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Business Start Up Guide – Part 9
This guide covers the following areas:
- Required Policies
- Commercial Liability Insurance
- Property Insurance
- Business Interruption
- Fidelity Guarantee
- Directors and Officers Liability
- Key Person Protection
- Partnership Protection
- Shareholder Protection
- Fee Protection Insurance
Business insurance, like many types of expenditure, is one of those items that business owners typically do not like to pay. You must remember that sufficient insurance can be as critical to the success of your business as a good product or service. Without proper insurance you could lose all the money, time and effort you put into your company.
The types and amounts of coverage you purchase must be evaluated on a cost – benefit basis like any other commodity that you purchase. Your insurance broker can help you review the amount of coverage your business requires.
Usually you will want to insure against risks that could have significant detrimental impact on your business.
This normally would include items such as fire, storm damage, theft, employers, public liability and products liability.
Depending on the nature and size of your business it is often a good idea to self-insure for all or a portion of certain losses. Often raising the deductible (excess) can have a very favourable impact on the policy premium.
The administrative cost to the insurance company to process small claims is quite high; consequently, the rates typically go down substantially if they are relieved of this expense by insuring losses in excess of a sizeable deductible amount.
An insurance broker can provide you with comparative costs for various types of cover and varying degrees of deductible amounts.
The insurance cover required by law is employers’ liability and third-party motor insurance. Your insurance broker can explain the required cover and help you purchase the correct policy. You must be aware that the terms of your building, office lease or mortgage may require you to carry certain kinds of insurance cover in specified minimum amounts. If you have leased equipment or have borrowed money from a bank or other lenders, there will usually be insurance requirements in the agreement relating to these transactions.
There are many other types of policies that you may wish to consider. Specific cover is provided by each policy and a qualified insurance broker can explain the related costs in-depth.
Some types of insurance cover that you should consider for your business are listed below.
Commercial Liability Insurance
There are many types of liability your business may need cover for. “Liability” refers to your legal obligation to pay compensation and costs awarded against you in respect of loss or damage sustained by a third party. Types of liability insurance you may want to consider are: –
Public Liability – this will protect you from any liabilities to a third party (other than your employees) for bodily injury or loss/damage to their property that may occur during the normal operation of your business.
Employers’ Liability – if you are a limited company or employ anyone outside your immediate family, you are required by law to purchase employers’ liability insurance. This insurance offers you protection for any liability arising from injury or illness sustained by employees whilst they are working for you.
Products Liability – this will protect you from any liabilities to a third party (other than your employees) for bodily injury or damage to their property that may occur from the products you have sold or supplied.
Professional Indemnity – this cover is usually purchased by “professionals” such as IT consultants, surveyors, accountants, solicitors etc. This cover will protect your legal liabilities to third parties arising from your or your employees’ professional negligence/wrongful advice.
There are many different types of property cover but generally businesses will purchase cover for buildings, machinery and stock against fire and other perils such as storm/flood etc and theft. They will also consider covering money, goods in transit and glass. For small businesses cover can be provided on a ‘package’ basis where certain covers such as money and goods in transit are included in the premium as standard. However, this option is only available for specific occupations/trades and you should consult with your broker for further details.
If you are working from home be aware that generally your ordinary household insurance policy will not provide cover for your business stock and liabilities. Specific policies can be purchased if you are working from home and you should contact your insurance broker for further details.
There are specific policies for property owners who rent out their premises to tenants. These policies provide cover for buildings, liability and loss of rent. Loss of rent cover is usually only provided in the event of an insured peril occurring such as a fire or flood etc.
This covers loss of income/revenue or additional expenditure incurred following a disruption to the operation of your business. Business interruption usually mirrors your property policy and covers the same perils. However, it is possible to add additional perils to your business interruption cover such as food poisoning or failure of utilities.
This type of insurance typically covers risk of loss from theft by employees. If your business deals in large amounts of cash, negotiable securities or similar types of assets, you may well be advised to consider this cover. Certain industries are required to carry this insurance by regulatory authorities.
Directors & Officers Liability
Directors and officers of companies in recent years have been found to be personally responsible for their negligence in the running of their company. Recent legislation has also made company directors liable for their behaviour to the company so that shareholders, creditors, customers and employees can now sue them as individuals.
Directors and officer’s liability cover provides indemnity to the company in respect of the costs it incurs in indemnifying a director against the successful defence of a claim or indemnifying the director where the defence has not been successful.
Key Person Protection
Identifying a Key Person
These are the people whose special knowledge, skills or enterprise are vital to the continuing survival of a business – people who are difficult to replace. Remember, key people come in many guises. They aren’t always the Managing Director or other high-profile senior managers. Consider other key functions that are necessary to the company’s business when talking key person insurance with your clients.
When is Key Person Protection Needed?
There are three clearly identifiable situations when key person insurance is most needed.
• To prevent loss of profits
• To protect the repayment of loans
• To safeguard the raising of capital
The death of a partner can be extremely damaging to any business. The ability to continue trading and maintain the financial wellbeing of the firm will be vital. In addition, there are other problems which may have to be faced, in the absence of property provision in the Partnership Agreement and insurance cover:
• the partner’s interest may pass to an heir who may not have the necessary skills, experience or interest to continue in the business.
• the partner’s interest may need to be turned into cash to pay Inheritance Tax or provide for his or her dependants on death.
Raising the finance to buy a partner’s interest may involve the sale of assets or finding someone who can afford to buy into the partnership.
Finding a suitable replacement and raising the money can be difficult and time consuming. If unsuccessful, the partnership may even have to be dissolved. It is clear that partners need to retain continuity, stability and control of the business whatever the eventuality. This can be achieved by making adequate legal and financial provision.
Like partners, shareholder’s shares may pass to an heir who does not understand the company’s business or whose interests conflict with those of the other shareholders. Alternatively, the shareholder’s interest may need to be converted into cash to cover Inheritance Tax liabilities or provide for dependants.
Maintaining control and stability of the company during this turbulent time is vital to its continued success. By taking the appropriate legal and financial steps shareholders can be confident that the future holds no surprises.
Fee Protection Insurance
HMRC’s powers have changed, and they now have wider scope than ever before to visit business premises and inspect records. The likelihood of enquiries into a taxpayer’s affairs appears to be on the increase.
The professional fees in dealing with such enquiries can often be costly so it is advisable to “insure” or subscribe to a tax protection service which will fund these fees in the event of an enquiry or visit. We offer such a scheme and full details are available on request.