In this guide we explain the ins and outs of small business insurance in the UK, including examples so you can see how the different types of cover work and decide which is best for you. The right business insurance not only provides financial protection, it also helps get your small business up and running again if you do face a disaster.
Table of Contents
- What is business insurance?
- How does business insurance work?
- How do I choose an insurance provider?
- Where can I buy small business insurance?
- Which types of business insurance do I need?
- Small business insurance costs
What is Small Business Insurance?
Business insurance is set of coverages designed to protect a business against certain disasters and financial losses, such as compensation claims. Business insurance is used as a risk management tool by businesses of all sizes from sole traders all the way through to large corporations.
Types of business insurance
The table below gives a brief overview of what the most common types of business insurance essentially cover. If you'd like to read about these in more detail, see the glossary section at the end of this guide. In addition, there are many other types of business insurance that you can read about in our article 12 Popular Types of Business Insurance.
|Common types of business insurance and what they cover|
|Public Liability||Covers legal costs and compensation payments due to personal injury or property damage claims made by third parties.|
|Employers' Liability||Covers legal costs and compensation payments due to job-related employee illness or injury claims; required by law.|
|Professional Indemnity||Covers legal costs and compensation payments due to claims made by clients that your advice or service was negligent and caused them a financial loss.|
|Commercial Property||Covers repair, rebuild or replacement of business buildings and contents in case of perils like a fire, flood and theft. Can protect buildings, inventory, business equipment, tools, stock and more.|
|Commercial Vehicle||Vehicle insurance for commercial vehicles; can include goods in transit cover.|
|Cyber Insurance||Provides access to an expert support team and covers financial losses due to hacks, data breaches, viruses and other cyber crimes—both direct costs incurred by your business and also claims from third parties that were affected by an attack on your business systems.|
|Legal Expenses Cover||Provides access to an expert legal team and pays your legal defence costs in certain situations such as employment disputes, HMRC tax enquiries, failed health & safety inspections, contract disputes, debt recovery, property protection, identity theft, etc.|
Business Insurance Examples
To help you get a better understanding of how these business insurance products can work in real life, here are some hypothetical business insurance examples.
- Public liability (bodily injury). You own a cafe that has a self-serve water station where customers can help themselves to glasses and pitchers of water. After some children spill water on the floor, a elderly customer slips on the wet floor and injures their back. They make a compensation claim against your business for negligence, claiming you did not post 'Wet Floor' signage, mop the floor in a timely manner or take other steps such as laying a mat under the water station to soak up spilled water.
- Public liability (property damage). A fire in your restaurant's kitchen damages the business next door. They sue you for the cost to make repairs.
- Public liability (property damage). You have a plumbing business that performs residential work. An employee accidentally knocks a valuable painting off the wall when bringing equipment into a client's property, damaging it.
- Product liability. You own a small business that sells dog toys. You outsource the production of your toys to a foreign company. The stuffing in a new line of toys causes some dogs to become sick when they inevitably tear open the toys. One dog falls particularly ill, and the owner sues you for vet treatment costs and damages.
- Product liability. You own a small business that designs and sells shoes. A woman has a serious injury after falling when the heel breaks on one of her high heels—a pair you designed. She sues your small business.
- Professional indemnity. A small contractor business works on a commercial building. One of their employees gives advice to the client that results in a costly error. It costs thousands of pounds to put the situation right and the business is sued by the client to compensate for their financial loss.
- Professional indemnity. A property management company manages a residential rental property containing a large number of flats for the building owner. A windstorm causes a leak in the roof, but the management company does not get it fixed in a timely fashion, resulting in expensive internal water damage. The building owner sues the property management company for providing negligent service.
- Professional indemnity. A small software business creates a custom piece of software for a client. After delivery, the client identifies critical errors in the software that result in a loss of client data. The client sues the software development business for work errors and negligence.
- Employers' liability insurance. An employee injures their back at work whilst moving heavy boxes. They blame you for faulty training and not providing adequate safety equipment, and take legal action.
