Liability insurances that protect SMEs in a lawsuit

By Kapil Mehta

A few months ago an exporter from Chandigarh reached out in frustration. His buyer in the US wanted him to procure comprehensive general liability insurance but the local insurer branch insisted that public liability was not available in India. Well, the local branch was wrong. Liability insurances are readily available and, in fact, their market is growing rapidly.

There are three important liability insurances that a small business should consider: Professional Indemnity, Directors and Officers' liability and Comprehensive General liability.

Professional Indemnity (PI) Insurance

If a customer sues you for human errors, mistakes or negligence then the PI insurance comes into play. A good policy will also cover you for legal defense costs and also, in some cases, the penalties levied. A PI works on claims-made basis. This means that the insurance in effect when a claim is filed is responsible for paying the claim.

The premium is decided based on the nature of work and business size. Sum assured depends upon the size and risk in your business. In over seventy per cent of cases a sum assured of Rupees two crore is good enough to begin with. This will cost about Rupees sixty thousand per year. If your clients are based overseas then insist on worldwide cover.

Directors' and Officers' (D&O) Liability

D&O protects company's directors against financial losses that arise because of decisions taken by key executives or directors. This insurance is particularly important because the law allows claimants to go after the personal assets of a director if they have a complaint. The D&O insurance pays legal defense costs and damages. Directors need not worry about personal assets being impounded.

Common D&O risk scenarios are reporting errors, HR Issues and Employment actions, breach of duty committed by a director or officer, misrepresentation in a prospectus. A D&O policy does not cover fraudulent, criminal or intentional non-compliant acts. All executive and non-executive directors of a company are covered under the policy.

The most common claims in D&O are those where an employee files a suit against a company executive. The employee may file a suit because they are harassed or feel that they have been unfairly treated. Such cases are also covered in a D&O but require you to purchase an entity EPLI extension.

Often, Investors insist that a company buy D&O Liability insurance before making an investment into it. The cost of D&O depends upon whether a company is listed, the industry and size of the company. For small businesses Rupees 2 crore of sum assured will costs about Rupees 30,000 per year.

Comprehensive General Liability (CGL) Insurance

CGL covers the legal liability when third parties file a suit. For example, if someone gets hurt in your office premises or if a buyer of your product gets hurt because of a product related fault. Most international clients insist that companies they work with have a CGL insurance as a precondition to doing business.

Another example where CGL is important is if you are a component manufacturer. A defect in your component may cause damage to customers who in turn may file a legal suit on you. This cost gets insured in a CGL. A CGL of Rs 1 crore sum assured will costs about Rupees 20,000 per year.

The next time one of your customers asks you to buy liability insurance don't think of it as just a tick-in-the-box. Instead understand the insurance and make sure you purchase the right liability product for your particular risks.

Kapil Mehta is Executive Director at SecureNow Insurance Broker (www .securenow.in)