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Small business insurance: An essential guide

When starting your small business, taking out a comprehensive package of insurance policies should be pretty near the top of your setup checklist.

However, many business owners leave insurance until the last minute or, worse still, fail to take out adequate cover for their needs, perhaps in a misguided attempt to reduce overheads or because they’re overwhelmed by the sheer range of insurance types available.

Whatever the reason, if you don’t have appropriate protection and disaster strikes, you’ll be left fully responsible for covering any resulting legal, compensation, or recovery costs. At best, you’ll take a major financial hit, at worst, you could be forced to shut up shop.

The only way to avoid this worst-case scenario is to strategise. That means assessing the specific risks your business faces, understanding the different types of insurance available to you, and taking out exactly the right cover for your needs. That way you’ll have peace of mind and you won’t be paying for unnecessary cover.

This page is your jumping off point for learning about all the different types of small business insurance, from legally required cover like employers’ liability to niche types that provide essential protection for businesses operating in specific sectors – click on the links to learn more about each type. We also delve into how much insurance costs, how to choose your level of cover, and how it works if you need to make a claim.

  1. Why do small businesses need insurance?
  2. What types of insurance does my small business need?
  3. Commercial combined insurance
  4. How much does small business insurance cost?
  5. How does small business insurance work?
  6. How much cover do I need for my small business?

Why do small businesses need insurance?

There’s no two ways about it: whether a customer slips on your shop floor or a cyber criminal gains access to your sensitive data, if you don’t have suitable insurance, you could end up forking out astronomical sums to cover legal or compensation costs, or to recover or replace lost or damaged property.

For a small business that’s operating on tight margins, these costs are not only punishing, they’re potentially fatal.

Every business has a different risk profile and requirements, and the onus is on you to determine not only the right types of insurance, but also the level of cover you need in order to be adequately protected. This means assessing the maximum possible payout you’ll have to make in any given scenario, whether that’s to cover legal fees or replace stolen tools, because if your level of cover isn’t sufficient, it will be effectively useless.

What’s more, the threats small businesses face are ever-changing. For example, the chance of falling victim to cyber crime has never been greater, with smaller businesses often seen as soft targets by hackers due to their lower investment in digital security. In light of this, even if you already have insurance, it’s always worth reassessing.

What types of insurance does my small business need?

Below, we explain every type of insurance available to your business, from compulsory cover to recommended cover, and specialist varieties for specific industries.

Compulsory

Employers’ liability insurance

Employers’ liability insurance is the only type of insurance that you’re required to have by law. It provides cover for any legal or compensation costs resulting from a claim made by a former or current member of staff who has been injured or becomes ill as a direct result of working for your business.

Even if you have only one member of staff, you must have employers’ liability insurance of at least £5m. If you fail to have adequate cover, the Health and Safety Executive (HSE) can fine you £2,500 for every day you remain unprotected.

The only exceptions to this are if you employ only members of your own family or if you run a publicly funded organisation.

Business car insurance

If you primarily use your vehicle for business purposes, you must have business car insurance. For example, if you drive between multiple work locations, use your car to visit clients or move stock, or transport colleagues or allow colleagues to drive you car, then you must be insured under a business car policy.

If you get into an accident while using your car for any of the above purposes, even if you have personal cover, it will be classed as driving without insurance.

You must also ensure you have the right class business car insurance. Class 1 covers everyday use like driving between multiple work locations. Class 2 is the same but allows you to add another named driver to your policy. Class 3 covers you for activities like door-to-door selling, where you sometimes need to transport goods.

Note that, if driving is integral to your work, as is the case with delivery drivers, couriers or taxi drivers, you will need commercial car insurance, which is not the same as business car insurance.

Recommended

Public liability

Public liability insurance covers your business for claims made by members of the public if they are injured or their property is damaged on your business premises or by work carried out by you or a member of your team. While it’s not a legal requirement, you may encounter potential clients that won’t work with you unless you have public liability insurance up to a certain level.

Cyber insurance

Cyber insurance protects your business against the ever-growing threat of cyber crime. It will cover you for compensation, fines, and legal claims in the event of a hack or data breach, and can even provide rapid IT, PR, and legal support to secure your systems against further damage and protect your reputation.

Professional indemnity

If you offer professional services or advice, we’d strongly recommend you take out professional indemnity insurance. It protects you in situations where a client has experienced financial loss as a direct result of your services. Again, some clients may insist you have professional indemnity insurance before agreeing to work with you.

Product liability

If you design, manufacture, or supply products, you should definitely take out product liability insurance, which covers you against claims made in the event that your product injures somebody or damages their property.

Recommended insurance for senior leadership or significant people

Self-employed income protection

Self-employed income protection ensures you receive a monthly income even if you’re unable to work due to an illness or an accident. The financial support provided is based on your typical monthly outgoings, such as bills, mortgage or rent payments, and other everyday costs. The Citizens Advice website has a good overview of this kind of cover.

