Employers Liability Insurance - New Rules

07 March 2005

Employers liability insurance covers the liability of an employer to pay damages to employees (current or former) for personal injuries sustained or illnesses arising in the course of employment. In general, an accident arising out of the course of employment will be deemed, in the absence of evidence to the contrary, to have arisen out of that employment.

Subject to limited exemptions, this form of insurance is compulsory. Employers failing to take out such policies commit a criminal offence for which there is a penalty of up to £2,500 for any day during which the employer operates in the absence of a suitable policy.

Until very recently the main exemption most likely to apply to small businesses relates to family businesses where employees are close relations (a spouse, parent, grandparent, stepparent, child, grandchild, stepchild, sibling or half sibling). These businesses do not have to take out the insurance unless they have been incorporated as limited companies.

A limited company will have a separate legal identity to that of the owners (i.e. the shareholders) of the company whose personal assets will generally be beyond the reach of claimants. The rationale behind the distinction between sole traders and partnerships on the one hand and limited companies on the other is perhaps that personal liability tends to focus the mind.

Clients have in the past, and with some reason, expressed disbelief that when they are the owner and sole employee of a limited liability company, the company is obliged to take out insurance to cover any liability the company may have to them.

With effect from Monday 28th February 2005 ¹, an employer is exempted from the compulsory requirement for insurance if it is a company having only one employee and that employee owns more than 50% of the issued share capital of that company,.

The Government estimates that around 300,000 companies will benefit from this rule change and the Association of British Insurers estimates that the average saving for each of these companies will be in the order of £250 per year.

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¹ The Employers’ Liability (Compulsory Insurance) (Amendment) Regulations 2004 (SI no.2882)
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