Recent reports indicate that the cost of taking out business protection insurance is sky-rocketing with some premiums as much as five times higher than rates in 2019.
Experts link the increase to Covid-19 and say insurers are reacting to a flood of claims they've had to pay out on. But the hike many companies face, presents a big challenge for businesses, many of whom may already be suffering from losses and debt created by the pandemic.
It's tempting to try and make do with cheaper cover - and some business owners may even be considering operating with no cover at all. One report suggested as many as 51 per cent of companies had gone down this route thinking it would help keep their businesses afloat.
According to the poll of 150 UK SMEs, the most common cover to be scrapped was employers’ liability insurance, which 26% of firms scrapped to try and save money. Others slashed cover for business property (23%), professional indemnity (22%), public liability (21%), product liability (18%), and cyber issues. While nearly one in five, or 19% of the respondents, stopped paying for business interruption insurance.
At Harper James Solicitors, our experts regularly advise businesses who need advice when things go wrong in the lifecycle of their enterprise and they need support to overcome a business hurdle. Here, Ian Carson and Sarah Gunton argue why having correct insurance in place is absolutely vital and explain why ditching the right cover is a bad idea for any business.
'If you make the decision to operate without adequate insurance cover you are leaving your business open to financial claims and legal proceedings from your customers and other potential third parties.'
Our dispute resolution partner Ian Carson advises: 'If a claim is brought against you or your business, which you wish to challenge, then the legal costs of defending a matter need to be aligned to the quantum of your insurance and legal expenses cover. Not having the right policy in place could hugely impact your ability to mount a robust defence and protect your business.
Equally, if you want to bring a claim against a third party then without appropriate legal expenses cover, you could be left on your own financially as you try to pursue compensation or to recover what monies or goods which are rightly owed to you. Insurers will pay out following a claim and then consider going after the third party separately to recover the monies paid out. This allows the insured company to focus on getting back to running their business without having to deal with a lengthy dispute.
I recently dealt with a case where a business sadly had £100,000 worth of items stolen from a storage facility they had hired. When I examined the company’s insurance policy, they were only covered for goods up to the value of £25,000. The company therefore lost out on £75,000.
We looked at bringing a separate claim for liability against the storage company but the claim was far from straightforward and the business did not have legal expenses cover. Although it may feel like a costly outgoing, ensuring you have correct level of cover, including legal expenses insurance could ultimately save you a lot of money in the future.
Simply put, if you make the decision to operate without adequate insurance cover you are leaving your business open to financial claims and legal proceedings from your customers and other potential third parties.
The costs of an insurance premium could prove significantly cheaper than a claim which could very quickly reach hundreds of thousands and in serious cases, even millions of pounds; all of which you could be held liable to pay. The cost of a claim, if you don’t have insurance, could in the worst case scenario even end up costing you your business.'
'Bear in mind that you owe a duty of utmost good faith to your insurers during disclosure of all material facts that could influence their decisions.'
Commercial partner Sarah Gunton points out that legally, you may be obliged to have certain kinds of insurance in place: 'You may be required by law to maintain certain insurances, for example, employer’s liability insurance; and your regulatory body may require you to take out professional indemnity insurance. Many contracts impose a contractual obligation to insure: if you fail to do so, then you will be in breach of contract and the other party may have remedies against you, for example to terminate the contract and/or sue for damages. However, there may be circumstances in which you are not under an obligation to take out insurance against the risks which may crystallise in relation to your business – and in the current circumstances you might consider saving money by doing without.
There are risks in taking this approach: if a successful claim is brought against you – and there are a range of people who might have a right to take action against you – and you do not have insurance, you will be required to fund that claim and this will have a direct impact upon your profitability. If you cannot pay then, ultimately, your business may be wound up.
Bear in mind that you owe a duty of utmost good faith to your insurers during disclosure of all material facts that could influence their decisions. And if you breach that duty then you will not necessarily benefit from the insurance protection that you believe to be in place. To obtain the correct insurance for your business, your insurer or your insurance broker will need a very clear picture of that business and the risks it faces, or you may find you are paying for insurance which does not cover a risk that subsequently crystallises.'
Do you need guidance about the type of insurance you should be looking at to suit your business? Get in touch with our experts and we will be able to steer you in the right direction.