Management liability insurance

Management liability insurance, which is sometimes called directors’ and officers’ liability insurance, covers senior managers for any fines, legal fees, or compensation arising from a claim made against them. This could be anything from errors in company finances to health and safety issues that affect employees.

Key person insurance

Key person insurance guards your business against the death, terminal or critical illness of anyone who has a crucial role in the day-to-day functioning of your company. For example, if their incapacity would result in loss of sales or profit, or a disruption of strategy.

Recommended insurance for buildings and belongings

You should also take out insurance to safeguard the physical assets of your business.

Equipment

Covers repair and replacement costs for things like communications equipment and other tech, as well as tools and portable machinery. This could be anything from a laptop or mobile phone to a power drill or hair tongs.

Tools insurance is sometimes included as part of equipment insurance, but you should check this if tools are integral to your trade. You may need to take out a specific tools insurance policy for specialist equipment.

Buildings

Will have you back up and running again as soon as possible if your business premises are damaged by an event like a fire or a flood. This often includes equipment breakdown cover, which will repair and replace things like boilers or other essential equipment, unless they’re not working due to general wear and tear.

Contents and stock

Covers you for damage to, or loss of, any possessions that are stored at your business premises, such as fixtures and fittings, or stock. Some providers offer optional extras to cover the deterioration of your goods or to protect them while they’re in transit.

Business interruption

Business Interruption Insurance

You may experience an unexpected disaster that is catastrophic enough to prevent your business from being able to operate as usual for an extended period of time. Business interruption insurance covers you for any loss of income you suffer as a result of forced closure that is not your fault. It is typically available as an add-on to other types of insurance rather than as a standalone policy.

Recommended insurance to protect your finances

Trade credit insurance

Covers you if your customers fail to, or are late to, pay their debts. For example, if your customer suddenly enters insolvency, leaving them unable to settle a £100,000 debt to your business, you could claim the outstanding amount on your trade credit insurance policy.

Money insurance

Cash is becoming less common, but many businesses still rely on handling a significant amount of physical currency. Money insurance protects you in the event that your cash is lost or stolen while in transit or on your premises.

Industry specific

Industry specific insurance policies combine various types of cover that are tailored to the needs of your business. Taking out these kinds of packages of cover can be a lot more efficient than buying lots of separate policies.

  • Retail insurance – retail insurance is suitable for everyone from butchers and bakers to grocers and salons and online stores. It can include public liability, buildings, stock and contents, and business interruption cover
  • Personal trainer insurance – designed specially for people who provide fitness instruction to members of the public, personal trainer insurance often includes public liability, equipment, and professional indemnity cover at a minimum
  • Jewellery business insurance – jewellery business insurance has to include adequate cover against the loss, damage or theft of potentially invaluable stock, as well as other types of insurance you’d expect a retail business to have. Bear in mind that the requirements might be slightly different for an online jewellery business
  • Chauffeur insurance – chauffeur insurance is tailored to drivers who transport passengers in luxury vehicles – standard business motor insurance won’t cut it
  • Recruitment insurance – from liability to indemnity cover, recruitment insurance is designed to protect you against the specific risks you’ll face as a recruiter
  • Photographer insurance – with all that expensive gear and regular encounters with the public, you’ll at least need equipment and public liability insurance as a photographer
  • Events planner insurance – from cancellation to injuries and property damage, events planners face numerous risks that a dedicated insurance policy can protect you against
  • Beauty business insurance – whether you’re a hairdresser or a nail technician, you must have a beautician insurance policy that at least includes liability cover – just be careful to review what’s excluded and restricted

Commercial combined insurance

Above is a comprehensive list of the many types of insurance that small businesses can use to protect themselves, as well as a number of industry specific policies.

Another option you have is to take out commercial combined insurance, which provides cover for many of the most common liabilities businesses face and can be tailored to your requirements.

Taking out a combined policy from a single provider is one of the most practical and cost-effective ways to ensure you are protected against a multitude of risks. To take out commercial combined insurance, speak to your insurance provider, who will be able to tailor your policy to your exact needs.

How much does small business insurance cost?

Many factors influence the overall cost of your business insurance policy, which is known as your premium. Essentially, if you’re a small household goods retailer, your insurance premium will be much lower than that of a larger business with high profile clients that operates in a risky sector.

When determining your premium, your business insurance provider will take into account:

  • The nature of your work and specific risks you face
  • The size of your business
  • Your claims history
  • The level of cover you choose
  • Your turnover
  • Your customers or clients
  • Optional cover types

How does small business insurance work?

If a disaster occurs, you need to make a claim, which is a formal request from your insurance provider to make good on your policy. But don’t expect an immediate payout – first, they need to investigate the reasons behind your claim in order to check that it is valid.

