This issue of whether a limited company requires employers liability insurance has been a long running question in the United Kingdom, and in truth the historical position on this has changed in recent years. However there is still some misunderstanding as to exactly what the legal requirements are of the Employers Liability Compulsory Insurance Act 1969 are as they apply to limited companies and incorporated bodies.
Our starting point here is the legal requirement on all employers to hold a valid policy of employers liability insurance with a minimum limit of indemnity of £5M. This seems fairly clear if you employ people, then you have to hold the appropriate insurance to protect you against claims made by employees in respect of personal injury or disease arising our of and during the course of their employment.
Limited Companies and Employers Liability
When you form a limited company everyone in the company is automatically an employee of the body corporate so in a sense there would be, and was historically a legal requirement for the company to hold a valid employers liability insurance policy in accordance with the Act.
What this did create was a situation where if a sole trader decided to incorporate his business and form a limited company he would automatically be required to take out employers liability cover even when there were no other employees in the business other than himself. It must be remembered here that the employers liability insurance is not an employee benefits package to be called upon when an employee suffers injury or disease, it is actual a policy of legal liability and as such the “sole trader” in question would in fact have to sue the company for damages and only then in the event of a successful action would the policy pay out any compensation to the employee.
The legal requirement was a source of annoyance for many small businesses and this was finally attended to in the The Employers’ Liability (Compulsory Insurance) (Amendment) Regulations 2004 which provided for an exemption to the legal requirement for employers liability insurance where the sole employee of the company also held at least 50% of the shares in the company.
Close family members exemption
When the act was first brought into force an exemption was created for businesses where the only employees held close family ties with the owner/principal. This is an area that has caused some confusion with some family businesses that are limited companies. The close family members does not apply when the employer is a limited company. In the interests of clarity if you operate a limited company that only employs close family members, or all the directors are close family members you are required to hold employers liability insurance.
In the UK, whilst the legal requirement is for a minimum limit of indemnity of £5M insurers generally issue a policy with a minimum limit of £10M. For some reason, which appears to be lost in the mists of time, employers liability insurance is not generally available as a stand-alone insurance product and has to be purchased alongside a public liability insurance policy or as part of a package insurance policy such as shop, office, commercial combined. You can find more information on our employers liability insurance page.