For a professional or small business, understanding what type of business insurance to purchase can be confusing to say the least. What risks do I face? What insurance policies do I need to cover those risks? What amount of cover should I buy?
Unfortunately, the answers are different for every business. And those answers are not fixed – they will continue to change as you grow and take on more clients, win bigger contracts, and maybe even move into premises and recruit staff.
As a rule of thumb, when your business grows so does your professional risk. If you take on more clients and/or bigger contracts, then the financial consequences if something goes wrong become greater. Growth also increases your ‘property risk’ i.e. the things your company needs to function.
Remember starting out with only a laptop on the kitchen table? Now, or sometime in the future, you might have an office with staff, rooms full of technology and office equipment. What happens if a flood makes your office unusable and destroys all your equipment?
Let’s take a jargon-free look at understanding some of your risks, and what you should be thinking about when it comes to buying or changing your insurance as your business changes and/or grows.
Your professional risk
Professional risk first: if you give advice to customers as part of your business, your professional risk is that something could go wrong and a client could sue you for damages, or refuse to pay you, or both. This is where professional indemnity insurance comes in (sometimes called PI).
Professional indemnity insurance will provide financial protection if you make a mistake (or are accused of making a mistake) in the services you have provided to your client and are sued by that client as a result. In days gone by professional indemnity was the preserve of lawyers and accountants, but increasingly it’s seen as essential insurance for any professional business.
How much is enough?
When buying professional indemnity, one obvious question is how much cover (i.e. the amount that an insurer will pay out on a single claim) is enough? Protection is available from hundreds of thousands of pounds into multiples of millions.
Generally small businesses should make sure your cover is at least as big as your biggest contract and it’s unusual for cover to be worth less than annual revenue – normally it should be in multiples of your turnover.
Clients often require a standard, specific level of cover, for example, £1,000,000 or £5,000,000, so it might be worth double checking any requirements in your contracts.
It’s worth remembering that you are only covered while your policy is still valid. If you cease trading for example and cancel your professional indemnity policy, and a client sues you after that date for work you had previously carried out for them, you may not be covered. It might make sense to keep a professional indemnity policy, or ‘run-off’ policy, in force for a period of time after you finish your last contract
As your business grows, reviewing your professional indemnity cover regularly to ensure it matches the size of clients and contracts you take on is essential.
One question we’re often asked is why has our professional indemnity premium changed even though we haven’t made a claim? This is normally because the type or size of your business is changing. For example, as a business grows, and takes on larger and more complex contracts, the risk of it experiencing a claim can be greater. Premiums will change to reflect the changing profile of your business.
Your property risk
As you start out, you may have little in the way of assets to protect. It might simply be that you need to make sure items like your laptop and smart phone are covered when you’re out of your office. Sometimes these might be covered under your household insurance so it’s worth double-checking with your current insurers. However, if you take on your own premises you might consider a specific office contents policy and also business interruption cover which will meet the costs you will face if, for any reason (a fire or flood for example) you are unable to operate business as usual from your premises. Buildings insurance, which covers the actual building you work in, is only really relevant when you own your own office premises.
Your public and employee risks
In this blog, we’ve focused on professional and property risk but don’t forget you will also need to consider public liability and employers’ liability. Again, any size business from a sole trader upwards should consider public liability cover, while you only need to consider employers’ liability if you take on employees.
The key however, is to continue to review all your insurance needs as your business grows, changes, and evolves. The risks you face will change to reflect the size and profile of your business and it’s vital that your insurance is tailored to meet those risks.
For existing Hiscox customers, there is no admin fee for making changes to your policy, and no limit to how many changes you can make in a policy year. You can call us on 0845 213 8900 if you think you may need to tailor your insurance as a result of changes in your business.
Need further information? Visit our article on what is public liability insurance.