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Liability insurance is a critical risk management tool for small businesses, but which types of cover do you need? The best type of liability insurance is the one that inherently protects against the risks faced by your small business. So the best liability insurance for one small business might be very different than the next. Below we explain the three main types of liability insurance available for small businesses so you can see which applies to you.
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Three Types of Small Business Liability Insurance
When choosing the best liability insurance for your small business, it's critical to understand the three main types of cover. Here is what they basically cover:
Roughly speaking, if you or your small business has any in-person exposure to clients, vendors or other members of the public you'll need public liability insurance; if you hire anyone you'll need employers' liability (it's required by law!); and if you are paid for your professional advice or service (e.g., architect, designer, etc.) you'll need professional indemnity insurance. Here's in-depth information of each type, including examples to give you an idea of how they each work.
Small Business Public Liability Insurance
Does your small business have in-person contact with members of the public such as customers or vendors? Public liability insurance is critical if your business (e.g., you, your employees) deals in-person with members of the public, such as customers, clients, a landlord or other people—this could be on your business premises or even off site (e.g., at events, visiting a client, etc.). Why? If a third party is accidentally injured or their property damaged because of your small business, your company could face a lawsuit.
Even if your small business is not to blame for an accident, you can still be sued. Public liability insurance can be a valuable resource by providing access to a legal team to support your defense whether or not you're at fault. PL insurance covers both legal expenses to defend your small business and compensation claims if it's found liable. How much public liability insurance do you need for a small business? It depends on the risk faced by your company, the size of your company, etc., but for reference, public liability insurance is commonly sold with £1 million, £2 million, £5 million and £10 million of cover in the UK. Get quotes here.
- Bodily Injury: You own a cafe that has a self-serve water station where customers can help themselves to glasses and pitchers of water. After some children spilled water on the floor, a elderly customer slipped on the wet floor and injured their back. They decided to sue your cafe for damages.
- Property Damage: A fire in your restaurant's kitchen damages the business next door. They sue you for damages.
- Property Damage: You have a plumbing business that performs residential work. An employee accidentally knocks a valuable painting off the wall when bringing equipment into a client's property, damaging it.
Public liability insurance isn't required by law, but it could be a condition of contracts you sign with vendors, customers and/or your landlord. That said, even when not required by law it is highly recommended. The cost of public liability insurance is not high, so it's well worth the peace of mind at the very least.
Note: Product liability insurance is often sold together with public liability insurance. Product liability protects businesses that design, make, fix or sell anything against third party claims of injury or damage due to their product.
It’s important to note that public liability insurance is third-party insurance, which means it does not cover you for claims made by your employees. For that, you need employers' liability, discussed next.
Employers' Liability Insurance
Does your small business employ anyone? If so, it's a legal requirement to hold employers' liability insurance (EL)—even for casual or temporary workers. There are just a few exceptions when you don't need EL cover but odds are you'll need it if you hire anyone.
The cost of employers' liability insurance can be high compared to other types of business insurance but it protects against compensation claims by current or former employees if they fall ill or are injured because of their work for you. It covers both legal fees in defending yourself from a claim and any compensation you're required to pay.
- An employee injured their back at work whilst moving heavy boxes. They blame you for faulty training and sue you for damages.
Professional Indemnity Insurance
Any business that sells their professional advice or expertise needs Professional Indemnity (PI) insurance. PI insurance covers claims by clients alleging they suffered a financial loss due to negligent advice or service given by your small business (for example, a mistake or error in work). This type of business insurance will give you access to a legal team, cover costs to defend a claim and, if you're found liable, pay any compensation your business is required to pay.
Who needs professional indemnity insurance? It depends on the work you do. Some clients might contractually require that a small business have a valid professional indemnity insurance policy in place, and it is a requirement of many professional organisations. Small businesses that might need PI insurance include, but are not limited to:
- Web developer
- Wedding planner
- A small contractor business works on a commercial building. One of their employees gives advice to the client that results in a costly error. It costs thousands of pounds to put the situation right and the business is sued by the client to compensate for their financial loss.
- A property management company manages a residential rental property containing a large number of flats for the building owner. A windstorm causes a leak in the roof, but the management company does not get it fixed in a timely fashion, resulting in expensive internal water damage. The building owner sues the property management company for negligence.
- A small software business creates a custom piece of software for a client. After delivery, the client identifies critical errors in the software that result in a loss of client data. The client sues the software development business for work errors and negligence.
Note: Small businesses in the salon industry (e.g., hair, beauty, barber, etc.) would buy an insurance product similar to professional liability insurance called "treatment cover", which covers injuries to customers or clients that occur during certain treatments.
Where to Get Small Business Liability Insurance Quotes
To learn all about the small business liability insurance market, you can read our in-depth article How to Get Liability Insurance for a Small Business—but if you'd like to fill out an online quote form right now to start the process, then click the blue button below. Fill in some details about your business and our partner QuoteZone will use their search engine to find up to 5 suitable insurance providers for you.
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