The Ultimate Guide to Business Insurance Coverage

The information provided in this article is for editorial purposes only and not intended as financial advice. SwitchPal is an Introducer Appointed Representative (IAR) of Seopa Ltd. (FRN: 313860).

If you own and run a business, you’ll already be familiar with the fact that sometimes things can go wrong. Accidents can happen, bad actors can cause disruption and vehicles can get damaged or stolen. Nothing can wind the clock back and undo the disruption caused by such incidents, but business insurance can at least ensure that you minimise any financial losses.  

What Is Business Insurance and Why Do You Need It?

Business insurance guards businesses against losses due to events that may happen during the regular course of business. It can help protect business owners and independent professionals against everyday risks, such as mistakes, damage to stock or premises, and legal costs. The range of services offered by insurance companies now also covers some industry-specific risks. 

Is Business Insurance a Legal Requirement?

The only type of business insurance that is mandatory under UK law is employers' liability cover, which is a legal requirement for most businesses that employ staff, even on a casual basis. However, you may find that regulators require you to have certain types of insurance in order to operate. 

Types of Business Insurance in the UK

Employers' Liability Insurance

If you're an employer or run a limited company with other directors working together, you must, by law, have employers’ liability insurance. This protects employers against the costs that must be paid or the compensation that may become due if an employee has an accident or is injured while working for them. This includes claims for industrial disease (an injury or sickness resulting from exposure, over a long period, to a workplace hazard). By law, you must have a minimum limit of £5m of cover, but most policies will insure you for £10m as standard. You must arrange cover for all employees, including those on temporary contracts, volunteers, and any previous employees you bring back during busy periods.

Public Liability Insurance

It's not a legal requirement, but public liability insurance should be a key component of your insurance protection. It covers you and your business against compensation claims made by the public in case of any injury or damage caused by your negligence. For example, a customer might visit your premises, slip over because of water on the floor and suffer serious back injuries. If the customer can prove that you were negligent in not mopping the floor, you have failed in your duty of care and will be liable for damages. Getting the right level of public liability insurance is vital. If you perform services or work for larger firms or the government, your contract with them may specify the minimum limit you need to have in place.

Property Insurance

Property insurance protects you against damage caused by fire, extreme weather conditions, theft, riot, vandalism and other incidents that occur which are beyond your control. This cover can be extended to cover ‘all risks’ and should cover you if your premises, contents, machinery or stock are damaged because of an event covered by the policy. Some of these risks may seem slight, but the costs are high enough to warrant consideration.

Business Interruption Insurance

Business interruption insurance covers you for loss of income during periods when you’re unable to carry out business as usual due to damage caused by a specific set of potential events that are detailed in your policy. Cover may include losses you suffer as a result of damage to your premises caused by incidents such as a fire, flooding or other physical damage. Some policies also give extensions to include losses that you suffer because you're denied access to your premises, while some may also provide cover against outbreaks of certain named diseases at your premises. The amount of cover you need will depend on the amount of time you think it will take for your revenue or turnover to recover to the level immediately before the loss. This is called the ‘indemnity period’ and it's very important to get it right. A broker can advise you here and help you avoid being underinsured or purchasing a policy with inadequate coverage.

Environmental Liability Insurance

Environmental liability insurance will usually cover you against loss or damage any third party incurs because of sudden and accidental incidents of pollution that are attributable to your business. The law, however, says that even if your business is not negligent in causing pollution, it can still be liable to pay for remediation, including restoring habitats such as rivers or lakes. As such, it’s a good idea for any business that deals with products that can cause pollution to consider environmental liability insurance to complement public liability insurance if you consider that your business could be at risk of causing something like this. 

Product Liability Insurance

Product liability insurance protects you and your business against claims brought by customers or other third parties if the products you make or supply prove to be defective and cause injury or damage. Manufacturers may also consider product recall insurance. This will cover the costs incurred if you need to recall your products due to defects or deficiencies.

Cyber Insurance

Cyber insurance covers losses related to damage to, or loss of, information from IT systems and networks. Policies typically include significant assistance with and management of the incident itself, which can be essential when your business needs to avoid reputational damage or comply with regulations. Cybercrime has been on the rise over the last few years, making this form of insurance more crucial than ever for individuals who store sensitive or private information.

You can also protect your business against business interruption losses caused by a cyber attack. For example, you might have a production line that is halted because your systems are compromised. Although there is no physical loss or damage, you've suffered a financial loss. If you suffer a cyber breach, having cyber insurance can make the recovery process quick and straightforward. Many insurers include as part of the insurance policy technical assistance with managing a breach, so you should always contact them as soon as you find a breach within your business.

Directors' and Officers' Insurance

Directors' and officers' insurance is designed to protect directors and senior managers against legal action they may face for mismanaging the business in a manner that results in financial loss to shareholders. But if small and medium-sized businesses are exclusively privately owned businesses with no external shareholders, why would you even need this form of insurance? The answer is that the cover will also protect you as a director in defending claims brought by the Health and Safety Executive (HSE) in instances of serious breaches of your duties, such as corporate manslaughter charges, for example.

Employment Practices Liability Insurance

Employment practices liability insurance is often bought alongside a directors' and officers' policy and pays the costs you might need to pay to defend you and your business against claims brought against you by employees or former employees for matters such as workplace discrimination, misconduct in the workplace such as harassment and bullying, or wrongful dismissal.

