The amount of insurance you should take out will depend upon the type of insurance you are arranging and your particular circumstances. Below are some examples of how to assess appropriate levels of cover.
Buildings - if you own buildings you should insure for the full cost of reinstating the property in the event of total destruction. This insurance figure is not to be confused with the current market resale value of the property (a simple shed costing a few hundred pounds to replace may stand on a site, valued in thousands). Local builders or Surveyors can help, usually by recommending a rate per square metre applied to the total floor space (if more than one floor, the aggregate space of all floors), and adjusted for the type of property, e.g. modern, listed, and the type of construction, e.g. timber, brick etc. Add to this total the cost of Architects and Surveyors fees, removal of debris costs to clear the old site and the cost of planning applications to arrive at the total Sum Insured Value.
Tenant's Improvements/Interior Decorations - When occupying leased premises, tenants may carry out internal alterations to either improve the standard of accommodation (insulation, air conditioning, central heating, etc.) or change the internal layout (partitioning, false ceilings etc.), which will all need to be reinstated if the building is damaged. The landlord's policy will usually insure the fabric of the building, not the tenant's improvements and the tenant should, therefore, add this item to his own business cover.
Stock Items - The value of stock can vary on an almost daily basis, and the sum insured should represent the highest value of stock at cost (rather than resale), which could be held at one time (including peak times of the year) to ensure adequate cover.
Computer Equipment - The values here include cost of replacing software and hardware all at current prices, (which may differ from the original purchase price). Insurers will not usually pay for upgrades, but if obsolete items are no longer available, the nearest equivalent would be acceptable. The figure must cover all items including servers, screens, printers, keyboards, as well as the cost of wiring or any special networking arrangements. Laptops should be separately identified to ensure they are covered for use away from the premises.
General Equipment - All other items should be insured for their replacement cost rather than their current second-hand (or book) value (where the term "new for old" derives) and must include the aggregate value of all items (rather than those which you consider to be the most vulnerable). Although this can be a tedious affair, preparing an inventory with itemised values is often the only accurate way of assessing the correct insurance figure.
New for Old Cover - Insurance will usually pay for the cost of repairs, but where repairs exceed the new replacement cost of the item or if the item is stolen or irreparable, insurers will settle on a reinstatement basis. This means that either they or you will source a replacement of a similar item to the one destroyed (or lost). If you choose not to replace the item, cash settlements can be negotiated with insurers, but at substantially discounted prices to the cost of replacement.
Conditions of Average - Sometimes policyholders can by intent or otherwise under declare the values insured to save on premiums. This results in underwriters receiving less premium for the risk involved. To avoid this, insurers will include in almost all policies insuring fixed assets a penalty clause entitled "Condition of Average". This allows insurers to reduce claims by the same percentage the insured values bear to the actual replacement values. In simple terms, if you were insured for only 75% of the replacement value of your goods, you would be entitled to receive only 75% of any claim. Often the loss will be far higher than the premiums saved.
Type of Cover - The most appropriate method of insuring fixed assets is by way of an "All Risks" policy which includes accidental damage and effectively covers any claim unless specifically excluded, for example, breakdown or failure of parts is not normally covered unless included as part of warranty insurance.
Excess - Normally insurance policies covering assets exclude a fixed amount from the total claim; this is mainly to discourage small claims being made, although the amount will be deducted from any claim under the policy. The excess (or deductible to which it is sometimes referred) relates to each claim (as distinct from each item of the same claim).
A claim for loss of business revenue will commence from the date the revenue is affected by an insured event. In other words from the date of a fire or flooding which damages the property and causes an interruption to the business.
The period for which the lost revenue is covered is usually referred to as the "Indemnity Period" which will usually be for 12 months, but for businesses unable to recover during that time (the premises may take longer to reinstate or customers may take longer to retrieve etc.), longer periods, typically of 18 and 24 months should be considered.
Cover can be arranged either on a Gross Revenue or Gross Profit basis, but the figure for each is the projected Gross Revenue or Gross Profit the business is expected to achieve in year 2 from the date the policy is taken out. This is because the "Indemnity Period" may not be triggered by a claim until part way through the current insurance year. Again as with asset insurance, there are penalties for under declaring and under insuring revenue values.
The cost of preparing a revenue claim can be significant and these costs can be insured as a separate item.
Loss of revenue to the business can not only be caused by physical damage to the business premises, but also by damage occurring elsewhere resulting in the loss of electricity, telephone systems, water, gas supplies etc. Losses can also occur when access to the premises is prevented due to damage to other surrounding properties or by bomb hoax, terrorism, loss of vital supplies (following damage to suppliers' premises). Loss of key customers can also have a devastating effect on businesses (particularly when the customer's own premises are damaged), and in respect of clinics and hospitals, their income can be affected by closure due to the outbreak of contagious diseases. Losses from such scenarios may not cause a total loss of revenue and can, therefore, be included with separate sub limits.
Unlike assets and revenues where the insured values can be fairly accurately determined it is almost impossible to gauge adequate limits for civil liability claims as they depend upon so many factors. Apart from the nature of the business, economic and cultural trends will also influence settlements, but the following examples may help in your assessment.
