Starting a small business; what about insurance?

By John Grant

Almost every residential insurance policy will exclude cover in relation to business activities. This means that if you're starting a business then insurance must be one of the priorities to get sorted.

Consideration needs to include cover for material assets (plant, tools, computers), stock, money, and of real importance is liability insurance. Liability cover is mentioned in many of our stories. This is because while the risks may be low, the potential value of losses can be high threatening your whole business if they happen. To help illustrate this, here are a couple of examples;

Case study 1:

This person does a few computer repairs at home. He's recently been made redundant from his IT job and has found a number of acquantainces who have been keen to get his expertise to do repairs and check out their computers. He has a workshop that he's built under the house and at any time he can have several computers in various states of repair.

Case study 2:

In this example the person works for an air conditioning company and has been approached about installing a system at a local business. He has been asked if this could be done privately to save money and he has spoken to his manager who said that what he did in his own time was up to him. He carried out the work and was paid in cash. He decided that honesty was the best policy and intends to declare this as earnings and pay tax on it. With the interest from neighbouring businesses he has purchased several heat pumps 'at cost' and has stored these at his home till he is able to install them during his free weekends. In both of these cases the work is being carried out in their own names and no insurance coverage has been taken.

What are the insurance risks that this is exposing?

1. In both case there is the potential risk of voiding their Home and Contents insurance as they have started using their premises for commercial activities and they must notify their insurer and obtain consent for this. They must do this is to ensure the private home covers are maintained. But approval is not necessarily straight forward as the insurer will be concerned that they no longer have a solely residential risk, due to the commercial activity.

2. In case study 1, there is also a risk of having property belonging to others being stored on the property. If this was stolen or damaged and the insurance company was aware of the 'commercial nature of the activity' then claims may be declined. If the items are lost, damaged or stolen and the owner claims on their residential policy, then their insurer will assess responsibility for the loss. If the insurer felt adequate security arrangements were not in place then they could seek reimbursement for the loss.

3. In either case there is a substantial risk of liability exposure. For example if a faulty part is installed in a computer and it was found to be the ultimate cause of a fire that damages other property, then there could be accountability back to the repairer/installer. It would be very unlikely for cover under the home and contents policy liability section to extend to cover this commercial activity.

4. In case study 2, there will be an exposure for potential problems from doing installs on the premises. This would normally involve attaching items to walls and drilling holes in walls for pipes to run through. If any damage is done to the premises in the course of the install then there could be accountability for the rectification.

These observations are not a comprehensive summary of all of the risks involved, but an illustration of the need to seek advice and make sure that your existing insurer is aware of what you are doing. Taking a few moments to do this can avoid potentially costly issues developing and then finding that there is no cover in place. The potential issues may be somewhat remote but the downside costs could be significant. It is really not worth taking these type of risks and exposures when you are in a home-based business, whether you are starting out or well established.