What is small business insurance and what does it cover?

Searching for business insurance can be particularly challenging, especially for start-ups.

Seeking advice on insurance can save you a great deal of money and reduce the level of risk to which your business is exposed.

This article will help you make the best insurance choices for your business.

What is business insurance?

Business insurance helps cover costs if you face legal claims, theft, or damage to your property or inventory.

Don't assume only large companies need coverage - losses can hit small businesses even harder.

Whether you're a growing enterprise or a sole proprietorship, explore quotes to find the policy that fits your company's needs.

The right insurance safeguards your livelihood, so you can focus on doing what you do best - serving your customers.

With the proper precautions, you can run your business with confidence knowing you've got your bases covered.

What kinds of business insurance do I need?

When you run a business, you’re exposed to many more risks than you are when working for someone else.

You have more responsibilities, and you also have more assets to protect.

There are many forms of insurance that a business may have.

Some are compulsory (or compulsory for certain types of business), while others range from extremely important to just nice to have.

Your accountant can advise you on which types to prioritise (and you should ideally research this when setting up your business).

What different types of business insurance are there and what do they cover?

The main types of business insurance are:

• Employer’s liability insurance
• Public and product liability insurance
• Professional indemnity insurance
• Building and contents insurance

Here’s a quick run-down of each type and why you might need it.

Small business liability insurance

Every employer has a duty to look after their employees’ wellbeing, so employer’s liability insurance is compulsory (the only insurance that’s compulsory for every employer).

If a member of staff gets ill or injured as a result of working for you, then your insurance can pay out any compensation due.

Legally you need at least £5 million cover, and you can be fined up to £2,500 for each day that you’re not covered. A financial adviser can help you find the best value policy.

Public liability insurance for small businesses

A customer slips on your wet floor, a brick falls from your building site and breaks a car windscreen, a meal from your café makes somebody ill… If your business is consumer-facing then public and product liability insurance is a very good idea.

Public liability insurance covers you for claims made against your business for causing harm to members of the public or damage to their property.

Similarly, product liability insurance covers you in the event of one of your products causing harm or damage.

Both kinds also cover any legal fees incurred in settling the claim. Such an incident might also result in bad publicity, so see our guide to handling a PR crisis.

Professional indemnity insurance for small businesses

If your business provides a service, rather than a product, then you may need professional indemnity insurance.

If your advice or service causes a client to lose money (or something else of value, such as a contract), this insurance will cover you against claims and legal costs.

It’s most often used by professionals such as consultants, solicitors, architects, engineers, accountants and IT contractors who work in a business-to-business capacity.

To decide on the level of cover you need, a good rule of thumb is to estimate how much your client could lose if you made a serious mistake.

How much would it cost you to pay them back? Professional indemnity cover starts from around £50,000 but you might need to be insured for a far higher sum, depending on the nature of your business.

Small business contents insurance

Just as you insure your home and its contents against break-ins, fires and other misfortunes, so you should cover your business premises with buildings and contents insurance.

If you own the premises, you’ll definitely need buildings insurance as well as contents, but if you lease or license the premises you’ll only need contents insurance (as the landlord should have covered the building).

Take care if you run your business from home – your home insurance might not be covered for business usage, in which case you may need to take out a separate policy for your business.

Ensure you have cover for everything you’ll need to get back to work quickly, including any plant and machinery or stock that may be lost.

Otherwise a minor crisis like a flood could spell the end of your business. Find out more about keeping your business running after a crisis.

How much does business insurance cost?

The average cost of business insurance in the UK is £118 a year. However most small businesses will spend more than this to ensure they're covered for additional types of risk. 

Your accountant and financial adviser can both help you to decide which types of cover and which policies will be best for your circumstances.

They can also help you weigh up the cost of insurance versus the risks and potential benefits, so you can see whether it really is financially worthwhile taking out a particular type of insurance.

Sometimes a small risk will not justify a large expense in insurance premiums.

Conversely, a risk with a large potential impact (which could damage or end your business) will justify a larger insurance cost.

Your accountant is best placed to assess these risks.

Small business insurance FAQs

What are the insurance essentials? 

Every business is different, meaning each one will have different insurance needs.

The cover you need will be affected by lots of factors, including: 

• The turnover of your business 

• How many employees you have
• The sector you operate in 
• Whether you deal with the public or not 
• Whether you have work premises 

The four main types of insurance for any small business owner are: 

• Employers’ Liability (EL) insurance 
• Public and product liability insurance 
• Professional indemnity (PI) insurance 
• Building and contents insurance 

We’ve previously discussed the small business insurance must-haves, so you can find more information in our article.  

Do I need insurance for employees? 

Yes. Employers Liability (EL) insurance is essential if your business employs anyone, or if you supervise or direct someone. 

This type of policy will cover both you and your staff in case of injury or illness that’s a result of their work.

For example, a tradesperson that you’ve employed could fall off a scaffolding and be out of work for a few months. 

Or, at the less dramatic end of the scale, your secretary could claim for repetitive strain from years of computer work.  

