An unexpected event - such as a break-in, fire, flood or IT failure - can seriously damage or even destroy your business. The right insurance provides peace of mind and financial compensation if things do go wrong.
The first step is to identify the key risks facing your business. You can then shop around to find insurance policies that offer the cover you want at the best price.
1. Legal insurance requirements
By law you must insure against certain liabilities to your employees, customers and the public.
Almost all businesses must buy employers' liability insurance
- Employers' liability insurance covers you against claims from employees for accidents or sickness they may suffer as a result of working for you.
- You must have cover of at least £5 million, though most policies now automatically provide £10 million. The policy must be issued by an authorised insurer.
- The insurance must cover all employees, including contract staff and casual workers.
- You must display your Certificate of Employers' Liability Insurance at each place of business or provide reasonable access to an electronic copy of the certificate to all employees.
- You should keep policy records even after the insurance has expired, in case of later claims.
- Businesses that only employ close family members, or where the owner is the only employee, are exempt.
You must have third-party motor insurance for motor vehicles
- This applies to all vehicles your business uses on the road and in other public places.
- Third-party insurance covers your liability for personal injury to someone else or damage to property. Comprehensive insurance covers damage to or theft of your own vehicles.
- If employees use their own cars for business, check they are adequately insured under their own private policies.
- Your liability for damage caused by an employee's private car while on business will usually be covered if you have public liability insurance (see Other business insurances).
2. Protecting key people
Consider key person insurance if your business depends on a few individuals
- Businesses run by owner-managers can be particularly vulnerable to the impact of illness or injury to the owner-manager.
- Cover is usually equal to the estimated loss or profit that would result from that person's death.
Protect against death or illness of key staff with critical illness cover
- This provides a lump sum in the event of someone suffering a serious health problem, such as a heart attack or stroke.
Consider private health and income protection insurance for key staff
- Private health insurance can help attract key staff to work for you, while comprehensive medical care might help employees return to work more quickly.
- Income protection insurance protects individuals by paying their salaries while they are incapacitated. This can also help you attract staff.
Limit personal liability for your company with directors' and officers' cover
- In some circumstances, directors or executive officers of a limited company can be held personally liable for their actions. For example, competitors could sue you personally for slander or libel, or a creditor might be able to pursue you for payment of an outstanding business debt.
- Directors' and officers' cover can be purchased by a company for directors without counting as a benefit in kind for tax purposes. However, it must be bought and paid for separately from other insurances.
Purchase travel insurance for owners and employees travelling overseas
- Overseas emergency medical costs can be very high.
3. Common insurance risks
Many threats are common to all businesses, including fire, theft and equipment failure. Consider each element individually to ensure your business is adequately protected.
Most businesses buy an all-risks policy to protect buildings and contents
- This covers a range of risks such as fire, flood and theft.
- If you own your premises, insure them for the full cost of rebuilding. This includes extras such as professional fees and site-clearance costs.
- If you lease or license your premises, check what insurance cover your landlord has. Check the wording of the lease to make sure you know what you are responsible for.
- Theft clauses cover stock and equipment when there has been forcible or violent entry to, or exit from, a property.
- Insure your stock at cost price. If stock volumes vary, use your highest value.
- Insure any stock or equipment you keep on your premises, even if you do not own it.
- Separate glass covers may be required for shop windows or other fixed glass.
Equipment failure can cause serious problems
- Specialist computer policies protect you against the cost of breakdowns and loss of information, but they will not cover the cost of upgrading to newer equipment.
- Engineering policies cover most machinery against breakdown. Comprehensive engineering policies will often include inspection and certification of your equipment as necessary, organised by the insurer.
- Equipment can be insured for the item's value less a deduction for wear and tear, or on a "replacement as new" basis.
Money is usually covered by a single all-risks policy
- This covers cash, cheques, stamps and other negotiable documents.
- Different cover limits will apply to money on the premises, in safes and in transit. The level of cover also varies according to the nature of your business and opening hours.
- Your policy may require you to vary banking times and routes, or take other precautions.
You may want cover for goods in transit
- This protects the value of goods lost or damaged while in your vehicle or when sent by carrier. Hauliers' terms of trade usually place strict (and low) limits on the compensation they will pay.
- The sum insured is usually limited to a fixed amount for each vehicle or each consignment.
- Marine cover may be needed if goods are going to or from overseas locations by sea.
Business interruption insurance offers cover for consequential losses following the original loss
- For example, if you cannot trade while premises are being rebuilt after a fire.
- Many business insurance packages include cover for loss of profits.
- The amount of business interruption cover should be adequate to protect the gross profit as defined by the terms of your policy, including any growth forecast during the indemnity period.
- Cover should include fixed costs, such as rent, as well as the extra costs of getting your business up and running again.
- Make sure the cover lasts long enough. Many businesses will need more than the standard 12 months to make good the damage. Don't underestimate how long it will take you to fully recover, including regaining lost customers.
- Make sure your policy covers all locations. Consider extensions to cover you for disruption arising from insured losses at suppliers' or customers' premises.
Staff honesty or fidelity policies cover against dishonesty by employees
- For example, theft.
Legal expenses insurance covers legal costs such as solicitors' fees and court costs
- Many policies offer legal guidance via a phone helpline.
