How much insurance are you going to need for your business?
Guide to Limits/Sums Insured:
| Employers' Liability | Public Liability |
| Products Liability | Buildings |
| Contents | Stock |
| Money | Business Interruption |
| Goods in Transit |
Additional Expenditure |
Guide to Excesses
Skip straight to Excesses
Guide to Limits and Sums Insured
What you’re insuring: Your legal liability to employees
Type of insurance: Employers’ Liability
The limit must be high enough to cover all the claims that your employees (or those you control their work, eg. work experience people or sub contractors) could make against you if
- they are injured or incapacitated in the course of their work,
- this happens as the result of a single accident or incident or event.
The standard Limit of Indemnity is £10,000,000. Most small and medium-size businesses decide this is a high enough limit.
What you’re insuring:
Your legal liability to members of the public, customers, contractors etc.
Type of insurance: Public Liability
The limit must be high enough to cover all the claims that members of the public, customers, contractors etc. might make against you. This will happen if:
as the result of a single accident or incident or event for which you are held liable.
If you work alongside customers or other members of the public, could they suffer injury as a result of what you do? How many of them could be affected in a single accident or incident?
Could any property belonging to other people be damaged as a result of your business activities? If so, how much property, and what’s it likely to be worth?
The standard Limit of Indemnity is at least £1,000,000 any one claim. Most small and medium-size businesses decide this is a high enough limit – but if you have any doubts, discuss it with your broker or insurer. Be careful to ensure that aggregate limits (ie. the total of all claims in any one period of insurance) are not imposed without considering the consequences.
What you’re insuring: Your legal liability for goods you’ve sold or supplied
Type of insurance: Products Liability
The limit must be high enough to cover all the claims that customers – both direct customers and customers of customers – might make against you in the course of a single year of insurance.
If you sell or supply goods, could members of the public, customers etc. suffer injury or illness if any of the goods are faulty? How many people might be affected? How seriously could they be incapacitated?
The standard Limit of Indemnity is at least £1,000,000. This is likely to be an aggregate limit (ie. the total of all claims paid in any one period of insurance). Most small and medium-size businesses decide this is a high enough limit – but if you have any doubts, discuss it with your broker or insurer.
What you’re insuring: Building
Type of insurance: Property
The sum insured should be the cost of clearing the site, rebuilding the whole building - so that it’s as close as possible to the current building, and so that – as nearly as possible – it provides the same facilities as at present. The total should make provision for professional fees, such as architect's fees.
Working out the cost of rebuilding may not be easy. So it’s usually a good idea to have a building professionally revalued on a regular basis. The Royal Institute of Chartered Surveyors have a website where you can find a suitably qualified building valuer.
Follow this link to access their website:
The cost of rebuilding may of course increase between
You need to make sure this possible increase in costs is fully insured. You do this by insuring the building on a Day One basis. This means your insurance includes any inflationary increases in cost up to an agreed limit.
The limit on inflationary increases is generally equal to 35% of the current rebuilding cost. You can ask for a higher limit if rebuilding could take an unusually long time - perhaps because of the building materials or techniques involved - and the cumulative effect of inflation would therefore be exceptionally serious.
What you’re insuring: Contents
Type of insurance: Property
Contents include furniture, fittings, machinery, patterns, documents, computers, computer records and any other contents apart from stock
The sum insured should be the cost of replacing all the contents (apart from any stock) - so that they’re as close as possible to what you have at present.
Because new machines and equipment may be technologically more advanced than the old ones, it may not always be possible to replace like with like. But the intention should be to have new equipment that – as nearly as possible – serves the same function that your existing equipment does now.
The cost of replacing all your contents may of course increase between
- the time you decide on the sum insured, which will be at the beginning of the insurance year and
- the time a claim is paid out – which, if rebuilding takes some time, could be some time after the end of the insurance year.
You need to make sure this possible increase in costs is fully insured. You do this by insuring your contents on a Day One basis. This means your insurance includes any inflationary increases in cost up to an agreed limit.
The limit on inflationary increases is generally equal to 35% of the current cost of replacing the property. You can ask for an increased limit if replacing the property could take an unusually long time - perhaps because the equipment is highly specialist - and the cumulative effect of inflation would therefore be exceptionally serious.
