Insurance Fact Sheet
This fact sheet has been prepared to help smaller companies in the construction sector to understand better how liability insurance is sold and priced. It also provides details of sources of further information on this topic and a glossary of liability insurance terms.
One of the basic principles of insurance is that the premiums paid by the many should cover the costs of the claims made by the few. In today’s claims conscious environment the cost and numbers of claims, particularly liability claims, has risen so sharply that the size of the insurance fund has to be increased and everybody has to contribute more.
Liability polices are insurance products that provide insurance cover for the damages awarded and the legal costs of claims made against your business under liability law. Such claims can arise under the laws of negligence, nuisance and contract. It is a complex area and it is important that you have some understanding of the nature of liability insurance products. The main liability products that this factsheet is concerned with are Employers’ Liability (EL) and Public and Products Liability (PL/Products) insurance.
Public Liability Insurance (PL)
PL covers your business for damages payments and legal costs of bodily injury to third parties and damage to third party property caused negligently during your business activities. It covers claims from members of the public, visitors, passers-by, trespassers, bona fide sub contractors both on your own premises and at third party premises where you may work.
- PL is not a compulsory class of insurance and typically policies can provide between £1 million and £5 million cover, but more can be negotiated. There are many conditions, exclusions and warranties that can be applied to PL policies and it is therefore important you are aware of any that are applicable to your policy. For example:
- A standard PL policy does not indemnify against claims for financial loss where there has been no injury or damage, but any financial loss to the claimant following directly from an injury or damage claim is covered;
- You may be required to or “warranted” to act in a certain way when undertaking certain hazardous activities e.g. to operate a “hot work” permit system if you carry out work such as welding at third party premises;
- Most PL policies exclude gradual pollution damage and only cover pollution damage caused by sudden and unforeseen events.
Employers’ Liability Insurance (EL)
EL covers employers against liability claims from their employees for accidents or ill health that they may suffer whilst working and that are due to the negligence of their employers. Insurance contracts are drawn up under the principle of “utmost good faith”, as insurers must be fully aware of the nature of the risk that they are insuring. It is therefore important that the description of your business that you give to your insurers via your broker includes all of your activities.
EL is a compulsory insurance that all employers are required to have under Employers’ Liability (Compulsory Insurance) Act 1969. It was introduced to avoid employees who had suffered injury or illness being unable to recover compensation due to a company’s insolvency.
By law you must have EL insurance with a limit of indemnity of at least £5 million; most policies provide £10 million. EL provides cover in respect of injury or disease caused during the period of the policy. Hence the policy that is in force at the time the injury to the employee was caused will deal with the claim, irrespective of when the claim is actually made against the employer. EL will therefore cover you for claims for ill health made in the future due to exposures that may occur today but do not manifest themselves during the current policy period e.g. asbestos related diseases.
Your insurance should cover all employees, including contract staff, casual and temporary workers. As a compulsory insurance only a few restrictions e.g. exclusions or warranties are allowed.
How is my liability premium calculated? Liability premiums not only have to cover the costs of claims but also the costs of reinsurance, agents’ commission, claims handling costs expenses as well as providing an element of profit to insurers. Such costs would be included in rates charged by insurers. There are two main methods in which liability premiums can be calculated. The first and most frequently used is called “book rating”. This starts with a base rate for specific trades that are applied to the risk exposure.
For EL the exposure measure used is usually the estimated wage roll with turnover during the forthcoming year used for PL.
Base rates are obtained either from the insurer’s own experience for the trade and/or by using other data that may be available e.g. HSE statistics. They will also reflect the insurer’s appetite for a particular type or size of business. The base rate is used as the starting point for a premium calculation and this is adjusted according to the merits of an individual case for things such as:
- a good claims record;
- evidence of a positive approach to risk management; and
- size of risk.
It is therefore important that you provide your insurer with as much detail as possible of the way in which you manage your health and safety risk, as this will influence the premium charged. The premium rate is based upon the actual claims experience of that risk over a suitable time period. This figure is then adjusted to take account of insurer’s costs and expenses as well as possible changes that might affect future claims performance e.g. regulation or law reforms.
Further help and information
Other sources of further advice and information on liability insurance can be obtained from:
- Your insurer;
- Your broker.
Also from organisations such as:
Association of British Insurers (ABI)
51 Gresham Street, London EC2V 7HQ | Tel: (020) 7600 3333 | www.abi.org.uk
British Insurance Brokers’ Association (BIBA)
BIBA House, 14 Bevis Marks, London EC3A 7NT | Tel: (020) 7623 9043 | www.biba.org.uk
Institute of Insurance Brokers (IIB)
Higham Business Centre, Midland Road, Higham Ferrers, Northamptonshire NN10 8DW Tel: (01933) 410 003 | www.iib-uk.com
Constructing Excellence | www.cbpp.org.uk