Guide to Insurance for Your Small Business
What insurance do you need to run your business.
Please note that this article is intended for educational purposes only and should not be deemed to be or used as legal, employment, or health & safety advice. For guidance or advice specific to your business, consult with a qualified professional.
Small business insurance can be confusing when you first consider it, but our guide is here to help explain each type so you can work out which insurance type suits you.
There are various types of policies available and each covers different aspects of potential financial loss. Some sectors will have specific legal requirements that require businesses to have a certain level of minimum cover in place, while other types of insurance for small businesses are entirely optional but may help prevent a financial tight spot in the future due to unforeseen circumstances. By arming yourself with knowledge about each type of small business insurance available, you’ll be better placed to make the best decisions about their policies.
What type of insurance do I need for my small business?
The type of insurance required will depend on the nature of your business and the events you wish to protect yourself against financially. Some of the most common types of insurance you’ll need to consider include:
- Public liability insurance
- Employers liability insurance
- Professional indemnity insurance
- Buildings insurance
- Stock insurance
- Product liability insurance
- Business interruption insurance
- Legal insurance
Some businesses are legally required to have certain types of insurance in place, while others are entirely optional. We’ve listed the details of various types of insurance available below, plus what they are designed to protect against. Use this to make an informed decision about cover for your business and manage your finances effectively.
Public liability insurance
Public liability insurance may protect small business owners against claims made by members of the public for personal injury or damage to personal property. This type of insurance for small business owners is typically chosen by companies and individuals whose work naturally brings them into contact with the public – on company premises or elsewhere. This includes tradespeople, retailers, restaurants and bars, builders, hairdressers and beauticians.
If a customer, or member of the public, sues a small business for injury or damage caused on the premises or by an employee, then public liability insurance may cover the costs of that claim. Public liability insurance is not often a legal requirement but most businesses that have contact with members of the public choose to implement a minimum level of cover to protect themselves from any claims.
Employers’ liability insurance
Employers’ liability insurance is a legal requirement for any business with more than one employee. This type of insurance provides cover that may help if an employee becomes injured or ill as a result of their work. This type of insurance is also often required for businesses that use subcontractors, even if they don’t directly employ anyone. However, each policy is different, so small business owners that use casual workers should check if this is covered.
Employees who become ill or suffer an injury as a result of performing their role, have the right to seek compensation from their employer. This type of claim can cover a variety of costs including loss of income, medical bills, legal costs and financial compensation.
Professional indemnity insurance
Professional indemnity insurance is designed to help protect against service-based disputes. It is not always a legal requirement but could be considered a core business need for those in sectors that provide professional services that could lead to dispute. These include anyone providing consultancy or expert advice to clients, those whose work may lead to disputes over issues such as copyright or quality, anyone dealing in training that could lead to claims of professional negligence or self-employed individuals providing services.
Certain industry sectors will require mandatory professional indemnity cover. These could include people working with sensitive client information (such as accountants, healthcare professionals or surveyors) or businesses providing services to specific industries such as the energy industry. The level of cover and the amount that can be claimed will vary between policies, so you’ll need to ensure you have the right level of cover to meet any eventuality.
Business buildings insurance is similar to domestic buildings insurance as it provides cover in case of damage or destruction to the physical property. Certain types of buildings insurance will also cover theft from the property or damage to stock, equipment or other goods and some policies will provide compensation for any interruption to business caused by any of the events covered.
Buildings insurance is not a legal requirement for commercial properties. However, most mortgage providers require business owners to take out business buildings insurance if they are to underwrite a property loan. The cost of buildings insurance will depend on the size of the property – or properties – the location and the level of cover desired.
Stock insurance can be taken out by small business owners to cover the financial costs of anything happening to any stock stored on the premises. This can include theft, fire damage or any other form of damage.
Some types of buildings insurance policies may also cover stock, so a separate stock insurance policy isn’t always required. Insurers will often require certain safeguards from the stock owners, such as adequate security measures in place around the property and having correct storage procedures to minimise the chances of stock becoming damaged. If a stock insurance claim is granted, it will usually cover the purchase price of the stock and not the retail price.
