When it comes to small business insurance, selecting the right type of policy and level of protection can be confusing. Our concise guide helps you understand your options and why it’s important to have cover, the types of coverage available, and how to assess your insurance needs. I’ll also provide cost-saving strategies, tips for navigating the claims process.
Doing business without commercial insurance coverage is often possible for most small businesses, but it can be a huge risk. A well-designed policy provides your business with financial protection against unexpected events that can result in financial losses, such as property damage, liability claims, and employee injuries. Small business insurance can help you avoid a financial claim that could really impact your business.
Small business insurance is important for several reasons. First, it’s often required by law. For example, if you have employees, you’re required to have employee liability insurance or if you’re working with the public, for example running a cafe, then you’ll need public liability insurance. Second, it can provide financial protection against unexpected events that could damage your business.
Types of business insurance policy
When it comes to your business insurance needs, every situation is unique. The industry in which your business operates, who your customers are, if you have employees, and other business risks all determine your insurance needs.
Here’s our quick guide to the main types of business insurances policies available:
Employers’ liability insurance
Employers’ liability insurance is a legal requirement under the Employers’ Liability (Compulsory Insurance) Act 1969 required if you have one or more employees – for example staff in an office, mechanics in a garage, or staff in a restaurant. Find out more from the Government’s HSE guide. It’s an important safety net for you and your employees and will protect you if they suffer work-related illnesses or injuries and decide to make a claim against your business. For example, if an employee feels that they have not received proper training and then goes on to suffer an injury when using a piece of machinery, they could make a claim against your business.
You don’t need this type of cover if you don’t have a limited company and only employee family members. Or if you use self-employed contractors. For any other situation, you must have this insurance cover if you have more will be fined up to £2500 per day you operate without cover – find out more from the Government’s information site.
As a side-note, you must display the insurance certificate and make it accessible to your employees and the Health and Safety Executive (HSE) inspectors – if you don’t, you are liable to a fine.
Public liability insurance
Public liability insurance provides cover for any compensation costs and legal fees you might have to pay if a member of the public is harmed or their property is damaged, because of your business activities. For example, if you interact directly face-to-face with customers, clients or members of the public such as a builder working at a client’s site, or working at an event or market, or have members of the public visit your premises, such as your shop.
A public liability policy will normally pay out to cover: compensation claims if a person is injured or their property damaged because of your business; legal expenses you might have to pay; cost of repairs if something has been damaged; medical fees if a person is injured.
You’ll find business insurers normally have tailored offerings for types of business. It’s typical to find policies specially for tradespeople (for example, a builder or decorator); office-based businesses; and retailers or hospitality providers (for example, a cafe, event venue or shop).
Many public liability policies also include product insurance that covers your business if someone uses a product you have supplied and suffers from an injury or damage to their property.
While it’s not a legal requirement to have public liability insurance, it’s normally seen as sensible business practice to take out cover – and if your company is part of a trade association, you might find the association requires you to have a certain level of cover. This is also true of contractors who often find when being hired for a project they must show proof of public liability cover.
This type of policy provides cover in the case of a customer using a product you have supplied and either injuring themselves or suffering damage to their property. It’s normally part of a public liability policy rather than being a separate policy on its own.
Professional indemnity insurance
Professional indemnity insurance (PII) provides cover for any compensation costs and legal fees you might have to pay if a client accuses you of providing wrong advice or negligence and claims against you. This is normally a type of policy aimed at professional services or consultants such as a lawyer, accountant, business consultant, or technology consultant. For example, if you provide a client with legal advice and the client then loses a case or suffers reputational damage then they could look to claim against you. Or it might be human error on your part that providing a design with an error in it or releasing the wrong version of a software product that causes problems for the users.
Professional indemnity insurance is a really important policy to have in place if you: give professional, expert advice to clients; handle data or software on behalf of a client. Most professional trade bodies require their members to have a this type of policy in place before practicing as a recognised professional in the field.
PII normally covers you for: breach of professional duty (ie if you give incorrect advice or make a mistake); dishonest acts (eg stealing or revealing confidential information); libel (eg saying or writing something that damages a client’s reputation); breach of confidentiality (eg accidentally disclosing confidential information); infringement of intellectual property rights (eg accidentally using images or material that is copyrighted); loss of documents (eg loss of documents in your care).