- Business contents and stock insurance. You have a t-shirt company, which create, makes and distributes your designs. A fire at your rented warehouse results in all your t-shirt stock being destroyed. You claim for the loss on your business contents insurance.
- Buildings insurance. Your restaurant has a fire in the kitchen, which results in significant damage to the building, which you own. Extensive repairs are required before the building is safe to occupy again.
- Legal expenses and tax investigation insurance. You have a contract dispute with a supplier and need expert legal advice.
- IT and cyber insurance. An employee opens an email attachment that contains a virus, allowing hackers to gain access to business files and sensitive customer information. Cyber insurance provides experts to deal with the situation, including credit score monitoring for affected customers, ransom payments, etc.
- Business car insurance. A small business owner is dropping off samples at a client site. On the way, they are in an at-fault accident. Their business use comprehensive car insurance covers the damage to their car and another car.
- Small business health insurance. An employee injures their back while playing sport at the weekend. The health insurance provided by your small business enables them to access the physical therapy they need immediately so they can return to work more quickly.
How Does Business Insurance Work?
A business (the policyholder) signs a contract called an 'insurance policy' with an insurance company. As part of this contract, the policyholder pays a small amount of money (the premium) to the insurer and in return the insurer will cover any valid claims made by the business (less any excess). A business insurance policy can be paid annually (i.e., upfront) or in monthly installments. Monthly payments often incur finance charges so it can cost more to spread out the premium payments throughout the year. Read more about how business insurance works in our article Business Insurance Basics.
What is a period of insurance?
A period of insurance is the length of time that an insurance contract is valid. Most business insurance policies are one year long, and need to be renewed annually. When it's time to renew, your insurance company might increase (or decrease) your premium. Or they might not offer you a renewal. This can happen if your profile changes and the insurance company reassesses the risk of insuring your business, for instance. Alternatively, an insurance company might not renew based on their own internal risk assessment, for example if they are cutting back on offering certain types of business insurance or covering certain occupations or industries.
Can I cancel my business insurance?
Yes, you can cancel your business insurance during the period of insurance if you no longer need it. There is typically an administrative charge (e.g., £50), which might be higher if you've used a broker because both the broker and the insurance provider can charge a cancellation fee.
If you've paid your insurance premium upfront (i.e., you pay annually) then you should be entitled to a refund. If the refund is calculated on a pro-rata basis, then you only pay for the time from your start date until the cancellation date. For example, if you cancel halfway through the year you should get 50% of your premium back (less admin charges). However, some insurers refund a smaller proportion of the premium than a pro-rata amount.
If you pay for your business insurance monthly, then you'll typically need to continue paying until you've settled up according to the terms of the agreement. If a company does not follow a pro-rata structure then you might need to make a final payment reflecting the additional amount owed to the insurer, even if you're stopping cover.
What is a limit of insurance?
A limit of insurance is the maximum amount an insurance company will pay out for claims during the period of insurance. The limit of insurance is typically something you'll be aware of when you buy a policy, and you can choose a limit of insurance that suits your needs. For instance, employers' liability insurance is sold with a minimum of £5 million of cover (the minimum amount required by law) but higher amounts are available. Generally speaking, the higher the limits the higher the premium.
What is a claim?
A claim is when you ask the insurance company to pay for a loss that is covered by your insurance policy. To make a business insurance claim, formally notify your insurance company ASAP. Insurers may not honour otherwise valid claims if they're not made in a timely fashion. You can check your policy wording to see if there's a specific time limit for claims with your insurer, or any specific steps you need to take as part of the claims process.
What is an excess?
The excess is an amount you must contribute towards a claim before the insurance company covers their share of your loss. Essentially, you and the insurer both pitch in to cover losses that are covered by your insurance—you pay the excess and they pay the rest (up to the limit of insurance).
For example, if you have a £5,000 claim on your business insurance and a £500 deductible, then you pay £500 of the loss and the insurance company pays the remaining £4,500.
What is a certificate of insurance?
