Business insurance: the basics

Getting the right insurance is essential for any new business. 

You’re legally required to have some types of cover – such as motor insurance for company and personal vehicles or employers’ liability compulsory insurance if you have staff.

It’s a sensible business decision to insure your premises, fixtures, fittings, equipment and stock against disasters such as fire, flood and theft which could prove highly damaging to your operations.

Some businesses may also want to consider insuring against legal liabilities and buying life and health cover for staff.

This guide sets out the insurance required by law and the other types of cover a new business may require. It also explains how to get advice from a broker and gives details of insurance for homeworkers.

The purpose of insurance

Insurance is a contract in which an insurer promises to pay the insured party a sum of money if one or more specified events occurs in the future, in return for regular small payments – known as premiums. It reduces your business’ exposure to the effects of particular risks. These could include:

• damage to, or the loss of, physical assets such as your premises or equipment
• illness or death of key members of staff
• compensation claims against the business or its directors by employees or customers
• business interruption caused by external events such as terrorism
• volatility and cash flow pressures following an incident

Almost all businesses buy insurance, but the type and amount of cover purchased will vary according to the particular risks your business is exposed to and how much risk you are willing to personally bear.

Your business is legally obliged to buy certain insurances, such as employers’ liability. For more information, see the page in this guide on insurance you must have by law. Unless you are obliged or required to buy a particular insurance, it is up to you to decide whether to buy it and what limit of indemnity (protection) is appropriate.

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Get the right insurance for your business needs

New businesses are likely to require a number of different types of insurance. Some are compulsory:

• employers’ liability insurance cover – worth at least £5 million – for most types of employees
• motor insurance if your business uses vehicles on the road or other public places
• professional indemnity insurance for businesses in professions such as law and accountancy

Other types of insurance your business may require include:

• buildings and contents insurance
• equipment insurance
• key person insurance and health insurance for the owner-manager
• life and health insurance for employees
• directors’ and officers’ liability insurance
• business continuity or business interruption insurance
• public liability insurance
• product liability insurance
• goods in transit insurance
• credit insurance
• fidelity insurance – which protects against dishonesty or theft by staff
• travel insurance
• legal expenses insurance
• money policies

You can read about business insurance on the Association of British Insurers (ABI) website- Opens in a new window. You can also use our interactive tool to work out which forms of insurance you should have for your business.

It’s important to monitor your level of insurance cover as your business develops. Schedule an annual review to consider how your needs have changed. Weigh up the cost of the premiums against the level of risk you’re running.

Using brokers

An independent insurance broker can help you select the right level of cover, assess which risks pose the greatest threat and find the best deal.

Find an insurance broker on the British Insurance Brokers’ Association (BIBA) website- Opens in a new window, or search for an insurance broker on the Institute of Insurance Brokers (IIB) website- Opens in a new window.

Some brokers charge a fee for their services but most obtain payment from the insurance companies they tell you about. If you purchase products or services from insurance intermediaries, you have the right to ask how much commission they receive for selling the product or service to you.

See our guide: choose an insurance adviser and present your risk.

Although you can buy cover directly from insurance companies, it’s generally best to use a broker, as they can provide advice and assess your insurance needs. If you choose to deal directly with an insurer, check they are a member of the ABI. Consult member listings on the ABI website- Opens in a new window.

It is also worth asking your broker what Professional Indemnity or Errors and Omissions insurance they have in place themselves, in case an error by them leads to you not having the right coverage when you claim.

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Insurance you must have by law

Some types of business insurance are a legal requirement.

Most employers must have employers’ liability compulsory insurance (ELCI). This protects your business against claims from employees for accidents or sickness they may suffer as a result of working for you. For detailed information, see our guide on liability insurance or download a guide on ELCI from the Health & Safety Executive (HSE) website (PDF, 190K)- Opens in a new window.

If your company uses motor vehicles on the road, you must purchase at least third-party motor insurance. This covers your business’ liability for personal injury to someone else or damage to property. You may also want to purchase comprehensive insurance to cover damage to or theft of your own vehicles. Sometimes employees use their own vehicles in their job – make sure that insurance for all such vehicles has been extended to include business use.

Businesses in certain professions – such as the law, accountancy and financial services – are also legally required to take out professional indemnity insurance. This protects against legal liability for losses suffered by customers as a result of negligence. See the page in this guide on liability and professional indemnity cover.

If you’re in any doubt as to whether you’re required to have professional indemnity cover, contact your trade association or professional body for advice. You can find details of your industry’s trade association on the Trade Association Forum website- Opens in a new window.

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Insure against common business risks

All businesses are vulnerable to a range of common threats – from fire, theft and equipment failure to unpaid bills, loss of cash or cheques and damage to goods in transit.

