A buyers’ guide to business insurance
It’s an expense you would love to do without, but could be the most important thing you do
With an ever-increasing slice of your company's cash reserves going on insurance, you've got to be pretty selective about the cover you opt for.
The recession and sluggish economic recovery has left many businesses looking for ways to cut costs and struggling to reinforce their business safety net.
This means that it's paramount to understand the difference between policy covers. Although many businesses are seeking to trim away excess costs, choosing the cheaper option can lead to greater costs in the future.
Picking a policy
Spiralling insurance costs have forced companies to review their risk management policies, implementing health and safety protocols, fire precautions, safer working conditions and better security to help reduce premiums.
According to Graeme Durlacher, small business development manager at Allianz Commercial, a packaged policy which covers all the business's needs can be the best option.
He advises: “For many small businesses, a packaged policy is the best option for providing a range of core covers for a wide spectrum of trades.
“Generally, package policies are comprehensive and flexible so that they can be tailored to meet your individual business needs. They are also easier to manage as you have a single set of documents, one point of contact and one renewal date.”
There is a raft of insurance policies for businesses but as you're no doubt well aware only two are legally required: employer liability, third-party motor insurance, with professional indemnity insurance required for firms which provide a service such as accountancy, finance or IT.
Compulsory employer liability insurance affects all companies beyond one-man bands. This insurance offers you protection against claims arising from injury or illness sustained by employees while they are working.
Business interruption insurance is one of the most beneficial covers available, as it covers you for loss of turnover or trading damage to your property that prevents the normal operation of your business after a fire or theft.
Public liability and product liability cover protects you from claims from a third party. Key man insurance provides an immediate payout in the event of the death of a key director or top executive. Alternatively, critical illness cover can offer financial support during an unexpected long-term illness.
Broker or direct?
When it comes to buying insurance, many of you have stuck with conventional purchasing methods, meaning specialist brokers. Online sales have however started to take off in the commercial sector, as more insurers offer direct sales. Nearly all of you now look for quotes and information on the web alongside using the services of a broker. Bear in mind that if you do decide to go direct, you need to put enough time in to do thorough research.
For Edward Naylor, chief executive of Naylor Industries, switching brokers can often pay dividends. “We put the business through a broker and saved 20% on premiums. The new broker just dug deeper into the business and came up with significant savings.” By shopping around, Naylor found a broker which placed the public and employers' liability insurance and product liability cover with different insurers.
Naylor is no stranger to employer liability claims and took steps to prevent the now almost inevitable claims. “A few years ago people were putting in claims for whatever they could get. We've done a good job of improving our record, appointed a health and safety executive, improved safety procedures and tightened up the claims procedure.”
Recruitment consultancy FreshMinds Talent has opted for a range of products: professional indemnity; public and employer liability; property and business interruption liability and directors and officers liability. Chief operating officer Adam Clements says that although the company uses a broker, it has opted to go for an established insurer. “We are happy to pay a premium for this reputable company. We had to make claims after a spate of burglaries in 2010 and the service we received was fast and thorough. Moreover, this established insurer has been able to provide very good advice on large commercial contractual negotiations where the client has sought assurances about the level and quality of protection that we have in place. It costs us more, but it has definitely been worth it.”
Celine Pinter, managing director of recruitment consultancy Recruiting People, says her company renews all its insurance at the same time and always goes via a broker: “We get three quotes for contents, professional indemnity and key man insurance and have used the same local broker for the past three years. We communicate with them quite a lot and have a strong relationship.”
Although Pinter uses a broker for the insurance, initial research is undertaken online. “This does have its frustrations. You have to fill in so many forms online. It is tempting to avoid getting in quotes as it is incredibly time-consuming.”
Ideal Solution Systems supplies computer peripherals and runs a warehouse operation. Its joint managing director Shabir Halai explains that a change in circumstances for the business made it necessary to review its building insurance cover when it came up for renewal. “I found a good deal with insurer Allianz through HSBC. I typically do the research and then ring a broker for specific advice, but did not expect a bank to do a good deal. We found the key person cover through a recommendation and thought we had a good deal, but we regret it now. It costs £400 per month for the two directors and offers £250,000 of cover so I am looking online for a better deal.” One broker, Churchill Insurance Consultants, always carries out an assessment of insurance risk, claims commercial manager Denis Veinguard. “When we discuss insurance needs we sometimes find that businesses need something totally different. Most buy on price and a few look at the name.”
Ian Smith commercial insurance manager of brokers Smart and Cook adds that brokers are there to advise the companies and make them aware of specialist risks. “They can save money and time, how many people have the time to source six different quotes and check all the terms and conditions? We can negotiate harder and when companies are having trouble with their insurers we can fight their corner.”
