Business insurance: the basics

Insurance for your business may help mitigate any risks you face.

When you’re dealing with a range of issues, organising your business insurance can appear a hassle you’d rather leave for another day. However, it’s important to consider it if you wish to mitigate against certain unforeseen risks and avoid possible fines.

Also remember that when you apply for your insurance – whether direct to an insurer or via an insurance broker – it’s crucial that you give them all the relevant information about your business. This is called your duty of disclosure. Fail to do this and it could affect a claim or your cover going forward.

The information below is from the SME Insurance Guide, created by the Confederation of British Industry, the British Insurance Brokers Association and the Association of British Insurers.

Businesses can often buy a ‘package’ insurance policy that bundles together many of the key types of cover firms usually need. If you buy such an ‘off the shelf’ policy, check that it meets your specific demands as you may need something that’s more tailored to your business.

Of course, you should seek independent advice from a broker, and you should treat what follows below as a brief guide to some of the common types of business insurance available.

Property insurance

Property insurance is probably one of the most important types of cover your business can buy. It protects you against damage caused by:

• fire
• lightning
• flood
• escape of water
• storms
• theft
• riot
• vandalism

And you can extend the cover to provide ‘all-risks’ protection against accidental damage (such as broken glass).

You can make a claim on your property insurance if your buildings, contents, machinery or stock are damaged because of an event covered by the policy. You can also buy insurance against acts of terrorism to sit alongside your property insurance cover. Although the likelihood of suffering loss or damage because of terrorist incident may seem remote, it's worth considering, particularly if your business is situated in a major city.

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 perils that are detailed in your policy.

It aims to replace certain financial losses your business sustains during the period of the disruption when your turnover may have reduced. Cover can 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 give extensions to include losses that you suffer because you're denied access to your premises (for example, if a gas leak occurs nearby and police cordon off the area). A small number of policies provide cover against an outbreak of certain notifiable diseases at your premises. One example might be if legionella is found in your water system, forcing you to temporarily close while the problem is investigated and your premises are decontaminated.

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 prior to the loss. This is called the ‘indemnity period’ and it's very important to get it right.

Most policies offer 12 months as standard, but this may not be sufficient so think about 18 months or even 24 months. An insurance broker can advise you here and help you avoid being underinsured or taking out a policy with inadequate cover (for example, you may want to ensure situations such as COVID-19 are covered).

Employers’ liability insurance

If your business employs people – or is a limited company with a few directors working together – it must, by law, have employers’ liability insurance. This protects you (as an employer) against the costs you have to pay, and the compensation that might fall due, if an employee has an accident or is injured while working for you. This includes claims for industrial disease (an injury or sickness that results from being exposed, over a long period, to a workplace hazard).

By law, you must have a minimum limit of £5m of cover, but most policies insure you for £10 million as standard. You have to arrange cover for all employees including those on temporary contracts, volunteers or any previous employees that you bring back during busy periods.

Public liability insurance

While not compulsory, public liability insurance is a key component of your insurance protection and covers you and your business against compensation claims made by the public in case of any injury or damage caused by your negligence.

An example might be a customer who visits your premises and slips over because of water on the floor and suffers serious back injuries. If the customer can prove that you were negligent in not mopping the floor, then 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.

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 in law to pay for remediation, including reinstating habitats such as rivers or lakes. Consequently, 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.

Product liability insurance

Product liability insurance protects you and your business against claims brought by customers or other third parties in the event that the products you make or supply prove to be defective and cause injury or damage.

One example could be if you made an electrical component that then overheated and caused a house fire. In this case, the policy would protect you if:

• you were found to be negligent in the manufacturing of the part
• the component was found to have caused the fire

Sitting alongside product liability insurance is product recall insurance. This will pay for the costs you incur in recalling your products if they are found to be in some way defective or deficient.

Cyber insurance

Cyber insurance covers losses relating to damage to, or loss of information from, IT systems and networks. Policies generally include significant assistance with, and management of, the incident itself, which can be essential when your business needs to avoid damage to its reputation or comply with regulations.

Having adequate cyber insurance has never been more important. Cyber crime has been increasing and the 2020 coronavirus pandemic led to a huge rise in the number of cyber attacks on UK businesses.

Other insurance policies you may have (such as property, business interruption or professional indemnity insurance) might provide some elements of cover against cyber risks.

You might also want to consider a specialist policy, especially if you:

• hold sensitive customer details, such as names and addresses or banking information
• rely heavily on IT systems and websites to trade
• process payment card information as a matter of course

You should seek advice from an insurance broker on what would be the most suitable level and type of cover for your business. But as a minimum, look to consider the following features:

• Ransom
• Cyber crime or ‘phishing’
• Restitution (restoring) of IT systems and data
• The costs to notify customers of an attack and loss of their personal data
• Liabilities to third parties after you have lost their data

You can also protect your business against business interruption losses that a cyber attack might cause. 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, which is why you should contact them as soon as you find a breach inside your business.

Directors’ and officers’ insurance

Directors' and officers' insurance is designed to protect directors and senior managers against legal action they face for mismanaging the business in a way that results in financial loss for shareholders.

Since small and medium-sized businesses will almost exclusively be privately owned business with no external shareholders, you might ask why you need to buy this insurance. The reason 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 possible breaches of your duties (it will pay for the cost to defend a corporate manslaughter charge, 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:

• discrimination
• misconduct in the workplace (such as harassment and bullying)
• 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 (usually a customer).

For some job roles — such as architects, surveyors, lawyers, financial advisers and accountants — the professional regulator usually requires 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 part and legal costs, up to a specified limit.

Motor insurance

Any driver who uses a motor vehicle owned by the business for any purpose – business or pleasure – is legally required under the Road Traffic Act (RTA) to make sure that the vehicle is insured while being used.

Third-party cover includes the basic requirement of the RTA to insure against the risk of injury to a third party and extends to cover damage to third-party property. You can extend this cover to include risks of fire and theft, or to fully comprehensive cover, which includes accidental damage to your vehicles.

It is also important you choose the right ‘class of use’ – use by a delivery driver is very different from use by a taxi driver.

Trade credit insurance

Trade credit insurance protects you if you've delivered your goods to a customer and they fail to pay you or fulfil their end of the sales agreement. You’re covered for the financial loss due to the bad debt and can include a debt collecting service.

This insurance is particularly important if you rely on only a small number of customers and one of them letting you down would significantly reduce your profits and ability to buy in more stock.

Insurance that protects your employees

There are various insurance products that will help provide financial security and medical assistance for you and your employees in the event of accident or illness.

They can also provide support services to help keep your employees healthy and in work. These include:

• weekly or monthly payments through personal accident and sickness cover or group income protection insurance
• lump sum payments though group life insurance or group critical illness
• private medical insurance or health cash plans to cover your employees’ fees for eye tests, dental care and physiotherapy

Additional support

You can find more information on business insurance and cover for small businesses at GOV.UK

For advice on business insurance, contact BIBA

The SME Insurance Guide, created by the Confederation of British Industry, the British Insurance Brokers Association and the Association of British Insurers is very useful.