Insurance - An overview

One of the most resented costs for a new business is insurance premiums as they seem to rise almost every year. When you’re setting out in business, there suddenly seems to be a raft of new insurances that you must have.

However, there are only two compulsory insurances in the UK and those are employers’ liability and motor insurance.

As a new business, you will have to have employers’ liability the moment you start taking on staff. It provides protection for you and your employees in the event of any incident. This is such an important issue that we've dedicated a whole section to it - click here to read about employers' liability insurance.

The second compulsory insurance is motor insurance. The law states that every vehicle has to be covered for third party liabilities. There is no need for comprehensive cover or for fire and theft but you must be covered for any damage or injury to a third party.

Other insurance

Despite having just two legally required insurances, there are a raft of other covers that you must buy. Often these will be linked to bank loans needed to set up the business.

There are also some insurances which could make the difference between survival and failure but which you may not be aware of.

Buildings insurance

Insurers all agree that the place to start with is your premises. If you own your property then you must have buildings insurance for it. This would cover the cost of rebuilding or repairing in the event of a claim.

If you lease a property, then check your lease and consult your landlord. Ask exactly what is covered and who is responsible for what. Does your landlord separate out the cost of insurance in your agreement or is it a hidden factor within the overall price of the lease?

Insurers say that some unscrupulous landlords have been known to charge their leaseholders far more for insurance than they pay out in premiums.

Buying your own insurance can also be a way for you to cut costs because you may be prepared to shop around far more effectively than your landlord to get a better price.

If you work from home, make sure your insurer knows. It may not affect your premium if you do not have regular visitors and are doing some kind of administrative work but non-disclosure could result in your policy being invalidated.

Contents

With contents insurance the trick is to balance the need for coverage against the cost to your business.

Mervyn Harris, product manager for property owners at Norwich Union, says: "An example at a macro level is that of the two towers in New York - only one was insured.

"If you only insured for 50% of your office/shop value, would you be able to survive financially if there was a total loss through fire. There has to be a balance between cost and risk."

Most contents insurance is split between all risks and perils - the difference is that the first category includes accidental damage such as dropping a computer or breaking plate glass.

Again, if you are a home worker, check your household policy. Many will include a PC as standard but not much else. A simple upgrade is often sufficient to cover most equipment and there are bespoke working-at-home policies.

Business Interruption and Business Continuity

An area that is often neglected but one that could save your business is business interruption coverage. This provides a financial package to see a business through a period during which it cannot operate.

Business continuity is designed not only to help businesses survive financially but also not to lose ground while getting back on their feet.

For example, if your office or shop were destroyed by fire, the business interruption policy would kick in and help cover the lost income that would inevitably follow any such catastrophe.

Business continuity would help pay for replacement offices and temporary equipment, which would allow you to continue operating while your original premises were restored.

Harris warns that: "A frightening number of businesses never recover from a major catastrophe, even though they had standard contents coverage, because they lose contact with their customers or suppliers."

His words are echoed by Clive Restall at Axa Insurance who believes it is vital that every business, whether with one employee or 1,000, has a contingency plan in place for emergencies.

"If there was a major fire your insurer would pick up the tab, but would you survive a smaller event such as all the telephones going down, or an IT disaster where all your files were wiped. A lot people believe they could fly by the seat of their pants through such emergencies but the reality is that many of them fail."

One PR company, too embarrassed to be named, can well testify to this after a small burglary at their London offices. Most of the computers were taken. Contents insurance covered the physical loss of the machines but it took months to re-establish all the contact lists that were never backed up and had been stolen along with the PCs.

The company was forced to resort to calling a few contacts and asking for other people's numbers so they could rebuild. For a concern that relies on its contacts to win business, it was a disaster. They survived, but lost a lot of money learning a harsh lesson.

Warren Hill Insurance Brokers is just one company that offers a comprehensive computer policy, ensuring that whatever disaster befalls your system, there is backup available.

Loss of money

For those operating small shops or other retail operations, loss of money cover is a more than worthwhile policy. This protects retailers against thefts from the till and also has coverage for assault against the employer and the staff - if there was a robbery, the team would be protected personally, as well as the missing valuables.

For most small businesses, cash flow is the biggest headache. And unless you are one of those mythical creature who find that all their customers pay on time, cashflow will be a problem at some point.

Credit insurance is another of those covers that people see as an expensive luxury but specialists NCM have hundreds of examples of people whose businesses are still in existence thanks to credit cover.

Another way to tackle this is through factoring - this means that for a commission, you will receive up to 80% of your invoice value immediately and receive the remainder after the customer has paid the factoring company.

Part of the service includes a credit rating of your customers and, of course, the security of always getting most of your money.

Tailoring

There is no such thing as an average requirement - everyone has a slightly different business, number of staff and levels of stock/equipment.

Make sure that your policy suits your requirements and if it doesn’t, make sure it is amended promptly.

For example, if you sell food, a frozen food policy may help if there is a power shortage or if you sell liquor and require a licence, you can be insured for losses if you lose that licence.

Reducing Premiums

Many of us groan as we open renewal notices for insurance policies and see that premiums have risen in price yet again. As a whole, the insurance industry has been trying to raise premium levels after a period of relatively cheap insurance.

There are things that can be done to try and reduce the annual bill, particularly for those just starting out in business. Harris says the first thing to consider is buying a small off-the-shelf business package.

"Insurers can sell these more cheaply than bespoke policies for each coverage because the administration costs are lower.

"There are upper limits to payouts in each coverage but most of these are way beyond the requirements of the majority of startup operations so this group is ideally suited to buying such packages."

Harris says that Norwich Union, for example, had a wide range of packages to suit a whole variety of small businesses.

He adds that the trick is to make sure that you are insured adequately but not over-insured. Reducing the upper payout limits may bring premiums down significantly and still provide the coverage you need.

Precautions

Thinking ahead pays dividends. If you are in the middle of buying a property that is being built or renovated, talk to an insurer or broker about the simple security measures that will help reduce premiums, for example, grilles on the windows or burglar alarms.

Even putting in the correct lock at the outset or buying the right thickness of door can save money. Most insurers have websites which list minimum security requirements, such as five-lever mortice locks.

But Mr Harris warns: "Make sure such moves are practical - some companies offer 10% discounts for grilles on windows but you may need to have a pretty display and not want to use bars - the insurance saving might cost you business."

You can also choose the levels of excess that you are prepared to pay on any claim. But insurers warn that it is easy to get carried away. Paying £50 excess may be sufficient to reduce premiums - but can you really afford £500 or £1000 when your business has been destroyed and you have no other income?

Another way to reduce premiums is to study the peaks and troughs of your business. For example, most retailers are well-stocked in the run-up to Christmas and need extra contents cover but do not need the same level of protection after the January sales.

Insurers will offer an "auto-lift" service where they build that extra seasonal cover into the annual premiums so you pay for the stock levels as required.

Russ Brady, communication manager Co-operative Insurance Society (CIS), says: "Shop around, but don’t be influenced solely on price. When starting a new business, avoid penny pinching on insurance. At the end of the day it's your own livelihood you’re protecting".

How to buy commercial insurance

Commercial cover is mainly sold through intermediaries such as brokers or direct by insurers. Insurers advise start-up operators to use a broker - even at an early planning stage.

Harris says: "Brokers will be eager to offer free advice on security and loss prevention techniques in the hope that such service will win your business."

Other sources of insurance information are the Federation of Small Businesses (tel: 020 7592 8100) which produces a leaflet on the subject. The Association of British Insurers (tel: 020 7600 3333) can advise on which of its members sells small commercial policies.