In Short
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Different business insurance policies cover different legal claims, such as public, employer, professional, or product liability.
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Insurance can cover legal defence costs and compensation, but only within policy limits and exclusions.
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Choosing the right mix of cover depends on your business activities and risk exposure.
Tips for Businesses
Review which risks your business faces and check that your insurance matches them, especially if you employ staff, deal with the public, provide advice, or sell products. Understand policy limits, excesses, and exclusions, and notify insurers promptly of incidents or potential claims. Keep records of accidents, complaints, and correspondence to support any future claim.
Summary
This article explains the main types of business insurance that cover legal claims against companies in the United Kingdom and how those policies operate in practice. Prepared by LegalVision, a commercial law firm specialising in advising clients on commercial risk and dispute management, it outlines key cover types, limits, and practical considerations for protecting businesses from litigation costs.
No business owner wants to face a legal claim, but the reality is that disputes, accidents, and allegations can arise even in the most carefully run companies. When they do, the financial consequences can be severe, not just from potential compensation payments, but from the legal costs of defending your position. This is where business insurance becomes invaluable, providing a financial safety net when your company faces litigation.
Understanding which insurance policies cover which types of legal claims is essential for protecting your business. Different policies respond to different situations, and having the right coverage in place can mean the difference between weathering a legal storm and facing financial difficulty.
This article explores:
- types of business insurance that cover legal claims;
- how each policy works in practice; and
- what businesses should understand about limits, exclusions, and choosing appropriate cover.
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The Main Types of Business Insurance for Legal Claims
Business insurance is not a one-size-fits-all solution. Various policies exist to cover different types of legal claims, and most businesses need several policies working together to provide comprehensive protection.
Public Liability Insurance
Public liability insurance protects your business when members of the public or other businesses claim they have suffered injury or property damage because of your business activities.
Employers’ Liability Insurance
Employers’ liability insurance is legally required for most UK businesses with employees. It covers claims from staff members who suffer work-related injuries or illnesses. Whether an employee alleges inadequate safety equipment or an unsafe working environment, this insurance provides protection.
Professional Indemnity Insurance
Professional indemnity insurance is crucial for businesses providing advice or professional services. If a client claims your advice, design, or service caused them financial loss, this policy covers your legal defence and any compensation awarded. Professionals who typically rely heavily on this coverage include:
- accountants;
- consultants;
- architects;
- solicitors; and
- IT.
Product Liability Insurance
Product liability insurance covers claims arising from products your business:
- makes;
- supplies; or
- sells.
If a product proves defective and causes injury or damage, this insurance responds, whether you are the manufacturer, distributor, or retailer. The coverage extends to:
- design flaws;
- manufacturing defects; and
- inadequate safety warnings.
How These Policies Work in Practice
To illustrate how different policies respond to legal claims, it is useful to consider real-world scenarios.
For example, if you run a café and a customer slips on a wet floor and breaks their wrist, then brings a claim for compensation and lost earnings. Your public liability insurance would generally cover the legal costs of handling this claim and any compensation awarded.
On the other hand, if one of your café employees develops a repetitive strain injury from using poorly maintained equipment and sues your business. Your employers’ liability insurance would respond to this claim, covering both defence costs and any settlement.
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What Your Insurance Actually Pays For
When a legal claim arises, business insurance typically covers several types of costs. Legal defence costs often represent the largest expense:
- including solicitors’ fees;
- barrister fees;
- court costs; and
- expert witness fees.
These costs can quickly escalate, sometimes exceeding the compensation amount itself.
The insurance also covers compensation or damages awarded to the claimant if the claim succeeds.
Understanding Policy Limits and Exclusions
Every insurance policy has limits and exclusions that affect coverage. The policy limit represents the maximum amount your insurer will pay for claims during the policy period. If claims exceed this limit, your business bears the additional cost.
Most policies also include an excess, which is an amount your business pays towards each claim before insurance coverage begins. Higher excesses typically result in lower premiums, but you need to ensure the excess remains affordable if a claim arises.
Exclusions are equally important. Policies typically exclude:
- intentional wrongdoing;
- criminal acts;
- situations where you knew about a problem before taking out the policy;
- fines and penalties imposed by regulators.
Reading and understanding these exclusions helps you know exactly what protection you have.
Choosing the Right Coverage for Your Business
Selecting appropriate insurance depends on your business:
- activities;
- size; and
- risk profile.
Maintaining Your Coverage
Having insurance is only valuable if it responds when you need it. This means:
- understanding your policy terms;
- notifying your insurer promptly of potential claims; and
- maintaining accurate records of incidents and correspondence.
Many policies require you to notify insurers of circumstances that might give rise to a claim, even before someone formally brings legal action. Failing to notify promptly can jeopardise your coverage, so understanding your policy’s notification requirements is crucial.
Key Takeaways
Different insurance policies cover different types of legal claims against your business. Public liability covers third-party injury and damage claims, employers’ liability covers employee claims, professional indemnity covers negligence in services provided, product liability covers defective products, and D&O insurance protects directors personally.
Understanding what each policy covers, its limits and exclusions, and how it responds to claims helps you make informed decisions about protecting your business. The right insurance coverage provides peace of mind and financial protection when legal claims arise, allowing you to focus on running your business rather than worrying about potential litigation costs.
If you need help in drafting your commercial contracts, LegalVision provides ongoing legal support for all businesses through our fixed-fee legal membership. Our experienced disputes and litigation lawyers help businesses across industries manage contracts, employment law, disputes, intellectual property, and more, with unlimited access to specialist lawyers for a fixed monthly fee. To learn more about LegalVision’s legal membership, call 0808 258 4780 or visit our membership page.
Frequently Asked Questions
Most UK businesses must have employers’ liability insurance if they employ staff. Other policies, such as public liability or professional indemnity insurance, are not always legally required but are often essential to manage legal and financial risk.
No. Each policy only covers specific types of claims and will include limits and exclusions. For example, intentional wrongdoing, criminal acts, and regulatory fines are typically not covered, so it is important to understand exactly what protection each policy provides.
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