The majority of small companies are leaving themselves open to footing the potentially crippling bill of legal action brought by employees by failing to have adequate insurance in place.

According to the results of new research, fewer than one in five (18%) small firms has employment practices liability insurance in place – which protects companies against the cost of lawsuits brought by staff – despite the fact that new employment legislation means a flurry of cases is expected over the next couple of years.

The survey by Hiscox also found that just 15% of company owners have directors’ and officers’ insurance, which aims to protect owners from personal claims brought against them in their role as director of a company.

However, nearly three in five small firms (59%) are spending more time looking at risk management issues than they did two years ago, while 70% believe they are more likely to be subjected to a frivolous legal claim due to the rise of a ‘no-win, no fee’ legal culture.

“While firms are increasingly viewing risk management as an important tool in their business armoury, the survey reveals some significant gaps in the level of insurance cover they have, particularly in areas such as directors and officers’ insurance and employment practices liability insurance,” said Gary Head, professions underwriting director at Hiscox.

“The potential cost from employee discrimination claims or other lawsuits is enormous, and these products are designed specifically for such eventualities,” he added.

The most common insurance policies taken out by small firms, according to Hiscox, are:

1. Public liability (80%)

2. Office contents and computers (66%)

3. Employers’ liability (66%)

4. Professional indemnity (59%)

5. Buildings (58%)

6. Motor (52%)

7. Portable equipment (49%)

8. Legal expenses (46%)

9. Business interruption/loss of income (44%)

10. Consequential loss (30%)

11. Health (28%)

12. Product liability (25%)

13. Travel (22%)

14. EPLI (18%)

15. D&O (15%)

The survey added that 10% of small businesses have suffered financially in the past because of a loss that wasn’t insured, with the average loss being £14,400.