Professional Indemnity Insurance

Professional indemnity insurance provides financial protection when you or your business could be alleged to have given negligent advice to a third party. In some job roles, such as architects, surveyors, lawyers, financial advisers and accountants, a professional regulator may require minimum levels of professional indemnity insurance. Many professional indemnity claims involve complex legal disputes and can be very costly. Cover includes compensation payable to the third party and legal costs, up to a specified limit.

Motor Insurance 

Any driver who uses a business-owned motor vehicle for any purpose, whether for business or personal reasons, is legally required to ensure the vehicle is insured while in use. Third-party cover includes this basic requirement for third parties and extends to cover damage to third-party property. You can extend this cover to include fire and theft risks, or to a fully comprehensive cover that includes accidental damage to your vehicles. It is also important that you choose the right ‘class of use’. A delivery driver’s usage of their vehicle, for example, is very different to that of a taxi driver.

Trade Credit Insurance

Trade credit insurance protects you if you've delivered your goods under a form of trade credit to a customer and they fail to pay you or fulfil their end of the sales agreement. You’re covered for the financial loss should it become a bad debt, and it can include the provision for using a debt collection service to recover financial losses. This may be particularly important if you rely on a small number of customers, and if one of them lets you down, it would significantly reduce your profits and your ability to buy more stock.

Employee Insurance 

This isn’t so much a single insurance policy as one of several. Various insurance products will help provide financial security and medical assistance for you and your employees in the event of accidents or illness. They can also provide support services to help keep your employees healthy and at work, such as regular payments through personal accident and sickness cover, lump sum payments through group life or critical illness insurance, private medical insurance, or health cash plans to cover your employees' fees for eye tests, dental care or physiotherapy.

How Does Business Size Affect Insurance Needs?

The more you have to insure, the more it costs. The size of your business will be determined by your revenue and the number of employees you have in your business. Businesses with higher revenues and larger workforces will generally pay higher premiums.

What Types of Business Insurance Would I Need if I Work From Home?

Home insurance policies will not usually cover you in the event of anything going wrong when carrying out your business at home. If people visit your home for business purposes, then you’ll need public liability insurance, and you’ll need employers’ liability insurance by law if you employ others, regardless of whether you work from home or not.

Assessing Your Business Risks

As in any area of operations, financial reporting and compliance, risks need to be identified and analysed. Assessing risk helps you better achieve your business goals by guiding you on how to manage pitfalls. Managers must determine the level of operations, financial and compliance risk they are willing to assume. Assessing risk enables managers to reduce unwanted surprises proactively.

A risk is anything that could jeopardise the achievement of an objective. Risks must be comprehensively identified for each aim at the department level and the activity or process level. Both external and internal risk factors must be considered. Usually, several risks can be identified for each objective. Conducting this type of risk assessment is crucial for your insurance needs, as there may be risks that your business requires protection against, of which you’re not already aware.  

Insurance Requirements for UK Businesses

There’s only one policy you’re legally required to have as a UK business, and that’s employers’ liability insurance. If you don’t have EL, the Health and Safety Executive (HSE) can fine you £2,500 for every day you go unprotected. So, flouting the law could be costly.

That’s not to say that there won’t be other types of insurance which may be suitable for you to trade without disruption. Trade bodies or potential clients, for example, may require it, or it may just make sound common sense to do so. This is often called “recommended coverage”. Don’t forget that two factors will primarily determine your specific insurance needs: your business sector and your business size.

Comparing Providers and Policies

There are some common reasons why pricing might differ on your business insurance quotes. An insurance company might be offering a lower price than others because:

• It has clients with fewer claims (better customers and more conservative underwriting).

• It has fewer expenses (more efficient or lower overheads).

• It doesn't pay out as many claims (worse claims service).

• It doesn't offer the same coverage as other insurance companies (inferior product).

• It isn't offering a sustainable price (temporary pricing).

Key factors to consider when comparing what a policy is offering may include:  

Coverage - What are you being covered for? Two insurance policy quotes might look similar, only for you to find that one of them has a considerably wider range of coverage than the other. 

Exclusions -  What is excluded from the policy? One insurance policy might look cheaper than another, but you may find that there are extra exclusions which make claiming on it more difficult. 

Premiums - How much does it cost? The cost is probably the biggest single factor to take into account when comparing insurance quotes. But remember that the cheapest policy may well not be the best one for you, and could leave gaps you actually need covered. 

Common Pitfalls to Avoid

There are common pitfalls to avoid when considering your insurance needs. Underinsuring is an obvious risk, but you should also factor in overinsuring. Paying out for products that you do not need and never use is a waste of money. Overlooking important coverage areas is also a potential risk. This is why it is such a good idea to precede dipping your toe into the business insurance pool with a full risk assessment or audit to establish exactly what your needs are. 

Should I Buy Standalone Policies or a Bundled Business Insurance Package?

Bundled business insurance packages can be a great way to save money. By bundling policies, insurers can offer a lower price for a package than they would for standalone policies. But this isn’t always the case. You might find that bundled business insurance packages come with a whole heap of policies that you don’t need, and that picking a small number of standalone policies to create a more bespoke package works better for you. 

Although it may seem daunting at first, there are solid reasons why the business insurance marketplace has experienced significant growth in recent years. With a broader range of policies available than ever, you’ll be more likely to be able to find some that fit your exact business needs and give yourself the peace of mind to be able to continue to trade without worrying about what might happen should something go wrong. Start evaluating your needs now, and you could save yourself a lot of time, effort, and money in the future.