When evaluating brokers you should consider three things: service, added value and price. Elaine Owen, MD of broker SBJ Stockport, says: “We need to understand the client's commitment to health and safety and understand all aspects of its business – looking at it from a pure insurance point of view is not enough. Brokers play a big part in presenting the insurance risk to the insurer.”
AXA offers a discounted building evaluation service to make sure companies are adequately covered. “We've got a lot of trade specific products,” confirms AXA property insurance manager Neil Mercier. “The majority of business is sold through brokers and banks. We are moving towards a web-enabled process but companies prefer to deal with brokers. The big challenge for a website is that there is a lot of advice needed when people buy insurance.”
“Business insurance is quite complex,” adds Groupama distribution and customer service director Amanda Blanc. “It is unlikely one insurer would provide all the cover. There is no price formula, it really depends on pricing within the market. This is a frustration for customers. When you choose a broker, it is important to get them to look at the small-print as insurers apply different endorsements.”
ACE Europe transacts all its business through brokers. “When selecting a broker it is essential to look at the geography, service level, specialisation, and whether they work on a fee or commission basis,” says commercial manager Rosemary Ness. “It is impossible to give price guidelines for particular types of insurance. Buildings insurance depends on so many factors, such as the type of construction, distance from the fire brigade, the company's commitment to risk management and its claims' experience.”
What to buy for you business
Buying business insurance can be a minefield and it is important to establish at the outset the type of cover you need. This depends on a number of factors such as the sector you are involved in, the nature and geographical location of your business, and the related risks.
The majority of businesses use brokers for specialist insurance advice. Researching the market can be time consuming but there are benefits in putting your insurance business out to tender with several brokers, particularly if you are looking to reduce premiums. Savings of up to 20% can be achieved by shopping around. To achieve the most from your tendering process, target brokers with experience in your industry sector and provide as much information as possible to support the quotes.
As there are only two compulsory insurance types for business, it is important to assess your risk and decide which other policies are most appropriate. This is a fluid market and cost indications are hard to pin down. Insurers and brokers prefer to quote on a one-off basis.
T he following guide outlines the main insurance products available to your business.
Employers' liability insurance
This is a legal requirement for all businesses and provides protection against your legal liabilities for death or bodily injury to employees while working for you. Employees will normally include contracted staff, apprentices and other trainees, as well as those hired on a short-term basis. The only exception is where all employees are close relatives. Minimum cover for employers' liability insurance is £5m, although in practice most insurers provide cover up to £10m. In 2003, UK insurers paid out £8.5bn for personal injury claims. Failure to meet employer liability legal requirements can result in a daily fine of up to £2,500.
The cost of employer liability insurance depends on the type of business you are involved in. For example, a manufacturing company would expect to pay more than an advertising agency.
Preparing a detailed risk assessment of your business is one way to reduce annual premiums. This includes conducting a safety and risk audit, demonstrating a clear health and safety policy with properly documented procedures and regularly servicing equipment.
This covers claims arising from the general public as a result of a business' activities. It is optional but in an increasingly litigious climate, it is a sensible investment. Public liability covers damages to members of the public for death, bodily injury or damage to property. It also covers legal fees.
According to Hiscox insurance expert John Heany, less than 15% of firms have this insurance. He says: “A business is lot more likely to be sued for things such as unfair dismissal or age discrimination, than to experience a fire on the premises. The number of actions against businesses are much higher now than three years ago as there has been an increase in ‘no win, no fee' lawsuits.”
The level of cover has to be weighed against the maximum claim that could be made against your company. If your company has turnover of less than £200,000, it is possible to secure cover for as little as £1500 a year.
If you make, repair or sell products, you could be held legally liable for damage or injury arising from defects in their design or manufacture even if you have not been negligent. Product liability insurance covers you in these circumstances up to a maximum amount each year. Standard cover is £2m, but this can be extended to £10m.
Your business premises should be covered for the full rebuild cost, including professional fees such as surveyors and architects, and the cost of site clearance.
It is important to make sure that your valuation is up to date. Insurance companies will send out a surveyor to value the building and determine the full rebuild or reinstatement cost. Make sure you are not under-insured. The value of the insurance premium is calculated to reflect the rebuilding costs in full.
In the case of leased property, business insurance is the responsibility of the property owners. It is always worth checking that the building owner has adequate cover in place.
This is standard insurance covering against theft of equipment, computers, machinery, furniture and fittings. Business equipment can be insured on a replacement as new or an indemnity basis. If indemnity is chosen, wear and tear will be taken into account when settling claims.
Ensure that contents insurance is kept up-to-date to reflect stock changes, new machinery or additional IT equipment. £500,000 of cover is standard for this type of insurance.
Business interruption insurance
I n the event of a fire, theft or flood, business interruption insurance provides you with cover for the additional expenses incurred so that you can continue trading. This could include employees' wages, interest on borrowed capital and rent.