A certificate of insurance (COI) is a document proving the existence of a valid insurance policy. A COI lists the name of the policyholder the type of cover and effective dates, among other things. It's supplied by your broker or insurance company. Third parties like clients may request to see a COI to prove you have adequate coverage in place; likewise there may be circumstances under which you want to see another party's COI. Read more in our article What is a certificate of insurance?
Do I Need Insurance for a Small Business?
Yes, most small businesses need at least one form of business insurance. There is only one legal requirement when it comes to small business insurance, and that's employers' liability insurance. A small business is required to have employers' liability insurance if they hire any employees.
A business might also need certain liability insurance if they're a member of a trade body, or it's required by any partners, clients or contracts. Besides this, insurance is a good idea for nearly all small businesses—but different businesses need different types and limits of insurance. Without the right insurance in place, your company can find itself in a tricky situation such as a lawsuit or financial loss that could have been mitigated by the right insurance coverage.
For example, even if a liability claim against your small business is unfounded and you've done nothing wrong, if you're sued you'll still need to hire experts and a legal team to defend your business—which can cost thousands and thousands of pounds. The right insurance not only pays for this, it should also help you find the right experts—this can be a huge bonus for small businesses in particular, as they typically don't have in-house lawyers. In addition, liability insurance can also pay any compensation you're required to pay if found liable; these can easily reach into the tens or hundreds of thousands of pounds or more.
When you need public liability insurance: One of the most common types of small business liability insurance is public liability insurance, which protects against claims of injury or damage made by third parties. Public liability insurance is usually needed if your business has in-person exposure to clients or other members of the public, including vendors or your landlord, for instance.
When you need professional indemnity insurance: If your small business (e.g., you or your employees) gives advice or offers a professional service (e.g., designer, architect, solicitor, etc.) then professional indemnity insurance can protect against claims made by clients who claim they've suffered a financial loss because your company hasn't done its job properly or made errors. Small businesses who practice accountancy, architecture, engineering, surveying, law, financial advising and insurance broking are required by regulatory or professional bodies to hold professional indemnity insurance.
When you need employers' liability insurance: If you hire any employees, even if they're temporary or short-term employees, your small business is required by law to hold employers' liability insurance in most cases.
And, of course, many businesses decide they need additional types of cover such as a form of commercial property insurance. If you're still uncertain about which is the best type of small business insurance for you, check out the six questions that can help you decide in our article What insurance does a small business need?
How do I choose an insurance provider?
- Financial Strength: If an insurance company is weak financially they may not be able to pay out claims. As an insured entity, you rely on an insurance company being financially sound so they will be able to pay claims in case of disaster. To check the financial strength of an insurance company, check with one or more of the major credit rating agencies: Moody's, S&P, Fitch or AM Best. They provide letter grades rating the financial strength of company, which can indicate the ability of an insurance underwriter to pay out claims to cover your losses.
- Customer Service Reputation: How easy is it to reach customer service? What's the claims process like? What's the renewal process like? How do you make updates to your policy like a change of address? Some insurance companies invest more in customer service call centres and technology that can make a big difference to your experience. To get a handle on an insurance company's customer service, check genuine customer reviews from sites like TrustPilot and Reviews.co.uk—if you use a broker, check results for both the broker and the underwriter of your policy.
- Value: Each insurance company has its own model for pricing risk. And each insurance company has its own portfolio to manage (e.g., is the insurer eager to expand their professional indemnity insurance portfolio, or reduce it?). As a result you might find very different pricing across insurance companies in the marketplace. There is no 'cheapest business insurance' so you'll have to compare the market or work with a broker or comparison engine to find the best deal for your business. And it's not always about price anyway—take into account how policies differ in terms of extra features (e.g., breakdown cover for a commercial vehicle policy) or the excess.
How to Get Small Business Insurance Quotes
You have a few choices for purchasing business insurance in the UK marketplace. With any of these options, we'd like to point out that if you're unsure of what coverage you need it's better to talk to a broker or advisor instead of buying online without having spoken to anyone.
