11.04 – Minimising Risk & Assessing Liability
Running a business always involves risks, but some events are more unpredictable and potentially disastrous than others. What happens if the warehouse burns down or your products cause harm to customers? While you can’t predict these events, you can prepare for them. This section provides guidance on how to manage risks and assess liabilities.
Understanding Insurance
Insurance offers a safety net against loss. To determine how much insurance your business needs, consider the extent of your assets’ exposure to risk and the potential impact of specific events on your business. Getting an insurance quote can help gauge the level of risk and cost.
Insurance is a necessary overhead, offering no immediate benefit until a calamity occurs. Deciding how much insurance to carry is a commercial decision, balancing the need for coverage against the desire to minimize costs. Some insurance coverage is mandatory by law or required by financial agreements.
Discuss your business plans with an insurance broker to establish your insurance needs. Ensure you understand what insurance you’re purchasing, and obtain at least three quotes before deciding.
The Association of British Insurers (ABI; www.abi.org.uk) and the British Insurance Brokers’ Association (BIBA; www.biba.org.uk) can connect you with qualified insurance experts.
Protecting Your Employees
By law, you must carry at least £2 million of liability insurance to cover legal liabilities for employee death or injury incurred during business operations. In practice, this coverage is often unlimited, with premiums related to your wage bill.
Employer’s liability covers only accidents for which the employer is legally responsible. Consider extending this coverage to any accident involving an employee while on business, regardless of fault. Additionally, ensure your financial security, particularly if your business relies heavily on your well-being.
Legal Expense Insurance
The increasing burden of employment legislation necessitates legal expense insurance for many small firms. This insurance protects against the costs associated with legal disputes, such as unfair dismissal claims. For example, in 2019-2020, around 104,000 claims were filed, with significant awards for successful claims. Legal expense insurance can cover fines, awards, and defense costs, providing peace of mind.
Business Property and Assets
Insuring your business premises, plant, and equipment is essential. You can choose between reinstatement (full replacement cost) and indemnity (current market value) coverage. Consider related costs like debris removal, architectural fees, and compliance with updated building standards.
Stock and Theft Protection
Protect your stock from hazards such as fire and theft, both from external sources and internal fraud. Fidelity guarantees protect against key employee dishonesty, while theft cover protects business premises and contents.
Consequential Loss Insurance
This insurance covers the financial impact of business interruptions, restoring your business’s finances to their pre-interruption state. It covers ongoing overheads, employee wages, and subcontracted work during recovery periods.
Transit Insurance
Goods remain your responsibility until they reach and are accepted by the customer. Transit insurance protects against loss or damage during transportation.
Key Man Insurance
Key man insurance provides financial protection in case of death or incapacity of a vital business member. This insurance is crucial for small and new firms where one person is disproportionately important.
Product Liability
Your products must meet legal standards, including those set by the Consumer Protection Act and the Sale of Goods Acts. If your product poses real risks, consider product liability insurance. Ensure compliance with stringent hygiene regulations for food-related businesses.
Public Liability and Professional Indemnity
Public liability insurance covers damages for injury, illness, or property damage caused by your business to others. Professional indemnity insurance protects against legal actions by clients claiming negligence or poor service. This insurance is essential for consultancy and advisory businesses.
Additional Considerations
- Avoid exaggerated claims about your products.
- Provide clear instructions and labeling.
- Comply with EU regulations if exporting within the European Union.
- Maintain records for ten years and be prepared for product recalls if necessary.
Conlcusion
Managing risks and liabilities is a critical aspect of running a successful business. By understanding your insurance needs, protecting your employees, and complying with legal standards, you can safeguard your business against unexpected events and ensure its long-term stability.