Types of insurance to consider

• All-risks buildings and contents insurance protects against a range of risks, such as fire, flood and theft. The right level of cover is likely to depend on whether you own or lease your premises and the value of your buildings and contents.
• Equipment can be insured for the cost of replacing an item or its current worth, taking wear and tear into account. You can also get policies to protect machinery and IT equipment against breakdown.
• Business interruption or business continuity insurance compensates you for costs incurred and loss of profits after a disaster such as fire or flooding or an IT system failure.
• Goods in transit cover protects the value of goods lost or damaged when in your vehicle or sent by a carrier.
• Credit insurance covers you against the risk of debtors becoming insolvent. But you’ll need to bear part of the risk yourself.
• Legal expenses insurance covers the costs – such as solicitors’ fees and court costs – of defending a legal action.
• Fidelity insurance protects against losses caused by dishonesty or theft by staff.
• Money policies cover cash, cheques and stamps. Different levels of cover apply depending on whether money is on your premises, in safes or transit.
• Travel insurance will be required if you or your employees travel abroad on business.

See our guide on how to insure your business and assets – general insurances. You can also read about business insurance on the Association of British Insurers (ABI) website- Opens in a new window.

Make sure you understand the terms used in your policy. You can read definitions of common insurance terms on the British Insurance Brokers’ Association (BIBA) website- Opens in a new window.

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Liability and professional indemnity cover

Some forms of insurance protect against your legal liability for any damage or harm caused by your business, its products or services to customers or the public.

Awards for damages can be high, and could put you out of business, so you need to consider your business’ exposure to these risks carefully.

Types of insurance to consider

• Public liability insurance covers damages and legal costs resulting from injury, death or damage to property caused to members of the public by any of your business activities. You’re more likely to need this if customers or the public visit your premises, eg if you run a shop. It is a legal requirement for a few businesses, such as horse-riding stables.
• Product liability insurance protects your business if anyone is hurt or killed or their property is damaged by goods you have made, sold or repaired. You could be held liable for damage or injury caused by defects in your products’ design or manufacture even if you haven’t been negligent. It may be worth considering if you work in a potentially high-risk sector, such as the food, toy or electrical industries. Product liability cover is often included with public liability insurance.
• Professional indemnity insurance covers businesses giving advice or providing services in a professional capacity. It protects against legal liability for losses suffered by customers as a result of negligent advice. It’s common in a number of areas such as management consultancy, IT consultancy, engineering and design. In some professions – such as accountancy, law and financial services – it’s a legal requirement.
• Directors and officers of a limited company can be held personally liable for their actions in certain circumstances. You can purchase insurance to provide cover against this liability.

For information on these types of insurance, see our guide on liability insurance. You can also read about business insurance on the Association of British Insurers (ABI) website- Opens in a new window.

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Protect your people with insurance

Small businesses are often dependent on the people who work for them – particularly the owner-manager. As a result you should assess whether you need insurance to protect yourself and your business in the event yourself or your key staff are unable to work.

You may also want to consider offering private health insurance or critical illness cover to attract and retain key staff.

Different forms of cover

• Key person insurance compensates your business up to a pre-agreed limit for the loss or unavoidable absence of crucial personnel – including the owner-manager. It may be appropriate if your business depends on a few employees.
• Critical illness cover pays a sum of money to specific employees or the business owner in the event of a serious illness such as a heart attack or stroke.
• Incomeprotection insurance protects individuals by paying their salaries while they’re unable to work.
• Private health insurance funds private healthcare for specific employees. As well as being an extra benefit of employment, it could help them to return to work more quickly after an illness by paying for rehabilitation treatment.
• Life insurance pays out a lump sum or regular income to the beneficiaries if an employee dies.
• Permanent health insurance provides benefits if an employee suffers from a prolonged illness or disability.
• Personal accident cover pays fixed benefits if an employee dies or suffers loss of a limb or sight following an accident.

Although some of these may be available through a general insurance broker, it’s generally best to purchase these types of cover from an independent financial adviser (IFA) who will be able to take account of your overall financial situation and planning. You can find an independent financial adviser on the Unbiased.co.uk website- Opens in a new window. If you do choose to deal directly with an insurer, it’s worthwhile checking that they are a member of the Association of British Insurers (ABI). Check that an insurer is a member of the ABI on the ABI website- Opens in a new window.

For information on these types of insurance, see our guide on how to insure your business – people, life and health.

You can also read about business insurance on the ABI website- Opens in a new window.

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Insurance for businesses set up from home

If you run your business from home, you shouldn’t assume that your existing household insurance covers you. You need to assess your business insurance needs separately. For example, your existing policy may not extend to cover:

• the full value of business equipment
• public liability if customers or members of the public visit your place of work

Talk to your current insurers and explain your plans. They may require an additional premium on your current insurance, changes to your home – such as the installation of a safe or partitions – or cover for new areas of risk and liability.

