Do I Need Business Insurance?
Regardless of the size or type of your business, it is very likely that you will need some form of business insurance. The right policies can provide comfort in the knowledge you will be covered in the event of any unforeseen disruptions, losses or claims that might be lurking around the corner.
When running a business, not everything is in your control. Business insurance can help mitigate this fact, giving you the peace of mind that, if something does go wrong, you should be covered financially.
So whether you are a big business, a small business, a sole trader or self-employed, chances are you should consider some form of business insurance.
However, it can be difficult to navigate the numerous commercial insurance policies that fall under this umbrella, and to know exactly which ones are the right fit for your business.
That is why we have put together a guide to when you need business insurance, why you need a good set of insurance products, and how much business insurance is appropriate.
What business insurance do I need?
There is no ‘one size fits all’ form of business insurance. Rather, the term covers a collection of products that can be used to try to safeguard your business from the unexpected costs associated with various incidents and outcomes.
These products range from dealing with everyday human error to the potential loss of income if your business cannot perform its usual operations due to an unforeseen event, and all the legal costs involved.
What business insurance you need, or legally require, will therefore depend both on your size and sector.
» MORE: What is business insurance?
Is business insurance mandatory in the UK?
Employers’ liability insurance is the only form of business insurance that is legally required in the UK.
The moment you become an employer, you must take out employers’ liability insurance from an authorised insurer, with cover of at least £5 million. If you fail to do so, you can be fined up to £2,500 a day until you are adequately insured.
However, with other forms of business insurance, different sectors and industries have different expectations. The most notable of these is around professional indemnity insurance.
While not a legal requirement, certain chartered bodies and regulators, such as the accountancy, engineering and healthcare sectors, require you to take out professional indemnity insurance as standard.
» COMPARE: Employers’ liability insurance
What happens if I don’t have business insurance?
The main risk of failing to secure business insurance is financial. Without business insurance, if something goes wrong, you will have to pay for any legal or compensation claims completely out of your own pocket.
Smaller businesses are potentially most in danger of suffering without business insurance, as they will likely not have the spare funds to cover any compensation claims or major damages.
Do I need business insurance to work from home?
Unless you have non-family members in your employment, you aren’t legally required to have business insurance when working from home.
However, certain products would still be recommended if you do run your business from home. For example, if you regularly have business visitors to your home, you may want to look into public liability insurance.
If you are a consultant or accountant, meanwhile, professional indemnity insurance is seen as a must – it may even be required by your regulatory body.
And if you sell any goods as part of your business, it would be wise to look into product liability insurance.
Why do I need business insurance?
Beyond the legalities of employers’ liability insurance, there are a number of reasons why it is advisable to take out the appropriate business insurance policies for your organisation:
- If a claim is made against your business, the right type of policy can potentially save you thousands of pounds in legal fees and compensation costs.
- It can help you replace tools and key equipment in the event they are lost, stolen or accidentally damaged.
- It can show your clients and customers that you take your work, and their safety, seriously.
- Some clients may insist upon certain policies being in place before they are willing to work with you.
- Some professional organisations and regulatory bodies require business insurance as a condition of their membership.
Types of business insurance
The specific collection of insurance products you decide to buy will depend on which sector your business is in. Below, we break down some of the most notable types of business insurance.
Business liability insurance
There are three major types of cover that fall under the banner of business liability insurance.
As previously mentioned, employers’ liability insurance is the only form of business insurance that is a legal requirement in the UK. It covers compensation costs and legal fees for you as an employer if anything happens to your employees at work, for example an injury or illness.
Public liability insurance, meanwhile, is designed to cover claims made against your business by someone outside the business. This includes clients and visitors as well as the general public, and would typically be used in the case of personal injury, death or property loss or damage.
Finally, product liability insurance protects against claims made related to injury or damage arising from products your business has created, sold or offered for free. Even if you did not manufacture the items yourself, you can still be held accountable so it is an important consideration if your business supplies goods.
» COMPARE: Public liability insurance
Professional indemnity insurance
Instead of personal injury or property damage, as with liability insurance, professional indemnity insurance protects your business if you cause financial loss for your client. This could be through poor professional advice or instructions, as well as if your business provides designs and specifications.
Depending on your industry, professional indemnity insurance is a must for a number of chartered bodies and regulators. It can therefore be a mandatory requirement for your business to function, without being a legal necessity.
Within the rules of these specific trade institutes and associations, a lack of professional indemnity insurance can result in disciplinary action.
» COMPARE: Professional indemnity insurance
Business interruption insurance
A business interruption insurance policy could be taken out to protect against events that prevent your business carrying out its usual operations, therefore causing you loss of income.
Traditionally, this is in relation to property damage caused by fires and floods or the breakdown of equipment.
However, it can be extended to other events. Most notably, following a test case brought by the Financial Conduct Authority (FCA), in January 2021 the Supreme Court ruled that many providers that hadn’t paid out Covid-19-related business interruption insurance claims had to do so.
Business car insurance
Technically, business car insurance is a legal requirement because car insurance is a legal requirement to drive on UK roads.
However, specific business car insurance will only be needed if you use your vehicle for work-related purposes.
You would not need specific business car insurance just to commute to and from a permanent place of work. You would need it, on the other hand, if your business involves driving to multiple places of work, such as meetings or business sites, or if you make deliveries and collections.
Business car insurance broadly comes in three tiers: class 1, class 2 and class 3. Which tier you need will depend on when and how you use your vehicle for work.
But you should be aware that there are other forms of business car insurance that fall outside those three tiers. For example, if you make deliveries, you will legally need hire and reward insurance, while to cover the products you are carrying, you would need goods in transit cover.
Commercial building and contents insurance
Similar to business interruption insurance, commercial buildings insurance will protect your business premises from damage, usually floods, fires and burst pipes.
Business contents insurance, meanwhile, covers everything inside your premises, such as your fixtures, fittings and stock.
How much business insurance do I need?
How much business insurance you need can vary greatly, depending on how much cover you are looking for and the size of your operation. This means the cost could range anywhere from as little as £10 a month to thousands of pounds a year.
It is important to remember that if you hire even one UK-based non-family member, you will need an employers’ liability insurance policy worth at least £5 million.
If your regulatory body, or professional organisation, requires you to have a certain form of business insurance as a condition of your membership, there will usually be guidance from them on the level of cover you need.
Other than that, how much business insurance you take out is up to you.
When choosing your policies, you will decide how much cover you want to purchase, based on the potential risks to your business you have identified. This will inform the cost of your premium.
Other factors that will affect your premium include how many insurance products you are purchasing, the size of your business, the specific challenges associated with your sector, and whether you can demonstrate how well run your business is.
On top of your premium, there are other business insurance costs to consider. For example, your insurance excess is the amount you will pay towards the value of a claim when it is made. The cost of this will vary between insurance types and will be determined when you take out the policy.
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Connor is a writer and spokesperson for NerdWallet. Previously at Spreadex, his market commentary has been quoted in the likes of the BBC, The Guardian, Evening Standard, Reuters and The Independent. Read more