Essential Insurance Types Every Business Owner Should Consider
Although insurance isn’t always a legal requirement for UK businesses, most founders need to consider it soon after setting up a company.
Business insurance can feel complex, but it becomes easier to understand when broken into clear categories. In this guide, 1st Formations will explain what business insurance is and which types of insurance entrepreneurs may need.
What is business insurance?
Business insurance is a contract between a business and an insurer that provides financial protection in exchange for a regular payment. The business pays an insurer for coverage (known as a premium), and the insurer helps cover financial losses if a specific insured event occurs. For example, if a customer is injured in a shop, the appropriate insurance policy may help cover the cost of compensation.
The level of coverage a business needs will depend on factors such as its industry, operational risks, number of employees, and whether customers visit its locations. A small retail shop will likely need commercial property insurance to protect its premises. In contrast, a freelance consultant who works from home may need professional indemnity insurance to protect against legal action.
As the risk of an incident increases, insurers will usually charge a higher premium. Typically, businesses that operate at a larger scale face higher risk. As a result, insurers often charge higher premiums. However, insurance is still necessary for smaller organisations, even if it’s not always a legal requirement. Getting the right cover in place can help protect a business’s cash flow, physical assets, and reputation.
Types of business insurance
There are various types of business insurance available, and the requirements can vary significantly based on thecompany formation. Some businesses will need multiple policies, whereas others may only require a lower level of cover.
Some of the types of insurance businesses should consider include:
Employer’s liability insurance
Employer’s liability (EL) insurance is a legal requirement for any business in England, Scotland and Wales that employs staff. While many types of insurance are optional, this one is non-negotiable for employers. The only exceptions are if you only employ a family member or someone based outside of England, Scotland and Wales. In some cases, contractors are considered employees under UK law, so it’s important to check whether this requirement applies to your business. If you don’t have EL insurance when you should, you could be fined £2,500 every day.
Employer’s liability insurance protects businesses if employees are injured or become ill because of their work. UK law requires a minimum cover level of £5 million (although many policies will provide up to £10 million coverage).
EL insurance protects employers from the financial consequences of workplace accidents and work-related illness claims. If an employee slips in the staff locker room, they could claim compensation for medical costs and lost earnings. EL insurance will usually cover claims related to incidents like this, including the cost of related legal fees.
In addition to having EL insurance, you’re also legally obliged to display its certificate where your employees can access it. This can be online or at a physical location. Failure to do this could result in a fine of £1,000.
In Northern Ireland, Employers' Liability Compulsory Insurance (ELCI) is the equivalent cover.
Public liability insurance
Public liability insurance is commonly used by customer-facing businesses. It protects businesses against claims from customers or visitors relating to injury or property damage. If you’re a sole trader who works in other businesses’ locations, you may also want public liability insurance to protect yourself against any damage or injuries you cause while working on-site.
Public liability insurance can protect businesses in situations such as a customer tripping over equipment in a shop. It may also help if a tradesperson accidentally damages a client’s property while working.
Although public liability insurance isn’t a legal requirement in the UK, compensation claims can be expensive – even for minor accidents. Without the correct insurance in place, a claim could create serious financial pressure for a business.
Professional indemnity insurance
Service-based businesses may need professional indemnity insurance to protect themselves against mistakes, advice errors, and any client losses caused by their services. It’s a particularly common type of insurance for consultants, designers, and advisors. It can apply to businesses that employ staff to provide services, as well as freelancers who deliver services independently.
Professional indemnity insurance helps protect businesses against claims from clients. For example, a marketing consultant may give advice that leads to a major revenue loss for a client. In that situation, the client may seek financial compensation. In scenarios like this, insurance can help cover legal defence costs and compensation awards.
Every policy offers a different level of protection. It’s important to check exactly what level of cover the policy provides. The bigger the consequences your actions could have, the larger the amount of coverage you’ll typically need. Sometimes, clients may request proof of professional indemnity insurance before signing contracts. So, even though it’s not a legal requirement, it’s often an expectation, particularly in the creative industries, financial services, and technology consulting.
Product liability insurance
If you sell physical items, product liability insurance can help protect your business if a product causes injury or property damage. It insures businesses against faulty product claims, safety defects, and consumer injury linked to products.
UK consumer protection laws allow customers to pursue compensation if products cause harm or damage. Insurance can help cover claims and the related legal costs.
Product liability insurance can apply to businesses that manufacture, import, or sell physical products. Many businesses assume they are not liable for claims if they did not manufacture the product. However, if they’re involved in a product’s distribution, they could still be liable for any damage it causes. Any business involved in the product’s supply chain should consider product liability insurance.
Business interruption insurance
Business interruption insurance helps protect a business’s income during periods of disruption. This typically applies when operations stop due to events such as fire, flooding, or major supply chain disruption.
While remote businesses can still be affected by unexpected disruptions, it’s particularly relevant for those with physical premises. For example, if a flood forces a business to close its premises temporarily, revenue will stop while expenses continue. Business interruption insurance can help organisations maintain financial stability through unavoidable moments of downtime.
Other types of business insurance
Not every business needs every type of insurance. Certain policies are more common in specific sectors.
Some other types of insurance a UK business may want to consider include:
Cyber insurance
Cyber insurance can help protect businesses from financial losses caused by data breaches, ransomware attacks, or other cyber incidents.
Commercial property insurance
If a business owns or leases a building, it will usually need insurance to protect it against damage. The business owner may also want to insure office equipment and stock.
Directors’ and officers’ (D&O) insurance
D&O insurance helps protect directors’ and officers’ personal assets if legal claims are made due to their business decisions.
Protecting your business with the right preparation
Business owners should take steps to protect both the company and themselves against potential risks and claims.
If you’re unsure about what types of insurance you need, consider a risk assessment. If your business faces a realistic risk of loss, it may be worth considering insurance to manage it. You may want to seek professional guidance to understand the levels of insurance you need and review available policies.
Even though many types of cover are optional, insurance policies still play a valuable role in protecting a business’s finances.