If you don’t notify your insurers in advance, you may find that your business isn’t adequately insured – and you may even risk invalidating your household insurance policy.

You must also remember to notify the provider of your motor insurance if you intend to use your private vehicle for business purposes.

There are special insurance packages for homeworkers – ask your broker for more information.

You can find an insurance broker on the British Insurance Brokers’ Association (BIBA) website- Opens in a new window, or you can search for an insurance broker on the Institute of Insurance Brokers (IIB) website- Opens in a new window. If you choose to deal directly with an insurer, it’s worthwhile checking that they are a member of the Association of British Insurers (ABI). Check that an insurer is a member of the ABI on the ABI website- Opens in a new window.

For more information on the implications of working from home, see our guide on how to use your home as a workplace.

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Losses and claims

If you have suffered a loss that is covered by insurance, you must notify the insurer as soon as possible. Legally, it is up to you to show that you have a valid claim under your policy. This means:

• showing that you have suffered a loss
• showing that the loss is covered under the insurance policy
• quantifying the amount of the loss

Your insurance policy should spell out how much time can pass between the incident occurring (or you becoming aware of it occurring) and you notifying the insurer. If you report later than this, the insurer may refuse to pay.

It is helpful to provide as many details as possible so the claim can be settled quickly – for example, by taking photographs of the incident. You could consider keeping disposable cameras at sites or asking employees to use camera phones to record this information. You may also have to provide proof of:

• ownership of items lost or damaged
• the value of items lost or damaged
• the cost of emergency repairs
• the cost of permanent repairs

You may also need a police crime reference number. Failing to provide enough information can also lead to your claim being refused.

Large or complex claims

If your claim is large or complex, the insurer will probably appoint a loss adjuster to negotiate the settlement. Although appointed and paid by the insurer, the loss adjuster must remain impartial. They should also advise on what to do after the incident, including which specialist companies can carry out the repair work.

If you feel that the loss adjuster has reached an unfair settlement, you may want to appoint a loss assessor to act on your behalf in negotiations.

Learning from losses

If you have had a fire, flood, a burglary or property damage or loss, you should consider improving your risk control and security.

Your insurance company may ask you to take steps to prevent the loss occurring again. It will also help when you renew your insurance if you can prove you have done this.

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Reduce your risks and premiums

The greater the risk you need to insure against, the higher your insurance premium is likely to be. For example, if you’re a tree surgeon, working from a height and using power tools, personal accident insurance is likely to cost you far more than if you work in an office.

Managing the risks your business faces is therefore key to getting lower premiums. Look at the risks and work out what you can do to reduce them.

You could consider:

• improving security with additional locks, closed circuit television cameras or alarms
• introducing management systems to help you meet health, safety and environmental requirements – see our guides on how to set up a health and safety management system and environmental management systems (EMS) – the basics
• drawing up a business continuity plan, setting out how your business will continue in the event of a major incident – see our guide on crisis management and business continuity planning

A strong health and safety record can really help you reduce your premiums for a number of kinds of insurance, as insurers are likely to be particularly concerned about these risks. For information on managing these risks, see our guide on managing the risks in your business.

There are a number of other steps you can take to reduce premiums. You may want to increase the excess – the part of the claim you have to pay yourself – in return for a lower premium. Consider, too, whether it’s worth making small claims if something does happen, as they could push your premium up.

An insurance broker will be able to help you identify ways of managing your risk. You can find an insurance broker on the British Insurance Brokers’ Association (BIBA) website- Opens in a new window or you can search for an insurance broker on the Institute of Insurance Brokers (IIB) website.

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Checklist: buying insurance for your business

Here are the key actions you need to take when considering your business’ insurance needs and buying policies:

• Appoint your insurance broker or insurance adviser – preferably one who is experienced in your particular trade. Make sure you get full details of how they are paid and who to contact.
• Carry out an assessment of hazards and risk exposures in your business.
• Review your standards of loss control – how secure are your premises?
• Review your business continuity arrangements – how will your business carry on in the event of, for example, a fire at your premises or loss of a key member of staff?
• Decide on the level of cover you would like against each risk you have identified.
• Collect and review information on your planned insurance needs to present to insurers.
• Compile insurance underwriting data – for example, the values of insured equipment.
• Compare the quotes and conditions you have received via your broker.
• Buy insurance and agree service level agreements with the insurance company.
• Agree on reporting procedures for losses, accidents and claims.
• Keep in touch with the broker and insurer and regularly review the arrangement, especially if circumstances change – for example, if your business expands.
• Keep insurance policies and any information related to claims in a safe place.

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