Author: Barry Sullivan, Sullivan Insurances
Introduction
I recently gave a presentation to Engineers Ireland Thomond Region, entitled 'The insurance considerations of setting up or running your own business as an engineer'. The presentation was based around a fictitious case study that allowed me to demonstrate the relevant insurance requirements for engineers in a practical manner.
In the following article I have again described the insurance considerations of running your own business as an engineer by way of a fictitious and basic case study. I also provide some very general product information.
Case study
John has been working as an engineer with a multinational firm since leaving college and has decided to set up business on his own. He has a small list of clients that will move with him, providing a reasonable income on which to build a solid business.
However, to save money John has decided to set up an office in his own home. Some clients will on occasion visit him at his home office but whenever necessary he will use his car to drive to the client's premises or other work-related sites.
John is also hiring a part-time administrator to keep on top of things as he is not very organised. John now needs to consider the insurance requirements for his new business.
Motor insurance
John is currently insured for Social Domestic and Pleasure use only. We now need to decide what insurance cover he requires? The following are the types of insurance cover we need to consider:
(Class 1a) - Social Domestic and Pleasure use. (SDP)
(Class 1b) - SDP including Personal Business use.
(Class 2) - SDP including Business use but excluding Commercial Travelling.
(Class 3) - SDP including Business use and Commercial Travelling.
- Class 1a use (Social Domestic & Pleasure): This type of insurance will only cover John while driving to and from work along with social use. This type of insurance is not suitable for John and in the event of an accident while using his vehicle for work purposes John’s insurance company may refuse to cover him;
- Class 1b use: This type of motor insurance will cover John for social, domestic and pleasure purposes along with occasional personal business use. If John is only occasionally using his vehicle for business purposes this may be sufficient. However, he will need to review his client base and make a decision on how often he will use his car for business;
- Class 2 use: This type of motor insurance covers John for business use. As with the class 1b cover above John will need to review his client book and make a decision as to how often he will need to use his vehicle for work purposes. The guideline is as follows: "If the success of his business is dependent on him having a car’’ - then he requires Class 2 usage. (For example – an auctioneer would require Class 2 cover);
- Class 3 use: This type of motor insurance is for commercial travellers and would not apply to John.
In our scenario John only has a handful of clients. He will only be using his car for business purposes once or twice a week at the very most and is therefore mainly office based. In my opinion, he only requires Class 1b insurance. However, in the future, if his business grows, he may need to upgrade to Class 2 insurance.
When taking out a new insurance policy most insurers will not charge an additional premium when selecting Class 1b use over Social Domestic and Pleasure use (Class 1a). However, this upgrade must be requested by you. However, if you are moving between Class 1 use and Class 2 use the difference in premium can be anywhere from 25 per cent to 50 per cent extra.
Another point to remember is that if John occasionally sends his administrator out in their own car to deliver documents on his behalf then his administrator will also require Class 1b use on their personal vehicle as social, domestic and pleasure use will not cover them in the event of an accident.
Home insurance
In our case study, John is planning on working from home. It is possible to purchase home insurance that includes a ‘home office’ but this would not be suitable for John’s needs as he also requires cover while working away from his office; employer's liability, public liability and cover for his office equipment.
Therefore John will require a separate office policy in addition to his home insurance but it is vital that he notifies his home insurance provider about his plans to work from home and his plans to hire an employee. Many insurers will allow this but may require evidence of a separate office policy for their records.
If John fails to disclose these material facts to his insurance company and subsequently has a claim, his policy will more than likely be cancelled from inception and his claim will not be covered. In the event of a claim, some insurance companies will even cancel a home insurance policy from inception even when the undisclosed material facts are unrelated to the claim.
Office/liability insurance
As discussed above, John will need to arrange an office policy to cover him for the types of risk listed below that are not covered by his home insurance. An office insurance policy/liability insurance policy is very easy to arrange through a broker and is usually relatively inexpensive for a small business. There are usually several optional extras in an office policy, so it is important to discuss the policy with your broker to ensure it meets your requirements.
The liability element of this policy is particularly important for any self-employed engineer. It is vital when tendering for business as you will be excluded from tendering for many contracts if you are uninsured. It is also crucial to cover you against public and employer liability claims. One uninsured claim of either type could be enough to put you out of business.
The following are some reasons why John will need this type of policy:
- Employer's liability insurance to cover his administrator if he/she gets injured at work;
- Public liability insurance while working away from his office on a client’s site;
- Public liability insurance to cover clients if they have an accident at his home office;
- Insurance cover for his office equipment;
- Personal accident for John and his employee (optional extra);
- He will need public liability insurance of €6.5 million to tender for any local authority work.
Professional indemnity (PI)
This type of insurance is required by any professional that gives advice to a client. It will cover you if the advice you gave caused a loss to a client. It will also cover you if the advice you gave was correct but the client names you in a legal action anyway.
In this type of situation you may have no case to answer but your insurance company will still have to pay legal costs to defend you in court. Professional indemnity insurance pays your legal costs and awards to claimants up to the policy limit.
There is usually a large excess on a PI policy typically in the region of €1,000 to €3,000 and a specified limit of insurance cover. It is vital that this policy is renewed on time every year to avoid gaps in cover, a gap in cover can lead to the possibility of a claim being turned down.
If you are taking on a project supervisor role it should be listed as a separate occupation on your policy. You should also make sure that you have a limit of indemnity that relates to the size of projects you are working on. If you are working on large projects you should have an appropriate indemnity limit on your policy to give you sufficient cover.
There are several different types of professional indemnity insurance. The following are the most common types:
- In the Aggregate. This means your limit of indemnity is the maximum that your insurer will pay for all accumulated claims in any one policy period, including associated legal costs;
- Any one Claim. The limit of indemnity level of cover applies to each claim regardless of how many claims you make in a policy period. Usefully, the legal costs are paid in addition to this and up to the same level of cover as your indemnity limit;
- Reinstatement. Depending on the policy terms you will get one or more reinstatements of your policy limit once the original limit has been exhausted. However, this type of policy usually carries many exclusions that you should understand before you take out the policy.
In relation to our case study I would recommend that John arranges a professional indemnity policy on an ‘Any One Claim’ basis with an indemnity limit of between €1.5 million and €2 million assuming that he only works on small- to medium-sized projects.
The ‘Any One Claim’ PI policy is the best type of professional indemnity policy to have but may cost more depending on the insurer. However in the event of a claim you know that you will be well covered.
Income protection insurance
As a self-employed individual if you are unable to work due to accident or injury, will you still have an income? For example, if John gets injured in a rugby match and is out of work for a year or even for the rest of his working life how is he going to pay his bills and support his family?
This is what an income protection policy is for. It will start after a chosen period of time and will pay you a specified salary every month up until the time you return to work or even until retirement age if necessary. Every self-employed person should have this cover. This policy can be combined with a personal accident policy which will cover you in the short term if you are unable to work.
Income protection policies are paid by monthly direct debit payments and premiums depend on the levels of cover you choose.
Conclusion
In conclusion, if you are thinking of going into business on your own as an engineer you should discuss your plans with an insurance broker before you start trading. Depending on the type of projects you are taking on, some of the above insurance policies may not be required immediately. If this is the case your broker can advise you on the essential policies to take out before you begin trading and they can put a plan in place to amend your cover as the business grows.
Barry Sullivan, Sullivan Insurances, can be contacted at: bsullivan@sullivaninsurances.ie