A minimum and deposit policy charges a UK contractor an estimated premium up front, then recalculates it at the end of the policy term against what the business actually did. The deposit is the minimum premium the insurer keeps, and it is not refundable. The adjustment therefore runs one way: if your turnover or wageroll came in higher than you estimated, an additional premium falls due, and if it came in lower, the premium you have already paid stands.
What Are Minimum and Deposit Policies?
Minimum and deposit policies involve an initial premium deposit based on estimated figures like projected turnover. The 'minimum' part is the premium the insurer has earned whatever the final figures show: it is retained in full, subject to policy terms, even where your actual exposure turns out to be well below the estimate. The structure turns up wherever the premium depends on how much work you actually do, so you will meet it on contractors all risk, contractors combined, commercial combined and tradesman policies rather than on any one product. It suits trades whose turnover moves through the year, which is most of them.
Key Features of Minimum and Deposit Policies
- Initial Deposit Premium: Calculated from estimated exposure, usually turnover or payroll.
- Minimum Premium: The amount the insurer retains whatever your final figures show, subject to policy conditions.
- Adjustment at Expiry: The premium is recalculated against actual exposure during the term, and an additional premium falls due where the figures come in above the estimate.
- Non-Refundable: The deposit premium is not returned, in whole or in part, where your actual turnover or wageroll comes in below the estimate.
How Do Policy Adjustments Work?
At the policy's expiry the insurer audits your actual exposure, usually by asking for the turnover and wageroll figures for the period. The premium is then recalculated against those real figures. The adjustment only ever goes in one direction: where the actual exposure is higher than the estimate an additional premium is charged, and where it is lower the premium already paid is retained in full.
Adjustment Process Explained
- Audit: Conducted to determine actual exposure such as turnover or payroll.
- Comparison: Actual figures are compared with initial estimates.
- Final Premium Calculation: Where the actual figures are above the estimate, an additional premium is charged. Where they are below it, no refund arises.
Benefits and Drawbacks of Minimum and Deposit Policies
These policies offer distinct advantages and potential challenges for contractors.
Benefits
- Flexibility: Premiums adjust to reflect actual business activity.
- Cover That Keeps Up: The policy stays in force as the figures grow, with the extra premium settled at the end rather than holding up work mid-contract.
- Cash Flow Management: Predictable initial costs aid financial planning.
Drawbacks
- Complex Audits: The audit process can be time-consuming and requires detailed record-keeping.
- No Refunds: The deposit premium is non-refundable, so a quieter year than you expected does not reduce what you have paid. An estimate pitched high costs you money you cannot get back.
- Variable Final Costs: Unexpected higher costs if initial estimates are too low.
Practical Example for UK Contractors
Consider a contractor estimating a £500,000 turnover and paying a deposit premium based on that figure. An audit at expiry shows a £600,000 turnover, so an additional premium falls due on the extra £100,000 of exposure. Had the audit shown £400,000 instead, the position would not reverse: the deposit premium would be retained in full and no refund would be due.
Comparison: Minimum and Deposit vs. Fixed Premium Policies
| Feature | Minimum and Deposit Policy | Fixed Premium Policy |
|---|---|---|
| Initial Premium | Based on estimates | Fixed amount |
| Final Adjustment | Yes, based on actual exposure | No adjustment |
| Minimum Premium | Applies | Not applicable |
| Refund if exposure falls | No, the deposit premium is non-refundable | Not applicable |
| Declaring changes mid-term | Picked up at the end-of-term audit | Must be declared as they happen |
| Flexibility | High | Low |
Declaring Changes on a Fixed Premium Policy
A fixed premium is fixed against the business you described when the policy was rated, not against whatever the business becomes. On a fixed premium policy, changes have to be declared as they come up rather than saved for renewal: turnover running above the figure the premium was based on, taking on staff or labour-only subcontractors, a change in wageroll, moving into work at height or heat work, or starting a trade the policy does not name. Tell your broker when it happens and the insurer can adjust the policy mid-term. Leave it until renewal and you risk a reduced claim payment, or an insurer treating the cover as never having applied to the work you were doing.