November 17, 2021

Is Insurance mandatory for Businesses?

Is Insurance mandatory for Businesses?

Commercial Insurance has the power to offer great financial relief to business owners and managers in the face of unexpected losses. Every aspect of a business, including business property, employee’s health cover, workmen’s compensation, credit transactions, transit of goods, etc. are covered by specific insurance policies. These policies indemnify the insured in case of any loss or damage from unfortunate events like fire, natural disasters, workplace accidents, creditors’ defaults, and much more- depending on the type and particulars of the policy.

There is no doubt that Business Insurance helps you run a successful business without worrying about impending losses. It offers a protective umbrella for the policyholders' finances which might get drained due to unfortunate and unforeseen perils. But, is it compulsory for businesses to purchase commercial insurance policies in India? In some cases, yes. Let’s take a look at some mandatory insurance policies below:

Workmen’s Compensation Insurance is mandatory in India as per the Workmen’s Compensation Act, 1923. This act was set in place to protect the rights of blue-collar employees, providing them monetary relief by their employer in case of any workplace accidents. Workmen’s Compensation insurance also protects the employers from their statutory liability in such cases.

According to the act, a Workmen’s Compensation is mandatory for businesses who have more than 20 workers. These can include manufacturing, mining, and construction companies, transport undertakings, factories, plantations, businesses that use mechanically propelled vehicles, etc.

Although this insurance was initially meant to cover only workers of a manufacturing unit or factory, etc, in recent times it has been amended & expanded to cover the so-called ‘white collared employees’ of corporations as well.

Public Liability Insurance protects businesses from defence costs or legal pay-outs resulting from any death, bodily injuries, or property damage to third parties that occur due to mishaps occurring within the business premises.

According to the Public Liability Insurance Act, 1991, it is mandatory for some businesses to take a Public Liability Insurance cover to protect themselves from any legal claims. These businesses include Restaurants, Hospitals, Schools, Colleges, Businesses undertaking contract work, and businesses manufacturing and selling hazardous chemicals.

It is mandatory under the Motor Vehicle Act 1988 for all vehicle owners in India to have Third-party Liability Insurance. This also applies to commercial vehicles like cabs, transit vehicles, goods carrying vehicles, passenger carrying vehicles, etc.

Commercial Vehicle Insurance covers for damages or losses to the commercial vehicle, its passengers and its owner/driver in the event of an accident, collision, fire, natural calamity, etc. It is mandatory for all businesses to purchase a Commercial Vehicle Insurance policy for all of their vehicles. These can include cabs, school buses, commercial vans, equipment carrying vehicles, tractors, among others.

Professional Indemnity Insurance, also known as Errors and Omissions Insurance, is a liability cover that protects individuals and companies providing professional services from losses arising out of lawsuits claiming negligence or wrongdoing. This type of insurance is applicable for professionals like doctors, chartered accountants, lawyers, etc. and businesses like accounting firms, consulting agencies, clinics, etc.

According to the Companies Act of 2013, it is mandatory for accounting firms and financial advisors to purchase this type of an indemnity cover. Furthermore, insurance intermediaries such as brokers, corporate agents, insurance web aggregators and marketing firms are required to purchase this insurance as per the IRDAI 2018 regulations.

While overall Group Health Insurance has not yet been made mandatory, the Indian Government has made COVID-19 Health Insurance compulsory for all industrial and commercial establishments, workplaces, and offices subsequent to the COVID 19 pandemic when businesses were resuming their operations. In the post-pandemic world, awareness regarding Group Health Insurance has steadily increased. It is largely becoming a major part of employee CTCs these days. Various insurance companies now offer comprehensive covers under this policy.

This insurance covers hospitalization of employees and certain family members up to a limit. It can be availed by the employees free of cost as the premiums are paid by the employer to the insurance company.

Fire Insurance covers damage or loss to commercial assets like buildings, stocks, etc. against events like fire, riots, natural disasters, strikes, terrorist attacks, among others. This type of insurance is mandatory for those commercial properties that have a loan attached to them. Shops, offices, commercial buildings, etc. that have been taken on a loan have to be insured under a Fire and Allied Perils Insurance policy.

Contractor’s All Risk Insurance policy or CAR is purchased by civil contractors to cover against any destruction or damage during construction projects right from the arrival of construction materials to the final completion of the project. It also covers any third party damage or destruction of equipment/machinery.

A CAR policy is mandatory for all civil construction projects. In fact, the local Municipal Authorities will not approve any construction project unless it has been insured under a CAR policy.

Some commercial insurance policies are not made legally mandatory by a law, act or regulation, but nevertheless remain essential for a business’ survival. Businesses cannot avoid taking these policies because of the crucial protection they offer. Some of these policies are :

This insurance policy is taken in conjunction with a CAR (Contractors’ All Risk) policy. It specifically covers Plant and Machinery such as fork-lifts, trucks, compressors, bulldozers, drilling machines, equipment, etc. that do not move on wheels. A CPM policy is extremely necessary for all contractors as it forms a major part of the construction project.

On the other hand, for movable Plant and Machinery such as dumpers, vehicles, etc. that move on wheels, it becomes compulsory for contractors to insure them under motor and miscellaneous insurance policies.

This insurance provides cover for the personal liability of a business’s directors and officers for any wrongdoing or acts of negligence conducted in their managerial capacity. It mainly covers the defence expenses borne by the company on account of any lawsuits arising out of a senior manager’s wrongful acts.

While a D&O policy is not mandatory by law, it is indispensable for large organizations, where upper management holds significant financial responsibility. Additionally, lending institutions require businesses to have a D&O policy in place since any misdemeanor by a director or an officer can have a major impact on the business’s health.

This type of insurance is purchased to cover valuable property and money such as cash-in-safe, high value goods like jewellery, stock, etc. from the risk of loss or damage due to theft or burglary within the business premises. A Theft and Burglary Insurance policy is not mandatory as per any law or regulation but is extremely necessary for shops, traders, godwons and offices with valuable property.

Marine Insurance covers loss or damage to ships, ports, terminals and most importantly the cargo being transported. This insurance has not been made mandatory by any law, but it is extremely necessary for trades since it forms part of the 'terms of sale' between the buyer and seller.

This type of insurance is required for all ships and yachts that are used for commercial or transportation purposes. Additionally, Marine Insurance is absolutely crucial for vessels carrying passengers, workers, or cargo across international waters. This means that exporters and importers need to ensure that their cargo is duly insured under a Marine Insurance policy.

Insurance is often an afterthought for most up and coming businesses. However, startups can greatly benefit from it. Learn more about it here

Opinions, conclusions and statements of intent expressed in this article are that of the author and Verak does not accept liability for the views expressed unless confirmed by an authorized representative of the Company independently of this communication.