Insurance industry jargon is confusing for lay business people looking for the best cover at a reasonable price.
Jargon is like a code; you are lost if you don’t have the key to unlocking this secret language.
Many of the most common business insurances talk about liability and indemnity.
They may sound like they do something similar, but they don’t – liability and indemnity insurance have different purposes.
Read on to find the difference between the main liability and indemnity policies.
Table of contents
What is liability insurance?
Liability insurance comes in three main types:
- Public liability
- Employer liability
- Product liability
Basically, each covers the same issues but for different groups of people.
Liability insurance covers the risk of someone dying, falling ill or suffering an injury due to your business activities.
Most of the policies include cover for repairing or replacing property damage. For liability insurance, the property can mean personal items and buildings.
Public liability insurance handles claims against a business from the public, for example, customers, delivery people and contractors visiting your business premises. Off-site incidents, like home visits, seminars, exhibitions or other promotions, are protected.
Public liability insurance is optional unless you run a horse riding establishment when the cover is mandatory.
Employer liability insurance does the same job as public liability, except it covers employees instead of the public.
An employee is someone on the payroll, and the term covers volunteers, interns, and staff on work placements.
If your business hires contractors, you should check their work status as some self-employed contractors are classified as employees should you direct their work and hours.
If you run a family business, you may not need employer liability cover for close relatives, such as your children, spouse or parents. Likewise, the cover is not required if you are the sole director or have a 50 per cent plus shareholding in a business.
Employer liability insurance is mandatory for businesses with staff.
Product liability insurance is a special cover for businesses that design, make, distribute or sell their products.
The policy aims to safeguard a business from compensation claims due to faulty products. It’s important to note that product liability also covers free gifts but excludes poorly made items or financial losses arising from a claim against a faulty product.
How Does Liability Cover Work?
Liability insurance covers the total cost of a compensation claim. Compensation includes damages, loss of earnings and the legal and professional fees attached to the claim.
A business can pay an excess to reduce the cost of cover. An excess can be compulsory or voluntary and represents a contribution towards the cost of the claim.
Public and employer liability cover often comes as a single policy. Product liability is a public liability add-on and is rarely sold as a standalone policy.
Liability insurance typically starts at £1 million for a small business and steps up to £2 million, £5 million and £10 million levels of cover, although other amounts are usually available.
Professional Indemnity Insurance Explained
Professional indemnity cover is often confused with public liability because their job is similar.
Professional indemnity comes into play if a client claims your business because they feel your work or advice has harmed their reputation or led to a financial loss. Sometimes professional indemnity is called professional liability insurance.
For instance, the professional indemnity would pay if you advised a client to install a software solution only to wipe their data or if an accountant forgot to file a client’s tax returns and were fined.
What does professional indemnity do?
The terms and conditions of a professional indemnity policy vary between insurers, but most offer similar standard covers:
- Professional negligence – covers compensation for giving poor advice that costs a client money
- Breaking confidentiality – handles divulging information or data to someone without your client’s consent
- Troublesome employees – if you have an employee or former one who impacts your client by behaving fraudulently, dishonestly or maliciously.
- LIbel or defamation – handles a claim if a client has a serious financial or reputational loss due to something your business says or publishes about them.
Some policies include compensation for infringing intellectual or property rights, losing or damaging documents, and a claim’s professional costs.
Who needs professional indemnity cover?
Professional indemnity cover is for professional advice and design businesses, like lawyers, accountants, architects, surveyors and IT consultants.
Taking out a policy is not compulsory for businesses.
The level of cover ranges from thousands to millions of pounds and depends on the job size and amount of cover required by the client.
Many professional bodies make a basic level of professional indemnity cover a condition of membership.
The two insurances are similar and are often confused with each other.
Liability insurance covers illness or injury to someone or damage to property.
Indemnity insurance covers clients losing money or damaging their reputation due to your business offering bad advice.
Often the cheapest and most convenient way to buy liability insurance is with a commercial combined policy which is tailored to cover your business needs as one package but includes public and employer liability insurance and other common business insurances.
A small business can expect to pay from £120 a year for a liability insurance package, while the price for larger businesses can run into thousands.
Like liability cover, professional indemnity insurance costs start from around £100 a year and can reach thousands or even millions for big contracts. Many professional and trade bodies offer the cover at a discount.
One unusual factor about professional indemnity is the cover runs for a year, but if a claim is made up to six years later, the insurer will take responsibility.
The Association of British Insurers (ABI) explains: “New claims can be brought against you for up to six years after an alleged negligent act occurred, so your run-off policy should cover you for this period.”
A run-off professional indemnity policy handles new claims even if you change insurers, so it’s like insuring a period that remains protected once your business has closed or moved on to another insurer.
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