
- show that you gave consumers adequate safety instructions and warnings about misuse
- show that you included terms for return of faulty goods to the manufacturer or processor in any sales contract you gave to the consumer
- make sure that your supply contract with the manufacturer or processor covers product safety, quality control and product returns
- have good quality control and record-keeping systems
What is covered
Product liability insurance covers you against damages awarded as a result of damage to property or personal injury caused by your product. If damages are paid for personal injury, the NHS can claim to recover the costs of hospital treatment - including ambulance costs.
Product liability insurance also covers you against unforeseen circumstances, such as product faults your quality control system couldn't trace. However, if you simply make an inferior product, you may be unable to make a claim, or even get insurance. Bad workmanship is not covered either.
Before issuing a policy your insurer will want to know that your:
- manufacturing or services are carried out in line with industry best practice
- staff are adequately trained
- equipment and systems are appropriate, up to date and well maintained
How much cover to take out
Most businesses have cover of between £1 million and £10 million.
Having quality control measures in place may help to reduce your premiums - and will certainly reduce the risk of compensation claims and protect your reputation in the marketplace.
Insurance against pollution damages
Most public liability policies include pollution liability as standard. This covers damages paid to a third-party who has suffered as a result of pollution caused by your business activities.
Pollution liability as part of public liability insurance covers sudden and unexpected incidents that take place during the insured period, such as one-off accidents.
If your business operates in an industry where there is a higher risk of pollution during everyday operations, eg the oil industry, you may want to opt for a bespoke policy such as environmental impairment liability. This can be designed specifically for your industry sector or even your particular business.
Environmental impairment liability should cover:
- clean-up costs from any creeping pollution
- damages awarded for injury to people or property
- the cost of investigating and defending the company against such claims
Talk to your insurance broker to find out if such specialist protection would be a good idea for your business.
For further information see reduce environmental risk insurance costs.
Property owners' liability insurance
Property owners' liability insurance enables you to meet any costs and damages awarded to a member of the public if they suffer an injury following an accident on, or linked to, your premises.
For private property owners, this protection is generally included in a household policy. For most businesses, any claim arising from your ownership of a property would be included in your public liability cover.
Where you choose to insure your contents and business, and a landlord insures the premises, make sure that property owners' liability cover is included in at least one of these policies.
For further information see insurance: business property and assets.
Professional indemnity insurance
If you are in the business of selling your knowledge or skills, you may want to consider taking out professional indemnity (PI) insurance.
What you will be covered for
PI insurance protects your business against claims for loss or damage made by a client or third party if you make mistakes or are found to have been negligent in some or all of the services you provided. PI insurance will also cover legal costs.
Many professions are required to have PI insurance cover as a regulatory requirement or as part of their professional authorisation. This includes 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.
Ensure you are properly covered
One important aspect to bear in mind when considering PI insurance is that cover is usually on a claims-made basis. This means that the policy will only cover claims that are made while the policy is 'live'.
So, if you plan to cancel your policy when you close your business or retire, you may need to arrange 'run-off' cover for a period of time afterwards.
Also, if you plan to change insurers, you will either need to arrange run-off cover or get agreement from your new insurer to accept new claims for previous incidents.
Keep everything well documented
One way to minimise such claims is to make sure projects are well documented. Ensure that you set out specific responsibilities in your contracts with clients beforehand and deal with complaints promptly.
As this is a specialist area of insurance you should take advice from a suitably experienced insurance broker - see specialist insurance advice for your business.
Directors' and officers' liability insurance
Directors and officers of businesses have various duties, responsibilities and powers in connection with their position. In most cases these are set out in a job description or terms of reference. As a result they can be held responsible for a range of issues including:
- health and safety
- data protection
- maintaining satisfactory accounts
Directors' and officers' liability insurance (D&O) enables the directors and officers of a company, or the company itself, to cover themselves against such damages.
If a director or officer is found to have accidentally acted outside their terms of reference and this results in a claim, compensation and legal fees will be covered by the D&O policy. If the act was deliberate, then it may not be covered.
Your insurance broker will provide more information on this type of policy - see specialist insurance advice for your business.
Specialist insurance advice for your business
Businesses are operating in an increasingly litigious environment where people are more inclined to seek compensation. The implications of a liability claim against your business could be huge because successful claims can sometimes lead to damages of millions of pounds being awarded against you. That is on top of all the legal fees. For most small businesses, this could spell financial ruin.
Business owners can also be held personally liable and even face criminal charges if they are found to have been negligent.
The importance of taking out adequate insurance cover
To protect yourself and your business, getting adequate insurance cover is vital. It is worth consulting your insurance broker to find out which types of insurance, and what levels of cover, are appropriate for your business.
It is worthwhile to check if an insurance provider is a member of the Association of British Insurers.
Insurance brokers and advisers are regulated by the Financial Conduct Authority (FCA) and you should make sure that your adviser has FCA authorisation. Check that an insurance broker is regulated by the FCA .
Premiums could rise at any time, so taking steps to reduce the likelihood of a claim by managing risks is an important way to keep costs down. Read health and safety risk assessment and set up a health and safety management system.