- Buying direct from an insurance company: You can go directly to a company like Direct Line or AXA for business insurance without using a broker or comparison site. There are pros and cons to buying direct. For example, you can end up overpaying if you only get one quote from one insurance provider without comparing the market. And finding alternative quotes from different insurance companies directly can be time consuming. Also, not all insurance companies will cover all scenarios, especially at an attractive price. That said, you can sometime pay less because there are no commissions being paid.
- Buying direct from a broker: Brokers are independent companies that represent your business to find insurance for you. The broker takes your details and obtains quotes from suitable insurance companies, which can save you time and can be especially helpful for those with tricky insurance needs. Specialist business insurance brokers can be particularly useful if you're having trouble finding insurance elsewhere. There is one drawback of using a broker—higher admin fees. They typically charge a fee to arrange your cover; and if you want to cancel your policy mid term you're likely to pay a cancellation fee to the broker (as well as the insurance provider).
- Buying via a comparison site: Comparison sites use their search engines to connect you with suitable insurance providers for your needs. They can connect you with brokers or insurance companies, or both. Some comparison engines are able to provide online quotes, enabling you to complete your business insurance purchase online with no human contact if you so desire. Other comparison engines send your details along to insurance providers that could be a good match; these companies would then contact you to finish your quote and purchase.
How Much is Insurance for a Small Business?
The average cost of small business insurance starts from under £100 a year for basic liability coverage, but small business insurance rates can rise into the thousands of pounds depending on your industry, the additional coverages you need and the details of your application.
To give you a better idea of the potential costs of insurance for a business, here are some average quotes for two different sample small businesses in the UK. For each metric, we've taken the 5 cheapest quotes we could find for our sample small businesses; your costs could be higher or lower.
Example 1: Small Building Company
Public and product liability for a small building company costs in the range of £100 to £500 a year, depending in part on the structure of your business. Limited companies with multiple directors cost more to insure. Employers' liability isn't cheap given the risks involved in building work, and you can expect to pay around £200 per employee but you'll pay less per person as your roster grows.
Tools cover was roughly £700 for £10k worth of tools, so long as you take the tools inside at night; leaving them in a locked vehicle overnight would nearly triple the cost of cover.
|Example Small Business Insurance Costs: Building Company|
|Public Liability (£5m) - sole trader||£100|
|Public Liability (£5m) - limited company with 2 directors||£500|
|Employers' Liability - 1 employee||£200|
|Employers' Liability - 5 employees||£900|
|Tools (£10k value, not left in van overnight)||£700|
Example 2: Small Restaurant
Minimum insurance costs for a small restaurant are typically on the high side as well, because they typically have multiple employees to cover under their employers' liability cover. In addition to restaurants presenting risk to employees (in terms of injuries), customers are more likely to be injured in a restaurant than, say, a shoe shop—e.g., slipping on a wet floor or getting burned—so public liability insurance costs can be higher as well. The minimum coverage of public liability and employers' liability for our sample restaurant cost £725 a year.
|Example Small Business Insurance Costs: Restaurant|
|£2m Public Liability (PL), Employers' Liability (EL)||£725|
|£10k Stock, £25k Contents||£175|
|£25k Tenants' Improvement||£900|
|£250k Buildings and Contents||£2,700|
Example 3: Consulting Business Example
A small consulting business is much cheaper to insure, due to lower risks to the insurer. Public liability might only cost 60 quid or so. Professional indemnity was particularly variable in price, and not all insurers cover this risk—our example case was quoted between £30 and £500! So it's definitely worth comparing prices for professional indemnity coverage.
Since there's less chance of injury in consulting work than, say, working as a builder, a small consulting business will typically pay less for employers' liability insurance than a business in a riskier industry.
|Example Small Business Insurance Costs: Consulting|
|Public Liability (£2m)||£60|
|Professional Indemnity (£2m)||£50+|
|Business Equipment (£10k)||£130|
|Employers' Liability (2 employees)||£180|
As you can see from the examples above, the cost of small business insurance is highly variable. Ultimately, business insurance premiums depend on factors such as the size of your business, your turnover, the number of employees, the type of work you do, where you're located, previous claims history and more.
