Insurance is one of the most important expenses your business might incur, yet it is often the most misunderstood. Every business is different and as such each individual business’ insurance needs will vary accordingly.
This guide (along with part 1, published last week) should help to cover the basics, giving you the right knowledge to make sure that you’re buying the right insurance for your business.
Professional Indemnity insurance
Professional indemnity provides insurance to protect you from mistakes you make at work that result in a financial loss to your client, specifically after you have provided them with a service or advice. For example….
An architect designs a house. Their client then spends money on building the house, only to find that it collapses as the design was faulty. The client will sue the architect for the money that he has lost as a result of the architect’s negligence, and the architect’s professional indemnity insurance will cover the costs plus any legal fees that are required (up to the limits of the policy).
On the other hand if a builder has simply built a house badly and it falls down as a result, Professional Indemnity insurance will not provide any cover as it is not the same as a warranty; nor is it providing a guarantee of work carried out badly (what insurers call “faulty workmanship”).
So in the two examples above, the architect has given advice to the client on how they should build a house; this advice has proven to be wrong as the house has fallen down, so Professional Indemnity covers the losses from the negligent advice. The builder however, has just done a bad job – the builder hasn’t advised the client how they should build the house, so Professional Indemnity insurance does not provide coverage as the loss was a result of “faulty workmanship”.
Some of the most common professions requiring Professional Indemnity insurance are:
- Management Consultants
- Architects and engineers
- Accountants and bookkeepers
- IT Contractors
Insurance coverage often starts from around £50,000 and can go as high as £5,000,000. It is important for you to determine your own level of risk. One rule of thumb is to think how much it would cost to financially pay back your client if you make a mistake. For example, if you are an IT Contractor working on a large call centre telephone system and the whole system goes down due to your mistake, the potential loss would most likely be much bigger than an accountant whose only clients are small charities with low budgets and turnovers.
Business property insurance
Have you considered insurance for your computer, specialist tools, and equipment? Or even your own office? These can be covered too. An insurance policy that covers both your liability exposures (Public Liability, Products Liability, Employers’ Liability, and Professional Indemnity) and also your property is typically called a comprehensive or combined insurance policy. Some insurers will provide a discount for these policies, so it is worth making sure you ask for quotes for everything rather than thinking it will be better to buy from different insurers.
Business property insurance is generally split into the following:
- Buildings insurance (this may be your shop or office)
- Fixtures and Fittings insurance (if you haven’t already bought buildings insurance)
- Contents insurance (desks, chairs, printers etc.)
- Portable equipment insurance (laptops, mobile phones, etc.)
- Tools (any specialist tools, such as a carpenter’s tools)
- Stock (building materials, items to be sold, etc.)
With all property insurance, particularly buildings, it is important that you don’t ‘under insure’. Under insurance commonly occurs when someone insures a lower value than the total, thinking that ‘my whole house won’t blow away,’ or ‘my tools will never all be stolen together’ so they will never need to claim for the full amount. If you haven’t insured the correct total value then you will be ‘under insured’ and most insurers will impose the principle of average on any claims.
The principle of Average: if a florist insures their building for £100,000 but the total cost of rebuilding would be £200,000 then they have only insured 50% of the shop. This means that the insurer has the right to impose average, meaning a penalty of 50% to any claims that they make.
One day a tree outside the florist blows over and falls through the shop roof causing £50,000 worth of damage. Because of average the insurer considers only half of this damage to be insured, so will only pay out £25,000 to the owner (minus any excess) – obviously a big short-fall and an unhappy florist!
This isn’t the insurance company being unfair – it is a principle of insurance that the insurance company can only pay you for what you have insured. If you are under-insured, they can only match the same. If a company is looking to insure 10x £1000 laptops, but only insure them for £5000 thinking they will never all be stolen, how does the insurer know which ones are covered and which aren’t? And even if they’re never together there is still roughly 10 times the risk of one of them being stolen, which the insurer must account for.
We often see people confused by the difference between ‘contents’ and ‘fixtures and fittings’ cover. A good explanation would if you were to imagine you were to turn a building upside down; everything that does not move (fitted cupboards, sinks, etc.) would be fixtures and everything that moves, or is now sat on the former ceiling (!) would be contents. Buildings insurance will usually cover you for the fixtures and fittings, so when buying buildings insurance you will probably only need to add on your contents – but if in doubt it is always better to check with your insurance broker.
Finally your portable equipment and specialist tools are pretty self-explanatory – however, it’s important to always remember average and please make sure that you read your policy carefully as many insurers will impose restrictions. An example would be an insurer that doesn’t cover tools when left in a vehicle overnight. In some cases, often for an extra premium, these restrictions can be altered or removed.