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A guide to liability insurance for your start-up

Liability insurance offers businesses cover against legal claims, but start-up entrepreneurs may not be aware of the kind of liability insurance that they need. Appropriate liability insurance from specialists will ensure fledgling businesses have the correct cover and avoid them coming unstuck if a claim is needed.

Employers' Liability Insurance

While many start-ups are essentially a one man show in the beginning, others will have one or more employees. Even a single employee legally obliges the company to take out employees liability insurance.

Start-ups may often use the services of freelancers and contractors. An 'employee', for these purposes, is an individual whom:
- the business obliges to provide defined levels of service
- is paid a salary from which the business deducts income tax and National Insurance
- the business has control of how and when they work
- the business does not allow to employ a substitute.

This insurance is not required if:
- the company is not limited and only employs close family
- it is a limited company with only one employee and the employee owns 50% or greater of the company.

These policies cover against claims made by employees who have suffered injury or illness during the course of their work that were caused by negligence on the part of the employer. Legally, companies are required to have a policy that covers up to £5 million. Policies vary amongst insurers but will generally cover damages, legal fees, compensation and hospital fees that are recoverable by the NHS.

Public Liability Insurance

This insurance provides cover for injury or damage to the property of third parties that is due to negligence on the part of the business. While it is not legally required for businesses except in special cases such as horse-riding schools, it is generally recommended, especially for those businesses where there is frequent interaction with customers or clients. Public liability insurance pays for similar costs as employer's liability insurance, but does not cover employees.

Policies are available with cover of £1 million to £5 million and more. Defective design or products are not generally covered by standard public liability insurance policies, and start-ups that are manufacturing products could benefit from extended cover to protect them from third-party claims related to these issues. The additional cost of this extended cover will depend on the nature of the business and the products. For example, sporting goods could require a significant increase in the cost of premiums.

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