Small Business Insurance: Types of Liability Explained
Written by Simon Taylor
19th October 2024
What is small business insurance?
Small business insurance is a broad term that encompasses various types of cover designed to protect small business owners from a wide range of risks. These business risks can include property damage, legal liabilities, employee-related risks, and more.
Small business insurance cover is crucial for safeguarding a fledgling company against unforeseen financial losses and ensuring its long-term viability. Public liability, employers liability, product liability, professional indemnity, cyber insurance, and commercial property insurance should be be considered.
As a small business, what liability insurance do you need?
Navigating the business insurance landscape as a small business owner can be complex, but it's an essential part of safeguarding your company and financial interests. Below we have identified and offered an explaination of the most commonly purchased insurance for small businesses.
*Please note this is a general guide and should be adapted to fit your specific business needs and local regulations. For specific advice, it's always best to consult with an FCA authorised insurance broker about your individual requirements.
Public liability insurance
Public Liability Insurance is one of the most critical types of business insurance for SME's because it protects against compensation claims made by third parties (such as customers, clients, suppliers, or members of the general public) for injury or property damage that occurs as a result of the business's operations.
Whether you own a shop, run a café, or provide a service from offices, public liability insurance is a necessity to protect the business against: 1) third-party bodily injury claims; 2) third-party property damage; and 3) legal defence costs.
Public liability insurance is important for any small business that interacts with members of the public or third parties. Some examples include:
- Contractors insurance - to offer protection on a building site, whereby the business is responsible for the safety of bonafide subcontractors, clients on-site, and members of the public.
- Landlord insurance - to offer protection under a property owners liability policy, the landlord can be held responsible for ensure a safe environment for the tenants residing within the building.
- Tradesman insurance - to offer protection when visiting a customer's home and you damage their property as a result of your negligence. For example, an electrician causes damage to window.
Public liability will cover the legal expenses and compensation if your business is held responsible for injury to a person or damage to their property.
Employers liability insurance
Employers’ Liability Insurance is required if your business employs staff, even on a part-time or temporary basis. It protects businesses against claims made by employees who suffer work-related injuries or illnesses.
The cbusiness insurance is legally required in the UK under the Employers' Liability (Compulsory Insurance) Act 1969 and protects your business if an employee gets injured or becomes ill whilst undertaking work for your business. The minimum legal requirement is £5 million, however all insurers will provide £10 million excluding a terrorist incident.
Any small business that employs staff is required to have employers' liability insurance and can be fined up to £2,500 per employee per day if they don't have the correct cover. This includes:
- working from an office environment; or
- undertaking manual activities, such as working form height, working with heat, or working with dangerous business equipment.
Professional indemnity insurance
Professional Indemnity Insurance is recommend if your business offers advice, design, consultancy, or specification. If a client feels that you have caused them financial harm, they may pursue legal action and seek compensation for damages. Even with the highest level of skill and due diligence, professionals can make mistakes.
The business insurance covers the legal costs and compensation claims if a client suffers financial loss as a result of your negligence, breach of contract, misrepresentation, error or omission, defamation, intellectual property infringement, or mistake in the provision of the professional services provided.
Any small company offering professional services, advice, or expertise should consider professional indemnity insurance. Read more about who needs professional indemnity. For example:
- Accountants and financial advisors
- Architects and engineers
- Consultants (business, marketing, IT, etc.)
- Creative media or design
- Medical clinics and professionals
- Software developers
- Solicitors
- Technology providers
Product liability insurance
Product Liability Insurance is important whether your business designs, manufactures, or supplies products. If a product is found to be faulty or harmful and causes injury or property damage, the business insurance protects against claims of personal injury or property damage caused by products your samll business sold or supplied.
Claims typically arise due to different types of product defects: (1) design defects, making the product inherently unsafe; (2) manufacturing defects, errors during the production that make the product dangerous or defective; or (3) marketing defects, which include inadequate instructions or failure to provide sufficient warnings about the product’s risks.
Some small companies are required to have product liability to work with certain partners or to meet industry regulations, especially those in high-risk sectors such as food, electronics, or life sciences.
Cyber insurance
Cyber Insurance is prudent in an increasingly digital world and protects small businesses from the financial impacts of cyberattacks, data breaches, and other technology-related risks. As cyber threats such as hacking, phishing, ransomware, and data breaches become more prevalent, the business insurance will mitigate the costs associated with these events.
