What Is Business Insurance?
Business insurance protects your company against financial loss from claims, accidents, and unforeseen events. Some types are legally required; others are commercially essential for any SME.
Key Takeaways
- Employers' liability insurance is legally compulsory if you have any employees.
- Professional indemnity insurance protects against claims arising from professional advice or services.
- Public liability insurance covers injury or damage claims from third parties.
- Check your client contracts — many will require you to hold specific types and levels of insurance.
The types of business insurance SMEs need
Business insurance is not a single product but a range of policies covering different risks. The main categories relevant to UK SMEs are: employers' liability insurance (legally compulsory if you have employees); public liability insurance (covers claims for injury or property damage caused to third parties by your business activities); professional indemnity insurance (covers claims arising from professional advice, services, or work that causes a client financial loss); product liability insurance (covers claims arising from physical products your business supplies); and business interruption insurance (compensates for lost revenue if your business cannot operate due to an insured event such as fire or flood). Directors' and officers' (D&O) insurance covers directors personally against claims arising from their decisions and conduct.
Employers' liability — a legal requirement
Employers' liability (EL) insurance is the only type of business insurance that is legally compulsory in the UK. Under the Employers' Liability (Compulsory Insurance) Act 1969, any business that employs one or more people must hold EL insurance providing cover of at least £5 million per claim (most policies provide £10 million). The policy must be obtained from an authorised insurer and the certificate of insurance must be displayed (or made accessible) to employees. Failure to hold EL insurance is a criminal offence, with fines of up to £2,500 per day of non-compliance. The requirement applies to all employees, including part-time workers, temporary workers, and apprentices — though it does not generally apply to family members working in the business.
Professional indemnity insurance
Professional indemnity (PI) insurance is not legally required but is commercially essential for most service-based SMEs — and is contractually required by many clients. PI insurance covers your legal costs and any damages if a client claims that your professional advice, services, or work caused them financial loss. For example, if a marketing consultant's campaign advice leads to a client's failed product launch and the client sues for their wasted spend, PI insurance would cover the cost of defending the claim and any settlement or damages awarded. PI policies are typically written on a 'claims made' basis — meaning the policy in force when the claim is made covers it, not the policy in force when the work was done. This means you should maintain PI insurance for several years after the last work you carried out under a contract.
Reviewing your insurance regularly
Business insurance is not a set-and-forget purchase. Your insurance requirements change as your business grows: as you take on employees, expand into new markets, win larger clients, or start offering new services, your risk profile changes and your coverage may become inadequate. Review your policies annually, at renewal, and whenever there is a significant change in your business. Check your client contracts carefully — many commercial contracts require you to hold specific types of insurance (typically public liability and professional indemnity) at defined minimum levels of cover, and failure to maintain this cover can put you in breach of contract. Use a commercial insurance broker rather than buying directly — they can assess your specific risks and ensure you are adequately covered across all relevant categories.