Businesses cancelling insurance policies to reduce their costs may be making false economies – and even leaving themselves exposed to legal trouble. Research suggests that 51% of small companies stopped paying for at least one type of insurance at the height of the Covid-19 pandemic.
It is illegal to operate without certain types of insurance, and there are fines and other penalties for those who are uninsured. In particular, if your business has even one employee, it must take out employers’ liability insurance, which will pay out if a member of staff is injured at work or becomes ill as a result of their employment. In most cases, you must have at least £5m of cover.
Motor insurance for businesses that use vehicles is also compulsory. They must have at least third-party cover, providing a minimum of £1m of insurance for property damage and an unlimited amount for personal injury.
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Depending on the nature of your business, operating without other types of insurance is hugely risky, even if it is not illegal. Public liability insurance, for example, protects you if your company comes into contact with people other than your employees. That might be anyone from customers visiting your premises to clients attending a meeting you have organised. If someone has an accident, falls ill or suffers damage to their property during such visits, you may face a claim for compensation. Public liability insurance will help pay for the resulting legal costs and any redress due.
Professional indemnity insurance also protects against claims for damages in cases where clients say they have suffered damages because you have given them poor advice. In certain sectors – notably legal services – your professional body will require you to have such cover, but it can prove valuable even where it is not mandatory.
Protecting your property
Then there are insurance policies designed to protect your business during the course of trading. Buildings insurance provides protection if you own premises and these are damaged in some way. Even if your firm doesn’t have property, it may still need contents insurance to protect its possessions, from business equipment to stock.
In addition, business-interruption insurance pays out if you are unable to trade for a period because of a problem with your premises – a fire that closes your office, say. While the refusal of some insurers to pay out on this cover for claims related to Covid-19 – successfully challenged by small businesses in the courts – has highlighted the importance of understanding exactly what cover you have, don’t overlook the value of business-interruption insurance.
Similarly, financial insurance may seem like a luxury until you find yourself exposed to a problem that you’re not covered for. Trade-credit insurance, for example, could save your company if a customer defaults on its debts to you. Key-person insurance can be crucial if your business is highly dependent on a specific individual. Cyber insurance is also growing in popularity, as the number of businesses targeted by cyber attacks continues to increase. Insurers can also offer valuable advice on protecting yourself from attack.
Naturally, different businesses will take different views on the cover they need, depending on their activities and exposures. And every business needs to balance value for money against quality of coverage: a professional insurance broker may be a worthwhile investment in this regard. But don’t just opt out of insurance to net a short-term saving – the long-term cost may be far higher.
David Prosser is a regular MoneyWeek columnist, writing on small business and entrepreneurship, as well as pensions and other forms of tax-efficient savings and investments. David has been a financial journalist for almost 30 years, specialising initially in personal finance, and then in broader business coverage. He has worked for national newspaper groups including The Financial Times, The Guardian and Observer, Express Newspapers and, most recently, The Independent, where he served for more than three years as business editor.
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