EL insurance isn’t just a nice-to-have. For most businesses with employees, it’s a legal requirement that should cover full-time, part-time and temporary workers, as well as people who have previously been employed by you.

There are two main exceptions: 

• Family businesses (where employees are the child, spouse or parent of the business owner) that aren’t limited companies 
• Limited companies in which one employee owns more than 50% of share capital 

The minimum legal requirement is £5million of cover, but it may be prudent to increase the size of your policy if you work in a high-risk industry.

Without the proper insurance in place, you can be fined up to £2,500 per day and could be liable for damages, medical costs and more.  

What insurance do I need as an adviser? 

You may think that you don’t need advice if there’s no chance that you can cause physical damage to your clients or their property and possessions.

But insurance for advisers is just as essential as it is for other small business owners.  

Not all businesses will need the same level of professional indemnity (PI) insurance and the cover you need will depend on the kind of clients you work with.

For example, solicitors who advise multi-national companies will need more extensive cover, as even small mistakes can be very costly when working with international firms.  

You can check out our guide to professional indemnity insurance to find out more.  

What insurance do I need to work with the public? 

If you deliver a service or product that involves you working with the public in some way, you’ll need public liability insurance. 

You'll be covered against claims between £1 million and £10 million, depending on the level of cover you choose. 

Not all businesses will need to take out a policy, but it’s wise if you:  

• Visit customers, meaning your equipment or the work you carry out could cause damage or injury
• Are visited by customers, meaning they could potentially injure themselves on your premises 
• Work in public, meaning your work could harm a customer, passer-by or property  

The purpose of public liability insurance is to protect you against the financial consequences of a claim that relates to your work.

A personal trainer, for example, could be sued by a client for an injury that happened during a session, even if it had nothing to do with your service and simply happened on the premises by chance (like a sprained ankle). 

What insurance do I need as a contractor? 

Contractors are likely to operate as sole traders, meaning they’re not likely to need insurance relating to employees.

As well as the basics we’ve mentioned already, here are a couple of other types of insurance that all contractors should strongly consider: 

• Tax liability insurance – You’ll be protected if HMRC choose to look into your accounts for matters such as IR35 enquiries, PAYE reviews and VAT issues.
• Travel insurance – While this isn’t strictly business insurance, taking out a travel policy to cover you, your possessions and any potential medical or legal costs during international work trips is a smart move.  

You can check out our detailed guide to contractor insurance needs for more information.  

Do I need to insure my work premises? 

If you rent or own a separate property for your business, such as an office or warehouse, you’ll need commercial property insurance to cover any claims for your work premises. 

Taking out a policy is likely to be a contractual obligation if you rent the premises, as your landlord needs assurances that they won’t be financially responsible for any damage you cause.  

Does my equipment need insurance? 

Your equipment is likely to be one of the most expensive things within your business, so it’s sensible to make sure it’s protected.

Business Contents Insurance (BCI) is a great starting point, as it will insure the items on your premises against accidental damage and theft. 

It's not a legal requirement, and isn’t necessary for all businesses, but it’s sensible if you have high-value equipment or large volumes of stock that you couldn’t afford to replace.  

However, if you have specialist or high-value equipment, you may need to take out a specialist policy to ensure you’ve got the right level of cover.

You can also insure intangible assets, like patents or data stored on your systems, that would cause you to suffer financially if they were lost.

If you’re not sure exactly what kind of cover you need, it’s always best to speak to an adviser or broker first.  

What are the consequences of not being properly insured?

Here are a couple of horror stories to show you exactly what we mean.

Australian company BizCover shared the terrifying tale of how a simple mistake on a marketing and design agency’s website cost the company AUD$1.2 million (£637,000).

A staff member incorrectly stated that one of the company’s clients had been deregistered and had stopped trading, causing the mining company to issue a claim for defamation and reputational damages.  

Even if your mistake isn’t quite so costly, it can still have an impact on your business. 

Another website shared the story of a handyman company that didn’t purchase the right insurance before installing a TV.

When one of the workers accidentally dropped it, the company had to buy the customer another one.  

If you’re just starting out, profit margins are likely to be small, meaning even a few hundred pounds of liabilities could tip you into debt. 

But even if there are no significant financial consequences of your mistakes, proper insurance can help you deal with any legal processes swiftly and comprehensively, minimising any negative reputational impact. 

Does my insurance cover everything I need? 

You've worked out which policies you need and have found providers offering a good deal.

Surely that’s all you need to do. Sadly, not all insurance policies were created equal.

Before settling on a provider or product, it’s essential to scrutinise the exact level of cover each policy offers you.  

For example, in the wake of the 2004 Hurricane Katrina in the US, many business owners had a nasty shock after realising their property insurance did not cover damage from floods. 

Livelihoods were lost due to not having the correct insurance. 

It's essential to sit down with an adviser if you don’t understand exactly what your policies cover to ensure you’re as protected as possible.  

Can an adviser help me sort out small business insurance? 

Thankfully, an adviser can help you work out exactly what you need to be fully covered as a self-employed individual or small business owner.

You can also pick the brains of an experienced accountant or independent financial adviser (IFA) to make sure your finances are in the best possible shape.