Whether you are a sole trader, self-employed professional or director of a limited company, running a business means accepting a certain amount of risk.
A customer could be injured while visiting your premises. An employee could suffer an accident at work. A product you supply could cause damage, or a client could claim that your professional advice resulted in a financial loss.
Without appropriate insurance, defending a claim and paying compensation could place considerable pressure on your business.
The difficulty is that liability insurance is not a single type of policy. There are several forms of liability cover, each designed to protect against different risks.
Understanding the differences can help you decide which insurance your business actually needs.
What Is Liability Insurance?
Liability insurance is designed to protect a business or individual against certain claims made by other people or organisations.
Depending on the type of policy, this could include claims from:
- Employees
- Customers
- Clients
- Members of the Public
- Investors
- Shareholders
- Regulators
- Other Businesses
Different policies cover different relationships and circumstances.
For example, public liability insurance is primarily concerned with third-party injury and property damage, while professional indemnity insurance deals with claims arising from professional advice or services.
Employers’ Liability Insurance, meanwhile, protects against certain claims from employees and is legally compulsory for most employers in Great Britain.
Employers’ Liability Insurance
Employers’ Liability Insurance is one of the most important forms of business liability cover because, unlike many other types of commercial insurance, it is generally required by law if you employ people.
It can help your business meet the cost of compensation if an employee becomes injured or develops an illness because of the work they carry out for you.
This could include situations involving:
- Workplace Accidents
- Injuries Caused by Machinery
- Falls From Height
- Manual Handling Injuries
- Exposure to Harmful Substances
- Certain Work-related Illnesses
Claims may also arise after somebody has left your business. Some occupational illnesses, for example, can take years to become apparent.
Most employers in Great Britain that fall within the legal requirement must have at least £5 million of Employers’ Liability Insurance from an authorised insurer. Many commercial policies provide £10 million as standard.
There are exemptions in certain circumstances, including some businesses that only employ qualifying family members, so the requirement should always be checked according to the structure of your particular business.
Do I Need Employers’ Liability Insurance If I Only Employ One Person?
Potentially, yes.
The size of your workforce does not determine whether Employers’ Liability Insurance is required.
A business employing a single person can still fall within the legislation.
Similarly, working from home does not automatically remove the requirement.
If you employ somebody and are unsure whether you need Employers’ Liability Insurance, establish your position before allowing them to begin work.
What About Contractors and Subcontractors?
The position can become more complicated when businesses use contractors, freelancers or subcontractors.
Simply describing somebody as “self-employed” does not necessarily determine how they will be treated for insurance purposes.
Factors such as who controls their work, whether they provide their own equipment and the nature of the working relationship may be relevant.
If your business regularly uses subcontractors, temporary workers, apprentices or other non-standard working arrangements, explain these to your insurance provider or broker.
Public Liability Insurance
Public liability insurance protects businesses against certain claims from members of the public arising from their business activities.
It can provide protection where your business is legally liable for:
- Personal Injury
- Property Damage
- Certain Associated Legal Costs
For example, imagine a customer slips on a wet floor inside your shop and suffers an injury.
Alternatively, you might be a tradesperson carrying out work at somebody’s house and accidentally damage an expensive item belonging to the homeowner.
These are situations where public liability insurance could become extremely important.
Is Public Liability Insurance Compulsory?
Public liability insurance is not generally a legal requirement for most UK businesses.
However, that does not mean it is unnecessary.
You should seriously consider it if customers, clients, suppliers or members of the public:
- Visit Your Premises
- Attend Events You Organise
- Visit Your Home for Business Reasons
- Come Into Contact With Your Employees
- Are Present Where You Carry Out Work
Some customers, landlords, trade organisations and principal contractors may also require a specified level of public liability insurance before allowing you to work for them.
This is particularly common in industries such as construction and contracting.
You can read more about selecting appropriate cover in our guide to the different types of business insurance.
How Much Public Liability Insurance Do I Need?
There is no universal level of public liability insurance suitable for every business.
Limits frequently available include £1 million, £2 million, £5 million and £10 million, although options will vary between insurers.