Business interruption insurance
Business interruption insurance keeps your business up and running during unexpected downtime when your business cannot operate normally or has to close temporarily, for example in the event of a fire or storm. The insurance will reimburse you for lost profits and payroll expenses while your business is out of commission. BOP includes business interruption or commercial property policy.
Commercial auto insurance
If you use a business vehicle in your business, it’s important to have commercial auto insurance that covers both your drivers, your vehicles and any public liability if you are involved in an accident or cause damage with your vehicles.
Cyber liability insurance
For many businesses, cyber liability insurance is now one of the most important policies to have in place as it protects your company from the risks involved in using digital technology. This ranges from losing sensitive customer data as part of a GDPR breach (eg if you leave a laptop on the train), through to your business suffering a malicious cyber attack that demands a ransom, or even your e-commerce store going offline due to a fault with the software.
This type of insurance policy normally requires your business to have a technology expert to help you answer all the questions around how your computers, data, website, email and business software is setup, configured and kept up to date.
Commercial property insurance
Commercial property insurance helps protect your business from the financial cost of vandalism, theft, storm damage, liabilities and other hazards that damage your business property. It normally covers both the building and its contents and, for some policies, will extend to cover for your inventory.
Keyman insurance is designed to provide your business with cover if one of your key employees is off work due to long-term sickness, injury or disability. It’s normally used to provide cover for just one or two key people in your business – the people without whom your business could not operate. We’ve written a longer article on keyman insurance.
2. Take Into Account Your Business’ Legal Requirements
Being prepared can help you avoid headaches down the road as a small business owner. Buying business insurance is one habit that helps keep your company’s finances safe.
It is especially true if you have clients, employees, and other assets that could be at risk in an accident. For instance, you might have to buy a general liability policy to settle future issues with commercial space renters or mortgage lenders.
As the employer, workers’ compensation insurance is your responsibility. Most regions require you to buy coverage when you hire your first employee, and some require it even before that. Regulations vary by region and business size.
Since client contracts may require a certain level of coverage, you may want commercial umbrella insurance. Commercial umbrella policies can provide additional liability coverage for business-related claims exceeding your basic policy’s limits.
It’s important to check your commercial insurance policy and ensure it has enough liability coverage to protect you from losses as you grow your business.
Do a risk assessment
Every industry has its own set of risks for a business owner, for example a software company will have cyber security risks, a decorator will have risks in working at a customer’s home, if you have an office then you have a responsibility to your employees and if you work with the general public then you have risks to potential injury or damage to their property.
And it varies by profession, for example, an accountant may be responsible for reporting any mistakes made in filing tax returns. Similarly, the health and safety of its customers are paramount to a restaurant owner.
Evaluate your business risks and how likely the event is to happen – and what would happen to your business if it suffered a claim. Many of the insurance companies provide templates or models that let you enter key business information (such as your business sector, turnover, number of employees, etc) and provide guidance on where you might have potential risks.
Consider the cover
Many business owners will look at the cost of taking out an insurance policy for their business rather than the level of cover it provides. For example, if you have a cyber insurance policy but with a very low level of cover then it might be unable to pay for any of the work required to fix a data breach or phishing attack or issue caused by a software fault.
When considering if you should take our a policy, look carefully at the levels of cover it provides. If you business is part of a trade association, the association might require you to have a minimum level of cover; if you’re not part of an association, look at how much a claim or damage to your business will really cost to repair.
A small business could sign up to every possible insurance policy, but that’s not always necessary and, as the owner, it’s your decision which type of policy you must have, which you should have and which is not necessary. For example, if you have employees then you must have Employers’ liability insurance; if you operate a cafe or shop you should have public liability insurance; and if your business relies on technology then cyber insurance would be sensible.
Each of the different types of policy will help protect your business from unexpected events that can result in financial losses and by understanding the types of coverage available, assessing your insurance needs, and choosing the right insurance provider, you can protect your business for long-term success. A suitable business insurance policy ensures you can continue operating when unexpected events occur.