If you’re a broker who has recently moved into the world of commercial finance, you may well be feeling bewildered by the sheer number and variety of business insurance products on offer.
Unlike domestic insurance policies, business insurance not only has to provide cover against risks to property, possessions and individuals, but also provide cover against risks to the business itself. There are therefore a whole raft of protection products, such as public and product liability and business interruption insurance, which have no equivalent in the world of personal and domestic insurance.
Many small businesses, especially those being set-up for the first time, view insurance premiums as an unwelcome burden on cashflow and therefore opt for the absolute minimum cover which is legally required. However, this approach often proves to be a bad error of judgement, as more than 90 per cent of businesses which are affected by catastrophes such as fire and flood, never open their doors for business again. It is also worth bearing in mind that we live in litigious times, in which both individuals and organisations are far more willing to take legal action if they believe there is a possibility of financial compensation. To not adequately insure a business is to expose it to unnecessary risks.
Required by law
So, what insurances should a business put in place? Some forms of insurance cover are required by law such as cover against risks to third parties, and these are therefore mandatory. Other insurances are optional but nonetheless essential, such as buildings and contents cover and the final category of insurances are those which may make sense, depending on the nature of the business in question. This third category includes policies such as product liability insurance, goods in transit and fidelity insurance.
Below is a brief description of each of the different types of insurance. It is not possible within the limits of this article to give an exhaustive explanation of each type of policy, but suffice to say there is plenty of information available on the internet and policy providers will be only too happy to furnish you with further details.
Employers Liability – once a company starts employing staff it is required by law to take out Employers Liability Insurance. This provides employees with cover against bodily injury, illness or disease which may have been sustained in the course of their work. The current legal minimum amount of cover is £10 million.
Public Liability – this provides a business with cover against claims made against it by members of the general public (not staff). The claims can be for bodily injury, loss, or damage to property resulting from the actions of a company or its employees. The ‘Limit of Indemnity’ is the maximum amount an insurer will pay out in the event of a claim and for many small businesses it is £5 million. However, if a business is contracted by another company they may be asked to have cover of £10 million or more in place. It is worth advising your clients to check this point in their contracts.
Product liability – the ‘liability’ theme continues and this time it is to provide protection if claims are made against a company as a result of defective or faulty products. This not only includes suppliers of products to the general public, but also suppliers to other businesses. A product manufacturer is usually liable if a product goes wrong, but a claim may be bought against a supplier if the manufacturer goes out of business.
Professional Indemnity Insurance – most brokers are familiar with PI cover, because they have this type of insurance themselves. Essentially, PI insurance provides cover against a business being sued for providing negligent advice or a poor service, which has resulted in losses. PI cover is not always compulsory but in some industries e.g. businesses offering investment advice, it is. Some trade bodies also insist on a minimum level of PI cover. Most advice and service providers e.g. consultancies, should have PI cover in place.
Directors and Officers Liability Insurance – it is often wrongly assumed that because a Limited company has ‘limited’ liability, that directors and senior officers cannot be sued. This, I’m afraid, is a dangerous assumption to make. In fact, there are more than 200 areas of statutory liability on which directors can be personally sued and this type of insurance provides cover both for legal costs and any claims made against an individual director or officer. Don’t be fooled into thinking that this cover is only for large businesses.
Buildings & Contents Insurance – the clue’s in the name! Buildings cover is usually provided against damage resulting from fire and flood and the complete destruction of a building. Cover should be provided for complete rebuilding costs, including site clearance and the costs of architects, surveyors etc. If your client leases their premises, the landlord will usually insure the building and collect a share of the premium from each tenant.
Contents cover provides cover against the theft of office equipment (computers etc) as the result of forcible entry into the building (it does not usually provide cover against theft by staff). Policies can usually be tailored to meet a businesses specific requirements e.g. some policies will include a ‘fidelity’ clause which provides cover against fraud or dishonesty by staff. Cover can be arranged for ‘goods in transit’ and ‘all risks’ which covers items such as cash.
Policies may also include cover against consequential losses e.g. a loss of profit because a business had to move premises as the result of a fire.
Many insurers provide policies tailored to meet the needs of specific industry sectors. For example, there are specific policies for retailers, as well as businesses being run from home (most domestic policies do not provide cover for businesses run from home). The challenge with buildings and contents cover is to ensure that your client has a policy which is tailored to their needs and does not provide unnecessary cover or gaps in cover. It may be worth carrying out a risk analysis to identify precisely which aspects of a business need insurance cover. It is also worth conducting a regular review of your clients’ insurance needs, because a company’s requirements can change quite dramatically as it grows. This is a good reason for agreeing regular review meetings with your clients.
The above covers the main types of insurances which most small and medium sized businesses should consider or have in place. There are, however, still a large number of other policies, which may be relevant to your clients. These include legal expense cover, credit insurance, ‘Key Man’ insurance, life policies, permanent health insurance, private medical cover and vehicle insurance.
There are also other specialist insurances of which your client may not be aware, such as business interruption insurance; loss of licence; loss of registration and loss of rents. Having a robust business interruption policy in place has been known to save businesses from the aftermath of fire or road closures disrupting their patronage. If a business needs a licence (such as a pub) or a registration certificate (such as a nursing home), insurance against the loss of these can be beneficial. A loss of rents policy may also protect an investor from a loss of income if their property is damaged. The list goes on……where a risk exists you can guarantee there will be an insurer willing to provide cover against it!
The sale of insurances can provide a valuable additional income stream for commercial finance brokers. Many insurers have online systems designed for broker use and are also willing to provide suitable training and support. On a final note, it is also worth bearing in mind that insurance sales can generate valuable annual renewal premiums which, over a period of time, can develop into a significant income stream.
A useful starting point for further information is the Association of British Insurers website www.abi.org.uk which has an ‘information zone’ for businesses.