What you’re insuring: Stock
Type of insurance: Property
For retailers and wholesalers, the sum insured should be the cost of replacing all your stock, including any transport and handling costs.
For manufacturers, how you calculate the Sum Insured varies between raw materials and goods that you’ve begun work on.
- For raw materials, it should be the cost of replacing the stock, including any delivery costs.
- For work in progress and finished goods, it should be the cost of the raw materials and any delivery costs, plus the production costs that you’ve incurred so far.
For some businesses, insurers ask you for separate sums insured on
- stock that is especially attractive to thieves – e.g. cigarettes, non-ferrous metals, electrical goods
- the remainder of your stock.
You then need to assess the sum insured separately for each category of stock.
What you’re insuring: Money
Type of insurance: Property / Money
Money is insured while you're transporting it, or while it's on your premises during business hours
The limit should normally be the highest amount that – at any time during the year – you’ll ever transport in one journey – probably to or from the bank.
The limit the insurer suggests may be higher than you need. If so, fine.
Or the insurer may want to impose a limit that’s less than the maximum amount you currently transport. We recommend you be guided by the insurer’s advice here. Remember it can be extremely dangerous for you or your staff to carry or handle large sums of money.
Explore what alternative arrangements you can make. Could you transport the money in two or more journeys? Would the insurer agree to a higher limit if two people carried the money instead of one?
What you’re insuring: Goods while being transported
Type of insurance: Property / Goods in Transit
Goods (stock) are insured while you're transporting them, or when they are sent by post, rail, etc.
The limit should normally be the highest amount that – at any time during the year – you’ll ever transport in one journey. Or, if you send goods by post, rail, etc, it should be the maximum value of any consignment.
What you’re insuring: Revenue
Type of insurance: Business Interruption
Loss of profit and additional expenditure following damage to your premises
You need to arrive at the sum insured in several stages.
- Calculate the current net profit of your business per year.
- Add to this the current total per year of any business expenses that would continue as normal (or nearly as normal) even if your business was seriously disrupted. Examples of these expenses are rates, rent, interest on loans.
- Consider how long your business would take to recover from the worst possible scenario – for example, if your business were destroyed by fire. Don’t just take into account how long it would take to reconstruct your premises – think too about how long you would need to rebuild your customer base. For most businesses 12 months is adequate, but go for a longer period if you think that’s necessary.
- If you opted for a period longer than 12 months, increase proportionally the figure you calculated in 2 (which was for 12 months). For example, if your business would take 18 months to recover, multiply the figure by 150%.
- Because the figure so far only represents current costs, allow for inflationary increases and increase the figure accordingly. You need to think about inflation both during the insurance year and – because the damage may happen right at the end of that year – during the subsequent period while the business is recovering (as you decided on in 3).
What you’re insuring: Additional Expenditure
Type of insurance: Business Interruption / Additional Expenditure only
Additional Expenses (or Increased Cost of Working) following damage to your premises
The sum insured should be the maximum amount you would need to spend to continue your business elsewhere if your existing premises were destroyed. Allow for the cost of alternative accommodation and any other one-off expenses you would incur.
¤ Guide to Excesses
Compulsory Excesses
It is common practice for insurers to impose an excess on some claims. This means that the insurers will not pay the first £** of any claim. These are largely designed to ensure that a lot of administrative costs are not incurred in the settlement of very small claims. Occasionally, an insurer will impose a more substantial excess if it considers the risk to be greater than normal. We are familiar with this approach regarding motor insurance for yound drivers.
Excesses normally range from £25 to £1,000, but they may be more if the likelihood of loss is considered higher than normal, as mentioned above. It is important to understand where excesses apply - these should be made clear to you in the Summary of Cover documents provided by your insurer or insurance broker.
Franchises
Sometimes, a franchise is used instead of an excess. In the case of a franchise, the insurer will pay the full claim once it exceeds the agreed limit. This can be adventageous to consider for larger amounts as it keeps the administration costs low but allows you to make a full claim where the loss is substantial.
Voluntary excess or franchise
It may be possible to negotiate voluntary excesses or franchises with your insurers in return for a reduction in premium. If you feel you could afford to sustain a loss up to a certain level then it may be worthwhile speaking to your insurers accordingly.
Find out more about . . .
which types of insurance your business needs
what each types of insurance covers
the typical minimum premiums that insurers charge.
Back to top