For example, small businesses in less-risky professions like cleaners, dog walkers, photographers, teachers, tutors, caterers, DJs, etc. will cost less to insure, while more dangerous small businesses like gardening and contracting can present a higher risk to insurers and consequently cost more to insure. This is not a surprise because these types of businesses are more like to expose third parties to riskier equipment and situations.
Also keep in mind that if you use your personal car for business use (that is, driving to visit clients or between multiple work locations), you need to declare business use on your car. Your car insurance premiums are likely to rise as a result, but if you don't declare business use when you should, your insurance could be deemed invalid (essentially leaving you uninsured).
If you hire any employees for your small business, even temporary or part-time workers, you'll need employers' liability insurance—it's required by law in most cases.
If you have any in-person interactions with third parties such as clients, customers, vendors, your landlord, etc. or their property then yes you should have public liability insurance.
A small business may be able to trade without insurance, so long as it has no employees and is not bound by insurance requirements by a trade or professional body—but that doesn't mean it should. Small business insurance can cost less than you'd expect and can protect against a wide range of risks.
Public liability, which protects against general injury and damage claims made by third parties, costs from as little as £50 a year or so. This cost range applies to small businesses in less risky industries like teaching, consulting, etc. Higher-risk small businesses like a building company can cost 10X or more to insure.
On a monthly basis, small business public liability insurance costs in the range of £4 to £40 per month—but be aware that some insurers will ask you to pay annually instead of monthly when your premium is below a certain threshold.
There are three primary types of liability insurance a small business might need: public liability insurance to cover third party injury or damage claims, employers' liability insurance to cover employee injury or illness claims and professional indemnity insurance to cover claims by customers that you've given poor advice or been negligent in the professional service you delivered.
While insurance needs vary from business to business, it's quite common for small businesses to need public liability insurance, employers' liability insurance and professional indemnity insurance. In addition, there are additional coverages that can protect your small business such as property insurance, business interruption, etc. Read more about small business needs here.
The average cost of property insurance in the UK is very roughly 0.1% of the building's rebuild cost. So for example the average cost of business building insurance for a property with a £200,000 rebuild cost is around £218 per year.
You are required by law to arrange employers' liability insurance if your business hires any employees; beyond this most businesses use liability and property insurance as important risk management tools even when not mandatory.
The only type of business insurance required by law is employers' liability insurance. Other types of business insurance such as public liability or professional indemnity might be required by professional organisations of which you're a member or by clients or other businesses you work with, but they are not required by law (other than adherence to any requirements of contracts you sign that require certain insurance coverages).
Small Business Insurance Glossary
While each small business is unique, there are a few types of business insurance consistently popular with small businesses in the UK. Below we explain what each one broadly covers to help you decide what types of cover are most appropriate given your individual business circumstances. More definitions can be found in our business insurance glossary.
Small Business Public Liability Insurance
Small business public liability insurance protects against personal injury or property damage claims made by third parties. Public liability is critical if your business (e.g., you, your employees) deals in-person with members of the public, such as customers, clients, a landlord or other people—this could be on your business premises or even off site (e.g., at events, visiting a client, etc.).
Even if your business is not to blame, public liability insurance can be a valuable resource by providing access to a legal team to support your defense if you're sued. PL insurance covers both legal expenses to defend your small business and compensation claims if it's found liable. How much public liability insurance do you need for a small business? It depends on the risk faced by your company, the size of your company, etc., but for reference, public liability insurance is commonly sold with £1 million, £2 million, £5 million and £10 million of cover in the UK.
It’s important to note that public liability insurance is third-party insurance, which means it covers you against claims by third parties, such as customers, vendors, or landlords. Claims by your employees are not covered under public liability insurance (you need employers' liability for that).
