- Insurance is often at the bottom of the list of boxes that need to be ticked, and even then it is normally a case of ‘have they got insurance?’ rather than, ‘is it the right cover’?
- A due diligence exercise covering the insurances could prove to be of benefit for a number of reasons, none more so than to ensure that the assets, people and future earnings of the business are adequately protected
Just how thorough is your due diligence?
When you invest in a company - whether it be your own capital or as part of an investment strategy for your clients - you naturally undertake due diligence to ensure that it makes sense and that everything stacks up. Do the financials add up? Do they have the right IP in place? And ultimately, are they invest-able?
So assuming they tick all the right boxes and you’ve invested the money, what happens if the company becomes embroiled in litigation? What if they have a fire and lose all of their stock? If they don’t have the right insurance in place, that may be the end of the business and your (or your client’s) investment.
Insurance is often at the bottom of the list of boxes that need to be ticked, and even then it is normally a case of ‘have they got insurance?’ rather than, ‘is it the right cover’?
A due diligence exercise covering the insurances could prove to be of benefit for a number of reasons, none more so than to ensure that the assets, people and future earnings of the business are adequately protected. Each case is different, and we adopt a made to measure approach for each of our clients. However, the key insurances to consider that apply to the majority of businesses are as follows:
Public Liability Insurance – This covers a business’s legal liability to third parties for any property damage or bodily injury that is caused in the course of the business activities. The policy covers defence costs and damages awarded against the company up to the chosen policy limit.
Product Liability Insurance – This is similar to Public Liability, but specifically relates to liability that leads to injury or damage arising from products that the company supplies, designs, manufactures or sells.
Employers’ Liability Insurance – This is a legal requirement and companies must buy the cover or else face the possibility of fines and/or imprisonment. We come across a lot of companies where there are two directors and no staff and they think that they don’t need the cover, but under HSE regulations, if the company is limited and there is more than one director then they must still buy the cover, even though there may not be any staff.
Directors & Officers Liability Insurance – This is often an after thought when really it should be the first thing that start-ups buy. Policies provide cover for financial protection for the Directors and Officers of the company in the event they are sued in connection with the performance of their duties as they relate to the company. Even though the company may have a limited liability, the individual’s liability is unlimited and personal assets are therefore at risk. There are over 200 possible offences that could give rise to a claim under the Companies Act alone, plus there is the Health & Safety at Work Act as well as Employment Law to name but a few.
Personal Accident & Travel Insurance – Often in the course of trying to promote the business and secure contracts and customers, the directors and staff may need to travel not just within the UK, but also abroad. If there are going to be a few people doing this then it is worthwhile taking out an annual group policy, which is much more cost effective, not to mention much less hassle, than arranging individual cover each time.
Business Contents Insurance – Even if the company is working from a serviced office or from home, there is still a need to cover laptops etc. If the business contents are owned by the company they are unlikely to be covered under a household policy so they will need to have separate cover.
Professional Indemnity – If you are giving any sort of advice or providing a service where a mistake could lead to a financial loss to the client, then you can buy insurance that provides cover for defence costs incurred and damages awarded, even if it is just an allegation of negligence.
Cyber Liability – If a company holds any form of personal data and they suspect that there has been a data breach – i.e. their server has been hacked – then they should report this to the Information Commissioner’s Office straightaway. They should then inform everyone whose data has been compromised and may have to also pay for their credit risk to be monitored. Public relations communications may also be necessary to protect the firm’s reputation. Depending on the amount of data breached, the cost of all of this could be significant, and that’s before anyone has even brought an action against you. The ICO is taking a tough stance and with new regulations coming in on data, you can expect this to continue and even increase. It’s not just the big firms who face the threat either; it is increasingly SME’s.
Keyperson Insurance – It is often the case for many of the companies that are seeking an investment that there are one or two people that the success of the business depends on, so if something were to happen to them it could be disastrous for the company. Key person insurance compensates businesses for financial losses that arise from the death or extended incapacity of an important member of the business so that in such a tragic situation, the business has a chance to survive.
I often find that even if there is any insurance in place, it’s not adequate or suitable. It may have been OK when the business was just starting, but as the business grows it’s important to ensure that the cover is adequate for the changing needs. It’s also important to understand not just where the business is now, but what the plans are as it’s no good going on cover with an Insurer who won’t be happy with the activities of the business in 6 months time – it is much better to get everything straight at the start.
Also, online quotations are normally no good for the companies looking for investment, as by their very nature they are different to most other firms and don’t quite fit the right boxes.
For example, I offered a consultation to a company who had just secured investment and were insured with an Insurer on a direct basis. They had a basic office package policy which they thought was fine but upon reviewing, it became clear wasn’t adequate for their needs at all – the business description was noted incorrectly and they thought that they had certain cover in place that they didn’t. They appointed us as their broker, and after speaking with the Insurer, I established that they weren’t happy to continue cover in light of their business activities. I, therefore, conducted a market review and managed to move them to an Insurer who was happy with their activities and get them the cover that they needed, which included their work with US customers which is normally an exclusion, under most policies, including their old policy.
Lark has been working with the investment community for many years and is proud to sponsor both the UK Business Angels Association and the London Business Angels. We work with both companies who are seeking investment and Angel investors, to help make them aware of the risks that are faced and how these can be managed with the appropriate insurance. I offer a free consultation, either to review their existing insurance arrangements or to give them advice on the sort of things that they might need. I understand that costs must be kept to a minimum, and it might not be something that is feasible for them to buy straight away if they are at a very early stage, but we can give them guidance and something that they can put into place when practical.
For more information on Due Diligence and how it may affect you and your investment, please feel free to get in touch with me on Eloise.Ellis@larkinsurance.co.uk or 020 7543 2823 .