Cover can be extended to include loss of income, which protects your gross income by the amount it falls short of the income you would have received. It will also cover any extra accountants' fees incurred.
These policies are available on a one or three-year term. It is worth considering a three-year policy, as it can be difficult to prove loss of earnings over a one-year period. When arranging this insurance you need to estimate the maximum time needed to get your business working normally following the most serious damage. The insurers will calculate premiums based on an estimate of your anticipated gross annual profit.
Trade credit insurance
This covers businesses against the risk of bad debt due to the insolvency or default of their buyers. It can be an important tool in credit management and can also provide a replacement of working capital when bad debts and late payment affect cashflow. Typically only 80% of debts are paid out in the event of default. In addition, credit insurers provide complementary services such as credit assessment and debt collection management.
Used extensively by exporters, it offers protection against bankrupt suppliers which could have a long-term negative impact on your business should particular suppliers fail. Despite the risks, less than 10% of companies opt for protection against bad debts.
Key person insurance
Key person insurance is cover that pays out for loss in the event of either death or disability of a key person in a company. The liability of any such insurance is the estimated cost of the loss for example in business/revenue, and the replacement of that individual. For small to medium-sized businesses, this can be a valuable investment as losing a key sales person; finance director or senior shareholder can potentially damage a business irreparably. For businesses of your size, the standard key person insurance provides a payout of up to £280,000 in the event of a death of a director. Premiums vary depending on the provider with a usual maximum of £250 per month.
It is worth considering this insurance as research shows that a large number of small companies collapse after the loss of a key employee or senior director.
Employee motor insurance
Third party, fire and theft insurance is compulsory in the UK. Most business policies are either fully comprehensive or third party. The former provides cover for damage to your own vehicles, particularly useful if you have a large fleet of cars or vans. The third party section of a commercial vehicle policy will meet your legal requirements to cover your liability to others.
To secure motor insurance, the insurers will require full details of the types of vehicle and their usage, and details of the drivers, including any serious motor convictions in the past five years.
Fleet managers running more than five vehicles can negotiate a fleet policy. The historical claims record of your fleet will provide the main rating factor in assessing the cost of the policy. It is also worth checking that all employees who use their own vehicles for business have their insurance extended to cover use for business.
Employee travel insurance
This is essential if you or your employees travel abroad. Many people who travel on business assume that their employer's or their own travel insurance policies cover them automatically. However, up to four million business trips a year are made without adequate insurance, according to industry estimates.
If you have a travelling sales force, make sure adequate cover is provided for working and travelling abroad. Individual or group travel insurance policies are available, providing medical and legal expense, personal accident and loss of baggage. Travel insurance should provide Europe, USA and worldwide cover; medical fees up to £1m; personal liability up to £1m; cancellation costs; personal baggage up to at least £2,000 and other money up to £1,000.
It is worth noting that travel insurance only covers a limited amount of personal effects and staff should be advised of the terms of the policy as they can often extend the cover on their personal contents insurance to cover overseas travel.
Directors' and officers' indemnity insurance
As a director, officer or manager of any company you are automatically exposed at law to unlimited personal liability. You are required to account not only for your personal actions but also – in some cases – the actions of fellow directors or officers. The UK Companies Acts of 1985 and 1989 currently enforce more than 200 areas of statutory liability.
Directors' and officers' liability insurance protects you financially if a claim is brought against you. It will also reimburse your company for any payments it has made on behalf of directors and officers.
PHOENIX FROM THE FLAMES
In August 2002 the offices of field marketing agency FDS Group were burned down by vandals and the company still has outstanding insurance issues. The building burnt down on Saturday and by Wednesday the company was up and running at replacement offices with 75 staff equipped with desks and laptop computers. The IT network was online and the data was undamaged as it was backed up off-site.
?The office burned down three years ago but there are still insurance issues to resolve about sound proofing,? says FDS Group chairman Alison Williams. ?The fire started at the back of the building next to a gas pipe, which exploded and gutted the building.?
FDS made claims for business interruption compensation to cover the extra costs incurred and building insurance. At the time of the fire, the general, employers? and public liability insurance were covered by Sterling Insurance, which picked up the claim. The broker was involved initially but they pulled out after a few meetings.
?We had been advised by our brokers, Folgate Risk Solutions, to have a one-year business interruption scheme, but you need three years. It is very hard to prove there was a downturn in business over one year.?
FDS hired loss assessors, Balcombe Group. ?The loss assessors take a percentage of what you get,? warns Williams. ?They advised on negotiations and attended meetings. They need to be quite tough and know their way around the industry. The claims went on for months and this is where we really saw the importance of the loss assessor.?
After the fire, insurance cover was reviewed. The general, employers? and public liability insurance is now with AXA, and professional indemnity is with Royal Sun Alliance. Business interruption has been extended to three years with a substantial increase in premium.