To make a claim, you’ll need to provide:

  • Your policy number
  • Contact details for anyone involved
  • Key details about the claim
  • Any evidence to support your claim – for example, this could be photographs of damage or proof of loss of earnings from your accounts – the more you can provide the better

Next, you’ll have to wait for your insurer to review the evidence and decide on the outcome. More complex claims will take longer to settle, and you’ll cause delays if you fail to provide any necessary information up front.

If they decide to payout, you should expect to receive your money within five days. And don’t forget, you’ll usually have to pay an excess, a pre-agreed amount towards the cost of the claim that’s designed to deter people from making fraudulent claims. After a successful claim, don’t be surprised if you find that the cost of your policy increases upon renewal.

How much cover do I need for my small business?

The main thing to bear in mind when deciding on how much cover you need is that it’s better to have too much cover than not enough. While you don’t want to be paying for more than you need, you also don’t want to be in a situation where your policy isn’t sufficient to cover the costs you’ve ended up with.

Some types of insurance come with a certain level of cover as standard or fall within a particular range. For example, professional indemnity typically starts from £1m and goes up to £5m.

Other types of insurance are more specific to your circumstances and the value of what you’re trying to protect. For example, your contents policy must be based on an accurate assessment of the total cost of your business’ belongings.

Final thoughts

Small business insurance can be an intimidating topic for a fledgling entrepreneur, but it doesn’t have to be. Set aside some time early on in your business journey to sort out the correct cover, because the sooner you do it, the sooner you can achieve the peace of mind you need to get stuck into the more fulfilling aspects of running and growing your new enterprise.

Case Study: The small business insurance journey

Lee Cullen, CEO and founder of creative agency No Brainer, discusses the key cover he put in place for the business.

Lee Cullen established No Brainer with co-founder Gary Jenkins in 2015
Lee Cullen established No Brainer with co-founder Gary Jenkins in 2015

Along with my colleague Gary Jenkins, I established No Brainer in April 2015. Back in December 2014, I left a full-time position at a Cheshire PR agency to become a freelance practitioner and Gary had done the same thing about six months earlier, leaving his role as vice president of communications at a leading UK financial services provider. In the months that followed we were able to collaborate on a number of projects as independent consultants, and in the background we started to develop the brand and ethos of our business.

When we decided to pursue No Brainer, we felt that our understanding of the convergence of PR, marketing, social and SEO – and the lack of traditional agencies delivering it – meant that there was a gap in the market. That’s where the left and right brain concept of No Brainer was born – intelligence-led communications and creative solutions to business problems or opportunities, or as we call it ‘Creative Intelligence’.

With our combined experience working with and for agencies of varying sizes, we’d often talked about how we’d do things differently if we ran our own business. I’d reached a point in my career where I genuinely felt I could do things better and we wanted to create an agency that really delivered for its clients and built strong and lasting relationships with them.

Getting covered from the beginning of the journey

Having the right insurance in place for our business was always going to be important, especially as we’re working with some major UK brands, so it was something we ensured was ready from the very beginning of No Brainer.

The key insurance policies we’ve had in place are employers’ liability insurance, public liability insurance, and professional indemnity insurance.

We were taken through things step-by-step over the telephone to ensure we had the right policies and the right level of cover in place for our business and we review these every year to ensure they’re up to date and reflect where we are as a business. The process was quite straightforward.

We work in the insurance industry right now with a few clients of ours, so we understand the value of protection. You might say we would say this, but there are some fantastic deals out there if you look hard enough. I think it’s important – as with all policies like this – that you spend the time making sure the cover is adequate for what you need, whilst affordable and giving you peace of mind.

No claims as of yet

We’re fortunate that we’ve not had to call upon our insurance policies during our first two years in business. We’re an experienced team and we have a number of processes in place to ensure the accuracy of our work but of course we appreciate mistakes can still happen.

As we’re in the business of reputation management, a lot of our work involves the creation of content in the form of news releases, social media content, video, imagery and other formats. We’re sharing all of that with a range of key influencers and journalists across multiple industries on behalf of some major brands, which is why things like professional indemnity insurance are so important for us.

Our expertise lies in PR, social media and content marketing so like most other business owners in our sector, our time is much better invested in managing the day-to-day operations for our clients.

I think we’ve always been quite good at identifying the things we need help with and pulling in the right people when required. Business insurance definitely falls into this category and we took advice from a couple of trusted contacts before we considered the right policies, the right level of cover and the right way to go about sourcing them.

For small business owners in particular, I think there’s a tendency to try and manage everything in-house, which is probably down to our entrepreneurial spirit! But I’d definitely advise other business owners in our sector to seek the help of an expert to ensure the policies they take out match their requirements. Trying to self-manage something like that could leave a business paying too much in premiums or worse, exposed to unnecessary risk.

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