64% of SME business owners are aware LEI exists, but less than half are policyholders, DAS’s new research shows.

It’s a well-documented fact that small to medium-sized enterprises make up 99% of all businesses in the UK. Their contribution to our tax coffers and money held in our banks – money that shores up the high stakes gambles taken by huge corporations in the remaining 1% - is the lifeblood of our economy. The latter, we are told, is performing better than expected - ‘well’ even, despite the ubiquitous overtures of doubt that come with any mention of Brexit. Putting this theory to the test, recently commissioned research by DAS found that 81% of larger SME companies indeed expect growth within the next two years, an outlook shared by 61% of smaller firms in the UK. This is obviously encouraging to hear, but are SME business owners doing anything to protect themselves from things going the other way? Small and medium firms might be outperforming expectations for the moment, but the advent of Brexit negotiations that also punctuate this two-year timeline means business regulation and legislation could all be set to change. Surely the heightened risk of compliance issues and costly legal challenges off the back of them are at the forefront of owners’ minds?

The data suggests yes, they are. But only in the same way that speeding on the motorway is only a worry once you get caught, handed a hefty fine or have to forfeit your licence; you never think it will happen to you. You might be aware of the risk, but you don’t take any precautionary measures. In business terms, legal risks could be anything from a tax investigation by HMRC, to a personal injury claim - say nothing of having to take action against other business partners or pursue unpaid invoices. (And who knows what else once we leave the EU: unemployment could be set to rise due to a recession, and the government would be at liberty to alter taxation). In short, these universal issues are not ones that SMEs can afford to outlay on without the right protections in place. And business owners know this. 75% of smaller firms said they are aware of legal expenses insurance, along with 53% of all medium-size businesses, but less than half of all SMEs are LEI policyholders.

As the matter of taking out LEI sits squarely on the shoulders of business owners, and to a lesser extent senior management, this somewhat laissez-faire attitude towards it is really intriguing, but it extends to their outlook on legal risk as well. 70% of all respondents believe the level of risk will stay the same over the next two years. But operating at the same level just means the risks are as prevalent as they’ve always been, and over half of SMEs have hitherto been running on luck. In the last 12 months alone, all respondents in DAS’s research confirmed they’d experienced at least one legal issue (which means the uninsured majority were out of pocket for them). These have ranged from chasing payments from customers, or debts from business partners, to 30% of all medium-sized businesses dealing with contract disputes. James Christacos, Managing Director of DAS Law, cites these figures as a wake-up call for SMEs: “[they] underscore that every business - regardless of size – needs to plan for legal issues.”

DAS's research also unveiled legal issues as three of the top four business concerns. Over half of all respondents said that in regard to legal risk, they place the most importance on compliance with legislation, followed by 43% of all larger SMEs on the wider compliance issue of pensions rules. (In excess of 20% of SMEs have had a case arising from this in the last year). Health and safety regulation brings up the rear as a concern for 32% of the smallest and 40% of the biggest SMEs. So why, when these companies have weathered claims, and know LEI exists, are less than half policyholders?

Judging from the previous statistics, and given that being incompliant or negligent are amongst their biggest headaches, it’s likely that those who have a policy or are considering one, are simply misinformed. “Many SMEs see LEI as a purely a defensive measure” James Henderson, Managing Director of DAS concludes, “a protection from a legal claim made against them.” It might also have something to do with their devotion to the fourth top business concern: increasing profitability. An appetite for monetary growth in business isn’t surprising – it sits as a concern for 63% of small businesses and 61% for larger outfits – but as the highest priority amongst SMEs, the people in charge clearly haven’t joined the dots of consequence between their bottom line and operating without LEI. James Henderson also touches upon this important link between business growth and indemnifying against legal issues: “businesses which grow cannot focus on profitability at the expense of managing their business and the risk it contains.” Read: management doesn’t just mean to think; it means to act. SME business owners should be managing their business risks responsibly with the safety net of LEI in place.

But who does it fall to, to tell them? All businesses have one form of insurance, and the data shows the majority of all policies are purchased through a broker. Sure, conversion rates are far higher amongst broker channels, but these need to improve. With over half of SMEs operating without any LEI at all, or just unaware of the opportunity before them, James Henderson highlights the "clear need for insurers, brokers, and business advisers to discuss what is covered by it," i.e. proceedings they bring against others, too. If advice about their legal risk and what they'd be entitled to are all that stands between business owners taking out a policy, brokers would do well to educate their clients. After all, who's to say what their risk will look like in the near future? Can SMEs really afford to prop up legal disputes without insurance to claim from? Surely the future's too up in the air to be sure.