IT contractor insurance overview
Business Insurance – Why bother?
Business insurance, like many types of expenditure, is one of those items that business owners typically do not like to pay. But you must remember that sufficient insurance can be as critical to the success of your contractor business as a good product or service. Without proper insurance you could lose all the money, time and effort you put into your company. The types and amounts of coverage you purchase must be evaluated on cost-benefit basis like any commodity that you purchase.
Some types of insurance cover that you should consider for your business are listed below.
Commercial Liability Insurance
There are many types of liability your business may need cover for. ‘Liability’ refers to your legal obligation to pay compensation and costs awarded against you in respect of loss or damage sustained by a third party. Types of liability insurance you may want to consider are:
- Public Liability – this will protect you from any liabilities to a third party (other than your employees) for bodily injury or loss/damage to their property that may occur during the normal operation of your business.
- Employers’ Liability – if you are a limited company or employ anyone outside your immediate family, you are required by law to purchase employers’ liability insurance. This insurance offers you protection for any liability arising from injury or illness sustained by employees while they are working for you.
- Products Liability – this will protect you from any liabilities to a third party (other than your employees) for bodily injury or damage to their property that may occur from the products you have sold or supplied.
- Professional indemnity insurance – this cover is usually purchased by ‘professionals’, such as IT contractors/consultants, surveyors, accountants and solicitors. This cover will protect your legal liabilities to third parties arising from you or your employee’s professional negligence/wrongful advice.
There are many different types of property cover but generally businesses will purchase cover for buildings, machinery and stock against fire and other perils such as flood and theft. They will also consider covering money, goods in-transit and glass. For small businesses, cover can be provided on a ‘package’ basis where certain covers such as money and goods in-transit are included in the premium as standard. However, this option is only available for specific occupations/trades and you should consult your broker for further details.
Working from home?
If you are working from home be aware that generally your ordinary household insurance policy will not provide cover for your business stock and liabilities. Specific policies can be purchased if you are working from home and you should contact your insurance broker for further details.
There are specific polices for property owners who rent out their premises to tenants. These policies provide cover for buildings, liability and loss of rent. Loss of rent cover is usually only provided in the event of an uninsured peril occurring such as a flood or fire.
This covers loss of income/revenue or additional expenditure incurred following a disruption to the operation of your business. Business interruption usually mirrors your property policy and covers the same perils. However, it is possible to add additional perils to your business interruption cover such as food poisoning or failure of utilities.
This type of insurance typically covers risk of loss from theft by employees. If your business deals in large amounts of cash, negotiable securities or similar types of assets, you may well be advised to consider this cover. Certain industries are required to carry this insurance by regulatory authorities.
Directors & Officers Liability
Directors and officers of companies in recent years have been found to be personally responsible for their negligence in the running of their company. Recent legislation has also made company directors liable for their behaviour to the company so that shareholders, creditors, customers and employees can now sue them as individuals.
Directors and officers liability cover provides indemnity to the company in respect of the costs it incurs in indemnifying a director against the successful defence of a claim or indemnifying the director where the defence has not been successful.
Key Person Protection
This provides a company with a valuable safety net should serious illness, disability or death curtail the contribution certain “key” people could make to its stability, profitability and success.
Identifying a Key Person
These are the people whose special knowledge, skills or enterprise are vital to the continuing survival of a business – people who are difficult to replace. They aren’t always the Managing Director or other high profile senior managers. Consider other key functions that are necessary to the company’s business when talking key person insurance with your clients.
When is Key Person Protection needed?
There are three clearly, identifiable situations when key person insurance is most needed:
- To prevent loss of profits
- To protect the repayment of loans
- To safeguard the raising of capital
The death of a partner can be extremely damaging to any business. The ability to continue trading and maintain the financial wellbeing of the firm will be vital. In addition, there are other problems which may have to be faced, in the absence of property provision in the Partnership Agreement and insurance cover:
- the partner’s interest may pass to an heir who may not have the necessary skills, experience or interest to continue in the business
- the partner’s interest may need to be turned into cash to pay Inheritance Tax or provide for his or her dependants on death
Raising the finance to buy a partner’s interest may involve the sale of assets or finding someone who can afford to buy-in to the partnership.
Finding a suitable replacement and raising the money can be difficult and time-consuming. If unsuccessful, the partnership may even have to be dissolved. It is clear that partners need to retain continuity, stability and control of the business whatever the eventuality. This can be achieved by making adequate legal and financial provision.
Like partners, shareholder’s shares may pass to an heir who does not understand the company’s business or whose interests conflict with those of the other shareholders. Alternatively, the shareholder’s interest may need to be converted into cash to cover Inheritance Tax liabilities or provide for dependents. Maintaining control and stability of the company during this often turbulent time is key to its continued success. By taking the appropriate legal and financial steps shareholders can be confident that the future holds no surprises.
Fee Protection Insurance
HM Revenue & Customs’ powers have changed and they now have wider scope than ever before to visit business premises and inspect records. The likelihood of enquiries into a taxpayer’s affairs appears to be on the increase. The professional fees in dealing with such enquires can often be costly so it is advisable to “insure” or subscribe to a tax protection service which will fund these fees in the event of an enquiry or visit [from HMRC].
An extract from The New Business Kit, a guide to financial, tax and accounting considerations for starting a successful business, by The Low Tax Group, a chartered business advisory for contractors.
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