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Mandatory vs Voluntary Insurance: Understand Your Obligations

If you’re looking for insurance to protect your organization from risk, you may feel overwhelmed by the wide range of options available in the market, all promoting the protection of your assets and shielding you from a range of risks.

However, knowing what insurance is mandatory for your organization (versus what is optional or voluntary) is an important first step to take. These are insurance policies that your relevant authorities have legislated a requirement to have.

Businesses will need to make sure they have the mandatory insurances as required by the laws of their jurisdiction. Failure to do so can result in fines, legal action, and potential liability.

Below, we will discuss the difference between mandatory insurance and voluntary insurance, provide examples of each and where you can go to determine if a particular insurance policy is required for your business.

Mandatory vs compulsory insurance

While the terms ‘mandatory’ and ‘compulsory’ may sound like the same thing, there is a slight difference when it comes to insurance requirements. Mandatory insurance refers to a requirement to have specific insurance in place to satisfy a regulator, but that insurance can be purchased in the open market from a number of sources or insurance carriers. Requirements may include minimum policy limits, deductibles, or requirements stipulating a minimum financial strength rating for the insurer. Professional groups in Ontario such as nurses and insurance brokers have mandatory insurance requirements for professional liability.

An advantage to mandatory insurance is that the insurance marketplace fills the need and competition can make pricing more favourable. A disadvantage is that higher risk individuals may face difficulties obtaining coverage.    

By contrast, compulsory insurance refers to the requirement to purchase specific insurance from a specific carrier. For example, lawyers in Ontario purchase their professional liability insurance from an insurer set up by the law society that all lawyers must purchase in order to practice law in the province.

What is the difference between mandatory and voluntary insurance?

Mandatory insurance, simply put, is insurance that businesses are legally required to have. The federal government, or governments in your province or territory, mandate certain insurances to protect the public and employees from any harm or damage that may occur in the course of your operations. The type of mandatory  insurance required can vary depending on the jurisdiction and the nature of the business.

It is important not to rely on this article for advice, and instead note that the mandatory insurance requirements can vary depending on the jurisdiction. It’s crucial for business owners to check with their provincial or territorial government or to find out what specific types of insurance they are required to carry.

Voluntary insurance, on the other hand, is optional insurance that businesses can choose to purchase. It is not required by law, but it can offer additional protection and peace of mind for the business owner or organization.

Examples of mandatory insurance

Below are some examples of insurance policies that are generally mandatory  no matter which province you live in.

Motor vehicle insurance

In Canada, drivers are legally required to have motor vehicle insurance. This insurance provides coverage for damages caused to other people or their property while driving. It also covers medical expenses for injuries sustained in a car accident.

Most provinces (such as Ontario) will require you to have at least a minimum of $200,000 in third-party liability coverage (which covers costs if you are responsible for an auto accident that causes injury or death to a person, or property damage).

Workers compensation “insurance”

Workers compensation is a form of workplace insurance in Canada. It provides wage replacement and medical benefits to employees who are injured or become ill while on the job.

In Canada, workers compensation and premium is determined by provincial ‘Workers Compensation Board‘.These boards are established and regulated by government and provide provincially-sponsored funds to insure costs associated with workplace injuries and illnesses. You cannot choose to opt out in favour of private insurance.

Federally-regulated employers (ie banks), must provide ‘wage loss replacement benefits’ to their employees. Federal Workers’ Compensation Service works in partnership with provincial workers’ compensation boards to process compensation claims submitted by federal employees.

Employer's Liability Insurance

Employer’s Liability Insurance, also known as Employment Practices Liability Insurance (EPL), is required in some provinces and territories in Canada. It is especially important if the organizations are exempt from paying into the Workers Compensation Boards described above.

This insurance provides coverage for costs a business incurs as a result of an employee suffering workplace-related injury, illness or death. It can cover costs such as an employee’s lost wages, medical costs, as well as legal fees to defend a lawsuit and settlements.

Other insurances may be required in your contracts

Depending on the nature of your business, you may be required to have other types of insurance depending on the contract or engagement terms with clients or customers. This is separate to the requirement by law to have a particular insurance policy.

For example, if you are a consultant or a contractor, your clients may require you to have professional liability insurance to protect them from any errors or omissions you may make while performing your duties. Failure to have this insurance will result in exposure to damages in the event you are claimed against as a result of errors or omissions in the rendering of professional services, but also potentially breaching the conditions your engagement.

Examples of voluntary insurance

In contrast to the above, there are also a range of optional insurance policies that businesses can choose to purchase. These may not necessarily be required by law, but they offer additional protection against certain risks that an organization may face.

Commercial general liability insurance

Commercial general liability insurance (referred to as CGL insurance) covers a wide range of risks faced by businesses.

It typically includes coverage for property damage or personal injury that occurs as a result of your organization’s negligence, and can also provide coverage in the event products are defective and cause damage to third parties.

The purpose of a commercial general liability insurance policy is to provide protection from lawsuits which may include legal fees, damages and settlements up to your policy limits.

Errors and omissions (E&O) insurance

E&O insurance, also known as professional liability insurance or malpractice insurance, protects your organization from claims of financial loss as a result of a service you have rendered for a client. This includes liability arising from negligence, providing poor advice, missing a deadline, or failing to deliver a service as promised.

Remember – you don’t actually have to have done anything wrong to attract a professional liability claim. Your client only needs to think you have been negligent or have committed some wrong for them to file a claim (thereby forcing you to defend it, and incur legal costs while doing so).

Commercial property insurance

Commercial property insurance provides coverage for damage to a business’s physical assets, such as buildings, equipment, and inventory. The damage may be caused by theft, vandalism or fire.  This insurance is not mandatory , but it is essential for businesses that:

  • owns or rents commercial property,
  • conducts business off-site,
  • contains computers or machinery used for business, or
  • uses portable electronics such as laptops or mobiles.

This type of insurance may cover costs such as renovations, the costs of repairing or replacing equipment, replacing stolen electronics, or repairing damage caused to your property if it is caused by a ‘covered peril’.

Cybersecurity insurance

Cybersecurity insurance (also known as cyber liability insurance) provides coverage for damages from cyber events including data breaches and cyberattacks. This insurance is not mandatory, but it is becoming increasingly important for businesses to consider as cyber threats become more prevalent.

Cyber liability insurance can cover a range of costs, including:

  • Responding to a legal proceeding resulting from a data breach
  • Notifying customers that their data may have been compromised
  • Hiring a PR agency to protect reputational damage
  • Engaging a forensic investigator
  • Restoring or recovering data that has been lost or corrupted as a result of a data breach
  • Business interruption (i.e. the costs incurred as a result of your business being interrupted).

Directors and officers (D&O) insurance

Directors and officers insurance provides coverage for claims made against an organization as a result of wrongful acts on the part of directors and officers in the course of their duties.

When a director or officer makes an error, third parties may file a lawsuit against the organization, including shareholders or a supplier. D&O insurance is designed to cover the losses associated with such a lawsuit.

This insurance is not mandatory, but it is recommended for businesses that have a board of directors.

Questions about insurance?

If you have any questions about the mandatory or voluntary insurance in your province, it’s always best to consult with an insurance broker.

Here at Axxima, we specialize in helping organizations (both private sector and government) find the right insurance coverage to protect themselves and their assets whether by mandatory or voluntary coverage. We also have extensive experience working with clients to understand the complexities of compulsory insurance and can help you navigate the process with ease.

Get in touch with our specialist team at Axxima, and let’s discuss what insurance is best for you.