Product liability insurance
Product liability insurance can help cover costs caused if someone seeks compensation for injury or damage caused by a specific product. If any injury or damage is caused by a product or any component part of a product, the injured party may seek compensation from the manufacturer, distributor, retailer or supplier under the terms of the Consumer Protection Act. The specifics of each case determine who is held liable.
It is not usually a legal requirement for businesses to have product liability insurance. However, some manufacturers, retailers, suppliers or distributors may choose to only work with businesses that have this type of insurance to ensure that extra level of protection.
Business interruption insurance
Business interruption insurance is designed to cover businesses for loss of income caused through unforeseen circumstances that mean business cannot be carried out as usual for a period of time. Examples would include floods, fire or essential equipment breakdown that may mean you can’t operate for a few days, weeks or months.
Business interruption insurance is often sold as an optional extra within a wider business insurance package. It can also be included in certain types of buildings insurance. Successful business insurance claims will compensate small business owners for loss of pre-tax profits for the duration of the closure and any increased running costs incurred as a direct result of the circumstances.
Business legal insurance may be referred to as legal expenses insurance or legal protection insurance. This type of policy can protect businesses from any legal costs the business may incur. These could include employee disputes or disputes with suppliers or contractors.
With legal expenses insurance, small businesses may be able to claim all or part of the legal costs back when they become involved in a dispute of any kind. Some policies also provide legal advice and tax advice as part of a legal protection insurance package. Successful claims can be used to cover the costs of solicitors, barristers and expert witnesses as required by the court.
How much does business insurance cost for a small business?
The cost of business insurance for small businesses will vary depending on several key factors. These include:
- the size of the business and number of employees
- how often staff members come into contact with members of the public
- whether members of the public are allowed on business premises
- what types of product or service are being sold
- if there is any dangerous equipment or machinery in the workplace
- what the value of the property is (in the case of buildings insurance).
Many small business insurers offer package policies that cover the aspects of insurance a specific business may require, which can reduce business insurance premiums. Some insurers will also offer discounts for paying a full year’s premium in advance. Minimising risk in the workplace reduces the chances of having to make a claim, which also helps keep insurance premiums lower.
Building a small business insurance policy could be a good idea for any small business owner, even when it’s not a legal requirement. Compensation claims and legal costs can be a real challenge for a small business and having the right protection in place can support you with covering unexpected costs, letting you focus on what you do best – running and expanding your business.
Frequently asked questions
- What does small business insurance cover?
Small business insurance is an important thing to keep on top of as a business owner. Having the right insurance will help you manage your finances, give you peace of mind and protect you from financial loss.
Your insurance needs will vary depending on your business, but these are the main options:
Employers’ liability insurance
Buildings and contents insurance
Professional indemnity insurance
Business interruption insurance
- Do I need small business insurance?
Most business insurance isn’t compulsory but it makes sound business sense to have it in place just in case. If your business involves physical interaction with customers in a public space, insurance will cover in case of physical injury to a member of the public.
Public liability insurance usually covers you for between £1 million and £10 million depending on the level of cover. Your insurer will advise you as to what level you require.
Product liability insurance is advised if you sell physical goods. It will protect you if you sell food, for example, and someone falls ill or if the products you sell are faulty.
Even if you merely act as an adviser, you should still consider insurance. If the advice you give causes serious financial loss or harm to another person or business, you could be liable. In a case like this, insurance could save you from taking a serious financial hit.
- Do I have to have employers’ liability insurance?
If you employ staff, employers’ liability insurance is a legal requirement. It covers both you and your staff in the event of injury or illness at work and covers full-time, part-time, and temporary staff and anyone who has previously worked for you. There are two exceptions:
You run a business where you employ close family members (parents, spouse, children) and the business isn’t limited
You’re a limited company in which a single employee owns more than 50% of the share capital
The minimum legal requirement for cover is £5 million but you may need to take out higher insurance, particularly if you work in a high-risk industry. The financial costs of not having insurance can be severe and you could find yourself liable for damages and medical costs, and be fined up to £2,500 per day.
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