4. Other business insurances
There are other risks that should be covered if they pose a threat to your business. These can be bought individually or added to existing packages. Check if these could apply to you before finalising your insurance arrangements.
Public liability insurance covers accidents, injuries or loss caused to the public
- For example, if a member of the public is harmed (or killed) by your business activities, or if their property is damaged.
- Consider the maximum claims that could be made against you when buying cover, as awards for serious injury can exceed £1 million. Standard policies provide between £1 million and £5 million cover, but more can be negotiated.
- Cover for related legal costs is included.
- Public liability insurance is more or less essential, though not required by law.
Product liability covers you against injury or damage caused by faulty goods
- This can be important if you manufacture, repair, install or retail goods.
- You could be held liable for damage or injury caused by defects in your products' design or manufacture, even if you have not been negligent.
- Product liability cover is often included with public liability insurance.
If your business provides advice, consider professional indemnity cover
- This type of cover is designed to protect businesses that give advice in a professional capacity, for example as a management or IT consultant.
- If you are proved to have been negligent and do not have insurance, damages and costs could put you out of business or even bankrupt you.
- Some trade associations and professional bodies insist you have professional indemnity cover as a condition of membership.
Credit insurance covers you against the risk of debtors becoming insolvent
- You can choose to insure whole or partial turnover. You may be able to insure selected accounts.
- Insurers will require you to carry at least 10% of the risk yourself.
You will face extra risks if you trade internationally
- Problems can include lost or damaged goods, delays or failure to deliver, non-payment by your customer and adverse currency fluctuations.
- The contract with your supplier or customer should clearly spell out what your responsibilities are.
- Cargo insurance can cover loss or damage to goods in transit.
- Different forms of international trade insurance can reduce the risks. Ask your bank or insurance adviser about the most appropriate options for your circumstances.
5. How to buy insurance
Calculate how much cover you need
- Insufficient cover is one of the main reasons insurance claims are not paid in full.
- If you under-insure, your claim will be reduced by a similar proportion. For example, your claim will be reduced by 10% if your cover was 10% less than it should have been.
- Always insure your assets for their cost price. If cost prices vary, insure them for their highest possible price.
- Your policy should protect against inflation and sudden increases in the value of your stock, equipment or liabilities.
- When calculating cover requirements, allow for projected business growth.
Make sure you are fully aware of the terms and conditions of your insurance
- You must disclose everything material to your application. For example, past thefts, bankruptcy or insolvency, or if an insurer has refused to cover you in the past.
- Most policies require you to take specified security measures. For example, you may have to install an approved burglar alarm or sprinkler system.
- Your insurer may send an insurance surveyor to assess the risks and recommend improvements before giving you cover.
- Most insurance policies require you to pay an excess or deductible, covering the first part of any loss. You can often negotiate a big reduction in premiums by agreeing to a higher excess.
- Some policies allow you to pay a lower annual premium for your cover if you build up a no-claims bonus over several years. You may want to avoid making claims just above the excess, if they would lead to increased premiums in subsequent years.
All insurance policies - even all-risks policies - have exclusions
- equipment failure due to wear and tear is not covered;
- theft insurance excludes shoplifting;
- buildings insurance may exclude subsidence cover, unless it is specifically requested.
Do not rely on ordinary domestic insurance
- Ordinary household insurance policies will not usually cover business risks such as employers', public or product liability.
- Private car insurance may not allow business use.
- If you start working from home or using your car for business, your household and motor insurance may be invalidated.
- Special 'working from home' policy packages are available.
Consider buying an insurance package
- Insurance for small and medium-sized businesses is often sold in packages grouping together common requirements, such as employers' liability insurance, buildings and contents, money, and business interruption.
- Some packages are tailored to cover specialist areas such as retail, construction or manufacturing.
- Other areas of cover can be bolted on to packages to meet your individual requirements. Check the cover you require against the package contents and add extra cover as necessary.
- Motor insurance should be bought separately.
- Make sure you receive copies of the individual policy documents so you can check that the cover provided is adequate and to make a note of the warranties to be complied with.
6. Where to buy insurance
When buying insurance, get professional advice.
You can deal directly with some insurance companies
- An agent or sales person will only recommend policies from their own company's portfolio.
Insurance advisers can recommend suitable policies
- Brokers and intermediaries should search a variety of providers on your behalf.
- Some will receive a commission if you buy from them, while others will charge a fee.
Shop around for advice and quotes
- Personal recommendation is often the best way to find a good adviser. Ask around.
- Suppliers that specialise in your type and size of business or policy need are more likely to offer competitive rates.
- Banks and building societies can offer good value, but may be tied to selling insurance policies from just one provider.
- Get at least three quotes, to ensure you are being offered a competitive rate.
- Once you have built a relationship with an adviser, it is always worth offering them the chance to match (or better) other quotes.
- Be wary of cheap deals. Why are they cheap? What is not covered by the policy?
Make sure you are buying from a reputable source
- The sale of insurance is regulated by the Financial Conduct Authority (FCA). Check that your proposed insurer, broker or intermediary is registered with the FCA.
- It is also worth checking if they are members of the Association of British Insurers or the British Insurance Brokers Association.