The amount you need may depend on:
- The Type of Work You Undertake
- Where You Work
- Number of Customers or Visitors
- Potential Severity of an Accident
- Value of Property You Work Around
- Contract Requirements
- Your Industry
A self-employed professional meeting occasional clients in an office has very different risks from a construction contractor working in busy public areas.
Choosing appropriate cover should therefore be based on your actual exposure rather than simply selecting the cheapest limit available.
Product Liability Insurance
If your business designs, manufactures, imports, distributes or supplies products, product liability insurance is another important consideration.
A defective product can cause:
- Personal Injury
- Property Damage
- Financial Losses Associated With a Claim
It is important to understand that responsibility for a defective product does not always end with its original manufacturer.
Depending on the circumstances, other organisations involved in the supply chain can also face claims.
This means retailers, wholesalers, suppliers and importers should not automatically assume that product liability is somebody else’s responsibility.
Do I Need Product Liability Insurance If I Don’t Manufacture Products?
It can still be relevant.
If your business imports, distributes or supplies products made by somebody else, you may still face potential liabilities depending on the circumstances.
Businesses selling products under their own name or importing goods can face particular risks.
Even where another organisation ultimately bears responsibility, becoming involved in a product liability claim can still create significant disruption and legal expense.
If physical products form part of your business, discuss product liability with your insurance adviser rather than assuming it only applies to manufacturers.
Professional Indemnity Insurance
Professional indemnity insurance is designed primarily for businesses and individuals that provide professional advice, expertise, designs or services.
A client could allege that a mistake, omission or negligent piece of advice caused them to suffer financial loss.
For example, a consultant could recommend an unsuitable course of action, an architect could allegedly make an error in a design or an accountant could be accused of providing negligent professional services.
Professional indemnity insurance can help cover certain compensation claims and legal defence costs arising from professional negligence, subject to the policy terms.
Who Needs Professional Indemnity Insurance?
Professional indemnity insurance can be particularly relevant to occupations such as:
- Accountants
- Architects
- Consultants
- Designers
- Engineers
- IT Professionals
- Marketing Agencies
- Photographers
- Surveyors
- Certain Healthcare Professionals
- Other Professional Service Providers
Some professional bodies and regulators require members to maintain professional indemnity insurance.
Clients can also make it a contractual requirement.
For example, a large organisation engaging a consultant may insist that the consultant maintains a specified level of professional indemnity insurance throughout the contract.
Even where it is not compulsory, businesses whose customers rely on their expertise should consider the financial consequences of a professional negligence claim.
Professional Indemnity Insurance Is Often Claims-made
Another important feature of professional indemnity insurance is that cover is commonly arranged on a claims-made basis.
This generally means you need an appropriate policy in place when the claim is made, rather than simply having been insured at the time the original work was completed.
This is particularly important for businesses that stop trading, retire or change insurer.
If your work could result in claims several years later, discuss retroactive cover and run-off insurance requirements with your broker or insurer.
Directors’ and Officers’ Liability Insurance
Directors and senior managers can face claims personally arising from decisions made while carrying out their responsibilities.
Directors’ and officers’ liability insurance – commonly known as D&O insurance – can provide protection against certain claims alleging wrongful acts by directors and other insured officers.
Examples could include allegations relating to:
- Breach of Duty
- Breach of Trust
- Neglect
- Errors
- Misleading Statements
- Wrongful Trading
Claims can potentially originate from shareholders, investors, employees, creditors, regulators and other third parties.
D&O insurance can help meet certain defence costs and compensation arising from covered claims.
Doesn’t the Limited Company Protect Its Directors?
Operating through a limited company creates an important legal distinction between the company and the individuals running it, but this does not mean directors can never face personal claims or investigations.
Company directors have specific responsibilities and duties.
In certain circumstances, allegations can be made against an individual director rather than solely against the company.
D&O insurance is intended to address some of these personal exposures.
It is important to note that D&O insurance does not normally act as general insurance for every claim made against the company itself.
Cyber Liability Insurance
Modern businesses increasingly depend on technology.
Customer databases, cloud systems, online payments, email accounts and websites can all become targets for cyber criminals.
Cyber insurance can provide protection against certain consequences of:
- Cyber Attacks
- Data Breaches
- Malware
- Ransomware
- Business System Disruption
- Certain Privacy-related Claims
The insurance available varies significantly between providers.
