What insurance does a small business actually need?

If you run a small business, insurance can feel like a maze of jargon and sales calls. The good news is that very little of it is actually compulsory. The rest is about working out which risks could seriously hurt your business, and deciding which of those you would rather pass to an insurer. This guide walks through the covers you are legally required to have, the ones clients and regulators often insist on, and the common optional covers worth thinking about.

I don’t recommend particular insurers or policies, and nothing here is a substitute for proper advice on your own circumstances. The aim is to help you ask the right questions.

Insurance the law requires

Employers’ liability insurance

If you employ people, you will almost certainly need employers’ liability (EL) insurance under the Employers’ Liability (Compulsory Insurance) Act 1969. It pays compensation if an employee is injured or becomes ill because of their work for you. According to GOV.UK, you must:

• get EL cover as soon as you become an employer;
• be covered for at least £5 million, with an authorised insurer; and
• display your EL certificate where employees can see it (a website or staff intranet is acceptable), and show it to inspectors if asked.

GOV.UK says you can be fined £2,500 for every day you are not properly insured, and £1,000 if you fail to display the certificate. There are limited exemptions, for example where your only employees are close family members, or are based outside England, Scotland and Wales. The exemptions are narrow and the detail matters, so check the Health and Safety Executive’s guidance before deciding you don’t need cover. “Employee” can also include people you might not think of, such as casual or part-time staff.

Motor insurance

Any vehicle used on a public road must have at least third-party insurance (see GOV.UK on vehicle insurance). The trap for small businesses is use. A personal car policy covering social, domestic and pleasure use plus commuting will not usually cover driving to see clients, carrying goods or making deliveries. If you or your staff use vehicles for work, tell the insurer exactly how they are used.

Insurance you may need because someone else requires it

Professional indemnity

Professional indemnity (PI) insurance covers claims that your advice, design or professional service was negligent and caused a client financial loss. It is not required by law for most businesses, but many professional and regulatory bodies make it a condition of membership or authorisation, and many clients write it into their contracts. Consultants, accountants, architects, surveyors, IT contractors and designers commonly carry it.

One point that catches people out: most PI policies are written on a claims-made basis. The policy in force when the claim is made responds, not the one in force when the work was done. If you retire or close the business, you may need “run-off” cover for claims that arrive later.

Public liability

Public liability insurance covers claims from members of the public or customers who are injured, or whose property is damaged, because of your business. It isn’t compulsory, but councils, event organisers, landlords and larger clients very often ask to see a certificate before you can work for them or on their premises. For tradespeople, market traders and anyone who visits customers’ homes, it is one of the first covers to consider.

Common optional covers

• Product liability: claims caused by products you make, sell or supply. Often combined with public liability.
• Buildings, contents and stock: damage to premises, equipment and stock from fire, flood, theft and similar events.
• Business interruption: lost income and extra costs after an insured event stops you trading. Pay attention to the indemnity period, which is how long the policy will pay for.
• Tools and goods in transit: useful if your equipment or stock spends time in a van.
• Cyber: help and costs after a data breach, ransomware attack or similar incident. Worth considering if you hold customer data or rely on online systems.
• Legal expenses: the cost of certain legal disputes, such as employment or contract disputes, usually only where the claim has reasonable prospects of success.
• Directors’ and officers’ liability: protects company directors personally against certain claims about the way they have run the business.
• Key person cover: protects the business financially if someone essential to it dies or becomes seriously ill.

Working from home?

Many businesses start at the kitchen table. Standard home insurance policies often restrict or exclude business use, business equipment, stock kept at home and visitors who come for business reasons. Tell your home insurer what you are doing; it may be able to add cover, or you may need a separate policy.

Telling the insurer everything that matters

Business insurance works differently from consumer insurance when it comes to disclosure. Under the Insurance Act 2015, a business has a duty to make a “fair presentation” of the risk. Broadly, that means disclosing every material circumstance that you know or ought to know, in a reasonably clear and accessible way, not just answering the questions you are asked. If you get it wrong, the insurer’s remedies depend on whether the failure was deliberate or reckless and what it would have done had it known the truth. Consumers have a lighter duty, which I explain in telling your insurer the truth.

Practical tips when buying

• List the risks first: what could stop you trading, cause a big claim against you, or wipe out your equipment or stock?
• Check your contracts and any membership or licensing rules for insurance requirements, including minimum limits.
• Check that any firm you deal with is authorised on the FCA Financial Services Register. A broker can shop around for you; buying direct is also an option.
• Read the policy wording, not just the summary. Look at the limit of indemnity, the excess, exclusions and any conditions you must comply with, such as alarm or security requirements.
• Diary your renewal date and review your cover each year as the business changes.
• If a claim or complaint goes wrong, you may be able to use the Financial Ombudsman Service. See how to complain about an insurer.

Insurance is rarely the most exciting part of running a business, but getting the basics right means one bad day doesn’t have to become the end of the business.

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