Liability insurance


If someone is injured or their property is damaged, the person or business responsible may be sued and held legally liable for the injury or property damage. Where legal liability is established, damages will be awarded to the claimant to compensate them for their injury or the damage to their property. Where damages have been paid for an injury, the NHS is entitled to recover costs for hospital treatment. The person or business responsible will also need to pay legal costs, including the claimant’s.

Liability insurance is designed to protect your business against these costs.

If your business has employees, it is likely that employers’ liability insurance is compulsory. However, there are a few instances where this insurance is not compulsory.

This guide explains what cover each type of liability insurance offers and how liability insurance is sold and priced.

How liability insurance works

The cost of insurance – known as the premium – is the price the insurer charges to accept your business. The premium charged by an insurer will depend on a number of factors, such as the nature of your business and the insurer’s own experience of your business sector.

For most small to medium-size risks, the insurer will use a book rate, or average rate, which is based on the claims they have paid out to similar businesses. The insurer will use this rate to calculate the premium using a factor that reflects the amount of activity undertaken by the business. For employers’ liability insurance, payroll is usually used to reflect the amount of activity. For public and products liability insurance, turnover is usually used.

The insurer may adjust the resulting premium to reflect positive features such as a good claims record or good risk management, or negative features such as a poor claims record.

For large or very large cases the insurer may calculate the premium based on the business’ claims record over a number of years, if it is relative stable.

Legal expenses insurance

Legal expenses insurance covers the cost of pursuing legal action or defending your business against legal action where this isn’t covered by your liability insurance, eg in an employment tribunal. The insurer will pay fees and expenses for solicitors, barristers, accountants and expert witnesses, as well as court costs and opponents’ costs if you are ordered to pay them in a civil court. Legal expenses insurers often provide advice and a legal helpline.