Businesses that hold customer information, process online transactions or rely heavily on technology should consider what would happen if their systems were unavailable for several days.
Cyber security measures remain essential – insurance should complement appropriate technical protection rather than replace it.
Does a Sole Trader Need Liability Insurance?
A sole trader working entirely alone will not normally need Employers’ Liability Insurance because there are no employees.
However, other liability insurance could still be highly relevant.
For example, a sole trader could need:
- Public Liability Insurance if Working With the Public
- Professional Indemnity Insurance if Providing Advice
- Product Liability Insurance if Supplying Products
- Cyber Insurance if Handling Sensitive Data
Being a one-person business does not remove the possibility of somebody making a claim against you.
In fact, because a sole trader does not have the same legal separation between themselves and the business as a limited company, protecting against substantial financial risks can be particularly important.
Does a Limited Company Need Liability Insurance?
The fact that a business operates as a limited company does not by itself determine what insurance is required.
Instead, consider:
- Whether You Employ People
- Whether You Deal With the Public
- Whether You Sell Products
- Whether You Provide Professional Advice
- Whether You Have Directors
- Whether You Hold Sensitive Data
- What Your Customer Contracts Require
A limited company with several employees providing professional services could potentially require Employers’ Liability, public liability, professional indemnity, cyber and D&O insurance.
A small company with a very different business model may need considerably less.
Insurance should reflect the risks rather than simply the legal structure of the company.
What’s the Difference Between Employers’ Liability and Public Liability?
These two policies are frequently confused.
The simplest distinction is who is making the claim.
Employers’ Liability Insurance primarily concerns employees who suffer injury or illness because of their work.
Public liability insurance primarily concerns customers, visitors and other third parties who suffer injury or property damage in connection with your business activities.
For example:
An employee falling from unsafe work equipment could potentially lead to an Employers’ Liability claim.
A customer falling because of a hazard at your premises could potentially lead to a public liability claim.
A business that employs staff and deals with the public may therefore need both.
How Much Liability Insurance Does My Business Need?
Appropriate limits depend on the potential financial consequences of a claim.
Consider:
- Your Industry
- Number of Employees
- Annual Turnover
- Contract Values
- Size of Customers
- Nature of Your Products
- Professional Services Provided
- Where You Work
- Potential Severity of Injuries
- Value of Third-party Property
- Contractual Insurance Requirements
It is also worth reviewing any contracts you sign.
Customers may specify minimum public liability or professional indemnity limits, particularly when working with larger organisations.
What Other Business Insurance Should You Consider?
Liability is only one category of commercial risk.
Protecting yourself against a liability claim while leaving another major part of the business completely exposed may still put your company at financial risk.
Depending on your activities, additional insurance could include:
- Commercial Property Insurance
- Business Contents Insurance
- Business Interruption Insurance
- Commercial Vehicle Insurance
- Tools and Equipment Insurance
- Goods in Transit Insurance
- Legal Expenses Insurance
- Personal Accident Insurance
- Stock Insurance
- Cyber Insurance
The appropriate combination will depend on how your organisation operates.
Review Your Liability Insurance as Your Business Grows
The insurance you arranged when starting your company may not remain appropriate several years later.
Your risks can change when you:
- Employ Your First Member of Staff
- Recruit Additional Employees
- Move Into Commercial Premises
- Win Larger Contracts
- Start Selling Products
- Begin Working Overseas
- Introduce New Professional Services
- Purchase Expensive Equipment
- Increase Your Turnover
- Take On New Directors
Review your insurance regularly and tell your broker or insurer about significant changes during the policy period.
Do not assume your existing insurance will automatically expand to cover every new activity.
Choosing the Right Liability Insurance
There is no standard liability insurance package suitable for every UK business.
Some forms of cover may be legally required, while others are determined by your activities, contractual obligations and the financial risks you are prepared to accept.
The key is understanding where a serious claim could come from.
Consider your employees, customers, products, professional advice, directors and technology. Then think about the financial consequences if something goes wrong.
At West Craven Insurance, we can discuss the way your business operates and help you identify suitable levels of liability and wider commercial insurance protection.
Whether you are a sole trader, self-employed professional, growing limited company or established employer, speak to our team about arranging insurance around the risks your business actually faces.
