Are small businesses ready to handle legal risks?

24/11/2017

This article first appeared in SME Magazine.

In the current economic climate small businesses are more important to the UK economy than ever before. Darren Weekes, Head of Broker at DAS, asks: are SMEs protecting themselves adequately from legal risks?

For a small business, ending up on the wrong end of a significant legal issue can prove catastrophic. What’s more, they are a very real threat. DAS recently surveyed 250 SMEs for one of our regular ‘Market Barometers’ and found that every single one had encountered a legal issue in the last 12 months.

But what do we mean when talking about ‘legal risks’? When we asked the SMEs what legal problems they’d been faced with the responses were varied, but the three most common were recovering money from debtors, tax issues, and contracts. Pensions, health and safety, and start-up legal administration the next most frequent which clearly shows the breadth of legal issues that SMEs are having to deal with on a regular basis.

Cross-referencing this against a subsequent insight piece – this time focussing on insurance brokers - we found evidence to suggest that the future threat of legal risks is being underestimated by SMEs.

Whereas 50% of brokers expected legal risk to increase over the next two years, only 5% of SMEs thought the same. With more than half of the SMEs we spoke to expecting their businesses to grow, it is vital that this does not come at the expense of properly managing business risks.

As it stands, I do have concerns that some SMEs are neglecting their insurance needs. I believe the protection given by legal expenses insurance (LEI) could be invaluable to these businesses, but with one in four admitting that they had no idea what LEI would cover, I worry that underestimating legal risks could not just scupper optimism, but in the worst case scenario it could force many SMEs out of business.

With over 99% of UK businesses being defined as an SME, this group needs to be well supported, not just for their individual interests, but also for those of the economy as a whole.

Whereas historically I’ve had the sense from the business community that LEI was seen as being for large businesses, our research went some way to disproving that perception. But despite three out of four SME’s surveyed saying that they were aware of legal expenses insurance, only one in three actually have a policy, a statistic which if accurate, appears reckless.

But while SMEs need to do more to align their awareness of legal risks with their protection against them, the insurance industry must itself do more to help SMEs manage legal issues.

Awareness and understanding is clearly an area where there is work to be done, and insurers and brokers are working to hard raise their game in these areas. My experience is that quite simply not enough people understand what LEI is, and what it covers. Legal risks are an ever present business risk; adequate protections against them need to be just as ubiquitous.