Product Liability Insurance for Small Business
Product liability insurance protects against claims that your small business's goods or products have caused bodily injury or property damage. If you design, make and/or sell a product, or if you fix things, strongly consider buying product liability insurance—it's often sold together with public liability insurance (discussed above). In addition to product designers and manufacturers, tradespeople like builders, plumbers and electricians should consider product liability insurance, plus those selling on ebay, Etsy, Amazon, etc.
Small Business Professional Indemnity Insurance
Professional Indemnity (PI) insurance protects a small business that sells expertise (e.g., advice or professional services). PI insurance covers claims by clients alleging they suffered a financial loss due to negligent advice or service given by your small business (for example, a mistake or error in work); this type of business insurance will give you access to a legal team, cover legal defence fees and, if you're found liable, pay any compensation your business is required to pay.
Depending on the work you do, some of your clients might contractually require that your small business have a valid professional indemnity insurance policy in place. Small businesses that might need PI insurance include, but are not limited to:
- Web developer
- Wedding planner
Note: Small businesses in the salon industry (e.g., hair, beauty, barber, etc.) would buy an insurance product similar to professional liability insurance called "treatment cover", which covers injuries to customers or clients that occur during or due to your company's work.
Employers' Liability Insurance
If your small business employs anyone, it will need employers' liability insurance (EL)—this type of insurance is required by law even for casual or temporary workers. There are just a few exceptions when you don't need EL cover.
EL insurance can be expensive compared to other types of business insurance but it protects against compensation claims by current or former employees if they fall ill or are injured because of their work for you. It covers both legal fees in defending yourself from a claim and any compensation you're required to pay.
Commercial Property Insurance
Whether your business owns its premises or you rent and simply need contents insurance, commercial property insurance is critical for protecting against perils like fire, flood and theft. Contents cover can protect against damage, loss or theft of valuable equipment, furniture & furnishings, computers and other business items that can be expensive to replace. Whether you rent your premises or own them, contents cover can be a critical component of insurance. And commercial buildings insurance protects the structure and, while not required by law, is a good idea for any property owner.
If your small business has valuable stock, you can pay an extra premium on your contents insurance to get stock cover. Stock cover provides financial protection if your stock is lost, stolen or damaged. As with everything there are exclusions, for instance frozen food isn't usually covered (but sometimes you can pay extra for this if you need it), nor is general deterioration of stock.
Legal Expenses and Tax Investigation Insurance
Business legal expenses insurance (LEI) covers situations that your small business might face such as contract disputes, tax enquiries, debt recovery and more, providing access to an expert legal team and paying your legal defence/expert costs up to the policy limit for situations such as:
- Employment disputes
- HMRC tax enquiries
- Failed health & safety inspections
- Contract disputes
- Debt recovery
- Property protection
- Identity theft
- and more
IT and Cyber Insurance
If your small business processes payment card information or stores sensitive customer information such as names, addresses and banking information then you might want cyber insurance. Cyber insurance covers financial losses due to cyber crimes such as hacks, data breaches, viruses and more. A good policy will cover direct costs incurred by your business and also claims from third parties that were affected by an attack on your business systems.
Business Car Insurance
Business Use car insurance covers privately-owned cars for certain work-related driving, such as travelling to clients and between different work locations. Depending on the class of business use, car insurance for small business owners can also cover employees or colleagues who drive your car for business purposes. Business use car insurance does NOT delivery driving or courier work (i.e., where a driver is paid to make deliveries).
Small Business Health Insurance
A small business can stand out from the crowd by offering health insurance to its employees. Plans are not as expensive as you might think, and can be well worth the cost in terms of employee satisfaction, retention and getting injured or ill employees back to work sooner.
Other Types of small business insurance
Additionally, there are other types of business insurance that a small business might need. For example, a limited company with directors and officers will want D&O insurance. A number of businesses also buy business interruption insurance, which provides protection if your business premises are physically damaged or made inaccessible due to fire, flood or storm (note: business interruption insurance doesn't usually cover lost revenues due to situations such as the coronavirus).