Insurance is big business and there’s no doubt that every business needs insurance, not least because it’s compulsory by law to have Employers liability and Public liability.
Other types of insurance, such as Property insurance cover are also more or less mandatory if you have a mortgage and of course are critical.
However, the insurance industry has evolved and there are now myriad other types of business insurance available and very actively sold. Just a few examples include :-
- Keyman insurance
- Directors & Officers cover
- Industry specific insurance products such as Tradesmans insurance
- Employment law insurance
- E-risks insurance
We have attempted to find out what the average small business may spend on business insurance but unfortunately, via online search, we have not been able to find any useful market research or studies on the issue.
When googling the question, there are various Q & A sites where estimates are given of possible spend (which of course will inherently vary from business to business and by size and type) but let’s say, for arguments sake that, in addition to compulsory insurance an average small business might also spend between £1,000.00 to £5,000.00 per annum on buying additional types of cover such as those described above.
Is that money well spent ?
The obvious reason for taking out business insurance is peace of mind and when comparing insurance to the value of legal advice, the latter can’t offer complete certainty.
However, whilst insurance may seem to be definitive, it rarely is. There is an irony that insurance policies are very carefully drafted by very experienced and able lawyers. Part of the problem with any insurance policy is that you really need to be a lawyer to understand all the ramifications and nuances.
For example, most insurance contracts for business include clauses which in effect mean that any breach by the insured may lead to the contract being cancelled by the insurer, leaving the policy worthless. This approach does not accord with general contract law principles whereby the consequences of a breach of contract and remedies available to the other party need to be proportionate to the breach. In other words, the contracts are very heavily slanted in favour of the insurer.
By way of specific example, many companies now consider taking out Directors and officers insurance, which seems like a very sensible approach given that there can be personal legal risks associated with being a company director. One of the most important of these risks is now possible liability under the Bribery Act 2010, which contains harsh penalties and where directors can in theory be liable for circumstances which are largely out of their control.
As advised above, insurance companies aren’t stupid and have excellent legal advice and risk assessment abilities. So, you find that many D & O insurance policies specifically exclude cover for liability under the Bribery Act !
Better to spend on legal advice ? A hybrid approach ?
Most small businesses and especially very early stage businesses are very reluctant to seek legal advice. Research indicates that over half don’t seek legal advice due to the perceived prohibitive cost.
Would money which is spent on insurance, seen as a necessity, in fact be better spent on legal advice ?
As lawyers, we would of course say yes – legal advice can avert many of the problems which would otherwise be considered as insurance issues. Insurance may not pay out, and in terms of day to day issues such as having the right contracts for your business, policies and procedures, employment contracts and practical advice on reducing business risks, legal advice may be better value for money.
If you as business person don’t agree with that, how about an approach whereby your business at least takes legal advice on the merits or otherwise of business insurance policies?
If you don’t fully understand what you are covered for or the ways in which the insurers may not pay out, the insurance you are considering may be of very limited use to you and may create a false sense of comfort and cause you to take unnecessary or ill advised business decisions in the mistaken belief that you are covered by insurance if things go wrong when in fact you are not.
For advice on commercial contracts, ways to protect your business or independent advice on the terms of an insurance policy offered to you, get in touch with me for an initial free discussion and fact find.
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