Employers' Liability - This cover protects Employers from work related illnesses or accidents to employees and is compulsory under the Employers' Liability (Compulsory) Insurance Regulations 1998 for an amount no less than £5 million any one event. Certificates are issued by insurers to certify compliance with the statutory regulations, and these certificates must be displayed prominently at each place of business. These certificates should be retained indefinitely by the employer in a safe place in the event they are needed to deal with any future claims which may arise from previous employment. The usual limit under such policies however is £10 million in respect of any one event, (as opposed to any one employee), and consideration should be given as to whether this is adequate to deal with claims from a high concentration of employees adversely affected by a single event. Higher limits should also be considered when high salaried employees are engaged. Remember Directors are also regarded as employees.
Public Liability - Accidents can happen during the ordinary course of business which give rise to injuries or damage to property belonging to others. Public Liability insurance will protect the business from civil liability claims arising from such accidents, and in assessing the limits to be insured, policyholders must calculate the maximum likely claim for both personal injury and property damage that could be awarded against them from any single event. Under both types of policy there is usually no annual limit on the amount that can be claimed, other than claims resulting from accidental pollution which is limited in any one year to the same single claim limit.
Clearly some businesses will have greater exposures than others, for example, demolition contractors working in expensive inner city locations will require higher limits than individual contractors in less dangerous occupations. Nonetheless, the basic rule is to purchase as much as is reasonable given individual circumstances, and as much as can be economically afforded. The most popular choice is a limit of £5 million any one claim, but higher limits are available by negotiation, even if the limits required go beyond the capacity of a single insurer.
Product Liability - The manufacturers of goods are normally responsible for any claims arising from defects in the goods manufactured. However, wholesalers and retailers in the supply chain will be drawn into an action for compensation claimed by purchasers injured or whose property has been damaged as a result of such defects. Beware however the Product Liability limit per claim is also the annual aggregate. If the limit is shown at £5 million, this is the limit for all claims in that period, so there is a greater need to ensure the limits are adequate for the entire year, should you receive a number of claims following the supply of defective products.
Product Liability insurance cannot usually be purchased as a stand alone, and is normally included as part of a Public Liability policy.
Professional Liability Insurance - This protects policyholders from financial claims arising from their negligent or wrongful advice. The type of advice being given and the potential financial consequences will influence the limits to be insured. As an example Architects and Solicitors will often require higher limits than most other professional advisers. The limits are usually per claim (sometimes with an overall annual aggregate), and may be inclusive of both compensation and legal costs (which can be substantial).
As these policies are normally arranged on a "Claims Made" basis, it is important to ensure the limits currently insured are adequate to deal with claims from both current and previous work. The advantage of this type of policy is that policyholders can insure for claims brought in today's values (rather than the limits insured under Public and Employers' Liability insurances which apply at the time of the occurrence and may be some years earlier than the actual date of claim).
In assessing Professional Liability limits, policyholders should again consider the maximum potential financial impact their wrongful advice could cause and use this as the basis for assessing the limit to be insured. Such policies usually exclude the first fixed amount of any claim which becomes the policyholder's responsibility (referred to as the Excess or Deductible), and in some professions this excess can be significant.
Medical Malpractice - This cover is similar to Professional Liability insurance and often the two are combined. However, Medical Malpractice claims are based on compensation for personal injuries which arise from negligent treatment or advice given by clinicians, healthcare practitioners or medical establishments. The compensation awards are influenced by the degree of injury sustained and the age and financial status of the patient involved. Doctors, therefore, treating high net worth patients in high risk areas of surgery, have greater exposures than most and will, insure for higher limits.
Almost all Medical Malpractice cover includes an aggregate limit and, therefore, not only should policyholders assess the maximum potential value of any single claim, but the total they could receive in any year.
As with Professional Liability insurance this cover is also arranged on a "Claims Made" basis, covering only claims notified to policyholders for the first time resulting from their previous work
Both types of cover include "Retroactive Dates" which are important dates as they exclude any treatments or advice given prior to these dates, regardless of the date of claim.
Legal expenses in defending actions against policyholders also form part of the protection given and should be taken into consideration when assessing adequate limits to be insured.
Excesses/Deductibles are also common under this type of policy making the policyholder responsible for the initial amount of each claim (the Excess will vary depending upon the activities insured and the level of indemnity required). Policyholders must therefore have the financial resources available to meet Excesses under such policies, as they can often amount to a significant cost if dealing with several claims in any given year.
Outsourced private healthcare service providers working for the N.H.S. (or other Government Bodies) may also have contractual obligations to provide insurance for specific limits which may also incorporate extended warranties. In such circumstances, it may be worthwhile ring fencing such work with separate policies to avoid undue dilution of cover shared with other elements of the business. Although wider protection for the business is purchased, it is not always, however, the most economical option.
Policyholders insured under "claims made" policies may also need to consider“run-off" cover when they retire (or no longer practice) or when a business ceases to trade. This is because claims can still arise in the future from their earlier work. The period for which run-off cover is required, will depend upon the previous work involved and the legislation governing the time during which legal actions can be brought. The time will vary dependent upon whether claimants are pursuing compensation for personal injury, the age of the injured person or whether the compensation claim relates to non personal injury matters.
Whilst we believe the accuracy of this information is correct, applicants and policyholders however should seek the advice of appropriately qualified insurance advisers before deciding upon the levels of cover to insure and the types of policy best suited for their particular circumstances.