What is Liability Cover?

Subjects covered in this “What is Liability Insurance” guide:

* Introduction
* How liability insurance works
* Employers’ liability insurance
* Public liability insurance
* Professional indemnity insurance
* Directors’ and officers’ liability

Liability insurance
As a business owner or employer, you have a legal responsibility towards your employees, customers and the public. You could be held legally liable and risk being sued if an employee or a member of the public is injured as a result of your negligence or breach of duty.

Liability insurance is designed to pay any compensation and legal costs that occur if an employer is found to be at fault. If you employ anyone it is most likely that you will need to have employers’ liability insurance. This guide explains what cover each type of liability insurance offers and how liability insurance is sold and priced.

How liability insurance works
The cost of insurance – known as the premium – is typically worked out using a book rating. A book rating is calculated using a base rate, which includes the insurer’s costs and reflects their appetite for your particular type of business – if they want your type of business the rate will be less than if they don’t.

The premium is also calculated on the insurer’s estimate of the level of risk attached to a particular business or industry area. The premium will be affected by factors such as your claims history, the size of the perceived risk and your approach to risk management. The safer your working environment and the fewer claims you have made, the cheaper your premium should be.

Premiums are also calculated on the records of other similar businesses by lumping good and bad together – small businesses with a good record may be adversely affected by this. Your own safety record and approach to risk management can minimise the effect of this.

Employers’ liability insurance
Employers’ liability (EL) cover enables businesses to meet the costs of compensation 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.

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. EL insurance must cover all your employees in England, Scotland, Wales and Northern Ireland.

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 employers’ liability insurance. Since February 2005, limited companies with only one employee, where that employee also owns 50 per cent or more of the issued share capital in the company, have also been exempt from compulsory EL insurance.

The HSE 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.
Generally, someone is defined as your employee if:
· you deduct National Insurance contributions and income tax from the salary you pay them
· you control when, where and how they work
· they cannot employ a substitute when they are unable to work

When you take out a policy you will receive a certificate of employers’ liability insurance. You must display a copy of this where employees can easily read it and keep copies for at least 40 years or risk a fine of up to £1,000. You need to make these certificates available to health and safety inspectors on request.

Public liability insurance
If members of the public or customers come to your premises or you go to theirs, you should think about taking out public liability insurance.

What the insurance covers
This type of 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, costs and expenses.
Premiums depend on the type of business you run, your turnover and the number of employees you have.

Talk to a professional
There are many conditions, exclusions and warranties that can be applied to public liability policies. It is therefore important that you discuss with your insurance adviser any that are applicable to your policy.
If you work from home, and customers or members of the public visit you there, you may also want to think about taking out public liability insurance.

Businesses which must take out the insurance
Some businesses, e.g. horse riding establishments, are to have public liability cover. You will also find that many of your customers or potential customers require proof of adequate insurance before they will allow you to work for them.

Professional indemnity insurance
If you are in the business of selling your knowledge or skills, you may want to consider taking out professional indemnity insurance.

What you will be covered for
This protects your business against compensation sought by a client if you have made mistakes or are found to have been negligent. Professional indemnity insurance will also cover any legal costs.
Most professionals carry professional indemnity cover. If you are a lawyer, accountant or financial adviser, then you must have professional indemnity insurance. Professionals such as architects, consultants and designers often opt for such cover as well.

Ensure you are properly covered
One important aspect to bear in mind when considering professional indemnity insurance is that, because there can often be a long delay between an event and a subsequent claim, you need to be covered both at the time of the event and when the claim is made.

This means that 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 prior 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.

Directors’ and officers’ liability
Directors and officers of companies and other organisations 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
· fraud
· negligence

If your company’s directors or officers are found to have inadvertently acted outside their terms of reference and this gives rise to a claim, then any compensation and legal fees will be covered by directors’ and officers’ liability insurance. If the act was deliberate, then it may not be covered by the policy.