Liability Cover Explained

What Is Liability Cover?

Liability insurance is designed to help protect businesses and individuals against the financial impact of claims made against them following an incident, accident or allegation connected to their activities. It is a broad category of insurance that covers several distinct types of cover, each relevant to different situations and relationships.

In general terms, liability cover may help contribute towards the cost of compensation claims, legal expenses, and in some cases medical costs, depending on the type of cover in place, the nature of the claim, and the terms of the policy. The three most common types of liability cover relevant to businesses are public liability, employers’ liability and professional indemnity insurance, each of which is explained in more detail below.

The level of liability cover that is appropriate for a business will depend on the industry it operates in, the nature of its day-to-day activities, and who it interacts with, whether that is customers, employees, clients or members of the public. A specialist broker will be able to discuss the options available and outline what may be most relevant to your circumstances.

Public Liability Insurance

Public liability insurance is designed to help protect a business or individual against claims made by members of the public who suffer injury, illness or property damage as a result of the business’s activities. This can apply to incidents that occur on the business premises as well as those arising in the course of day-to-day operations elsewhere.

For example, if a customer sustains an injury while on business premises, or a third party suffers loss or damage as a result of the business’s work at an external location, a public liability claim may follow. Depending on the policy and the circumstances of the claim, public liability insurance may help cover the associated legal and compensation costs.

Public liability insurance is not a legal requirement in the UK, but is commonly arranged by businesses that regularly interact with the public, operate customer-facing premises, or carry out work at client sites. Because incidents can occur even where reasonable precautions are in place, many businesses choose to arrange this type of cover as part of their broader insurance arrangements.

Businesses and individuals that commonly consider public liability insurance include, but are not limited to, retailers, hospitality businesses, tradespeople, taxi drivers, salon owners, event organisers and contractors. The level of cover that may be appropriate will depend on the nature and scale of the business’s public-facing activities.

Employers’ Liability Insurance

Employers’ liability insurance is a legal requirement for the vast majority of UK businesses that employ staff. This includes full-time and part-time employees, temporary workers, agency staff, apprentices, volunteers and unpaid interns – in short, if an individual is working for the business in any capacity, employers’ liability cover is likely to be required.

The purpose of this cover is to help protect the business against the financial impact of claims made by employees who suffer injury or illness as a result of their work or working environment. The costs associated with defending a claim, including legal fees, medical costs and any compensation that may be awarded, can be significant, and employers’ liability insurance may help manage that exposure – subject to policy terms.

Where an employee is injured or becomes ill as a result of a breach of health and safety regulations, the business may also face regulatory or legal proceedings. Employers’ liability insurance may provide some cover in these circumstances, depending on the nature of the incident and the terms of the policy. Regardless of how an incident occurs, an employee may have the right to make a claim.

Legal Requirements

Under the Employers’ Liability (Compulsory Insurance) Act 1969, most UK businesses that employ staff are required to hold employers’ liability insurance. The minimum level of cover required by law is £5 million, although many policies are arranged at higher levels depending on the nature and scale of the business.

Businesses that do not hold valid employers’ liability cover may face financial penalties. The specific penalty applicable can vary and is subject to change, so it is advisable to confirm current requirements with a broker or by consulting relevant regulatory guidance.

Professional Indemnity Insurance

Professional indemnity insurance, sometimes referred to as professional liability insurance, is designed to help protect businesses and individuals who provide advice, consultancy, design or other specialist professional services against claims arising from their work.

Unlike public liability insurance, which relates primarily to physical injury or property damage, professional indemnity insurance is concerned with the financial losses a client or customer may claim to have suffered as a result of professional advice or services received. Claims of this kind can arise from a range of situations, including:

•       Financial advice that a client believes led to a loss of investment or capital
•       Errors in design, calculations or specifications that affected a project’s outcome or a client’s budget
•       Inadequate data security measures resulting in a client’s information being exposed or compromised
•       Alleged failure to deliver work to the expected professional standard
•       Unintentional breaches of confidentiality or intellectual property

Professional indemnity insurance may help contribute towards the cost of defending a claim and, where a claim is upheld, towards any compensation or damages awarded, subject to the terms and limits of the policy. Even where a claim is ultimately unsuccessful, the cost of mounting a legal defence can be substantial, which is why many businesses in advice-led or service-based industries choose to arrange this type of cover.

Professional indemnity insurance is commonly arranged by businesses and individuals working in areas such as business consultancy, accountancy, architecture, surveying, IT services, marketing and design, legal services and financial advice. In some industries and professions, it is a regulatory requirement or a condition of professional membership. A specialist broker can explain whether this applies to your sector and what level of cover may be appropriate.

Is Liability Insurance a Legal Requirement?

The legal requirements around liability insurance in the UK depend on the type of cover in question and the nature of the business.

Employers’ liability insurance is a legal requirement for the vast majority of businesses that employ staff in any capacity. The obligation exists regardless of the size of the business, the number of employees, or whether they are paid or unpaid. Businesses without valid cover in place may face financial penalties, and the costs of an uninsured employee claim can be significant.

Public liability insurance is not required by law, but is widely considered by businesses that interact with customers or members of the public. Some clients, venues or contracts may also require evidence of public liability cover as a condition of engagement, making it a practical consideration for many businesses beyond the question of legal obligation.

Professional indemnity insurance is not a universal legal requirement, but in certain regulated professions, including financial services, legal services and some areas of surveying and architecture, it may be required by a regulatory body or professional association as a condition of practising or operating.

If you are unsure which types of liability insurance may be required or recommended for your business, a specialist broker will be able to advise based on the nature of your activities, the industry you operate in, and your specific circumstances.