- Cyber incident response
- Business interruption
- Cyber extortion
- Data breach notification expenses
- Information and network security, otherwise known as cyber liability insurance
- Regulatory fines and penalties
- Cyber crime (including social engineering fraud)
Cyber insurance helps businesses recover quickly and mitigate any financial damage or losses. This can be especially important for small businesses because they won't have the expertise and resources available to keep up to date with all the cyber related risks to the business or know how to respond.
D&O insurance
Directors’ and Officers Insurance protects the personal assets of directors and officers in case they are sued for wrongful acts while managing the company. It can cover the legal costs, settlements, and compensation awards if legal action is brought by shareholders, customers, regulators, competitors, suppliers, employees, or third parties.
Without D&O insurance, directors and officers could be held personally liable for decisions made in their professional capacity, putting their personal assets at risk. Small businesses that are seeking investment should certainly consider arranging the cover because insolvency related claims are the single largest driver for claims made under D&O insurance policies.
Insurance for small businesses is typically provided under a management liability product, that will also include cover for corporate legal liability and employment practices liability.
What is liability insurance?
Other small business insurance covers include:
Business interruption
Business Interruption Insurance: This type of insurance policy can be a lifesaver in the event that your business operation is interrupted, for example, by fire or flood damage. It covers lost income and additional costs incurred while your business is out of action, helping you to keep paying expenses like rent or wages until you’re back on your feet.
Property damage insurance
Property Insurance: Whether you own or rent your business premises, property insurance is important. It covers the building and its contents against risks like fire, theft, and flood. If you work from home, don't assume your home insurance will cover your business assets – check and upgrade your policy if necessary.
Fleet, car or van insurance
Motor Insurance: If your business uses vehicles, commercial vehicle insurance is required by law. Even if you’re using your personal car for business activities, make sure it’s covered for business use.
Personal accident insurance
Personal Accident Insurance: This is beneficial if you or your employees are injured or become seriously ill and can’t work. It can help replace lost income or cover medical costs.
Why do we need small business liability insurance?
For small businesses, unexpected events can have a significant financial impact. A legal action, natural disaster, or accident in the workplace, can result in substantial costs that any small enterprise could bear without indemnity insurance. Cover not only provides financial protection and business continuity, but also peace of mind, allowing business owners to focus on growth and operations.
For small business owners, navigating the world of insurance can seem daunting. Insurance is a critical aspect of running a successful business, protecting it from unforeseen risks and liabilities. Having the right insurance in place is important for sustainability and growth.
Small business insurance policies can offer protection from a wide range of financial risks. These can include property damage, bodily injury, legal liabilities, financial loss, cyber-attacks, and employee-related risks. Certificates of insurance are commonly requested under contract with new clients before engaging to demonstrate your credibility and safety net should something go wrong.
How much does small business liability insurance cost?
Understanding the cost of small business insurance is crucial for budgeting and financial planning. However, determining the exact cost can be challenging as it varies significantly depending on several factors. Here's a breakdown of what influences the cost of business insurance and what you can expect.
Type of business: The nature of your business plays a pivotal role in determining insurance costs. A high-risk business like construction will have higher premiums than a low-risk business like a consultancy. The specific activities your business undertakes, the size of your operations, and the environment in which you operate are all considered.
Size of your business: The number of employees you have and your annual turnover are key factors. Generally, the larger your business, the higher the insurance cost. This is because larger businesses typically have more assets, employees, and potentially more significant liabilities.
Type of insurance required: Different types of insurance have different costs. For instance, professional indemnity insurance for a financial advisor will be priced differently than public liability insurance for a retail store. The more comprehensive the coverage, the higher the premium.
Level of coverage: The amount of cover you choose will directly affect the cost of your insurance. Higher cover limits provide more protection but also come with higher premiums. It’s important to strike a balance between having adequate cover and managing costs
Location: Where your business is located can impact insurance costs. Areas with higher crime rates, flood risks, or other geographical risks might see higher premiums.
Claims history: If your business has a history of making insurance claims, insurers may view it as higher risk, leading to increased premiums. Conversely, a clean claims history might qualify you for lower rates.
Risk management measures: Implementing risk management measures can lower your insurance costs. For example, installing a security system might reduce the cost of property insurance.
Payment options: How you choose to pay your premiums can affect the overall cost. Annual payments typically work out cheaper than monthly payments, as some insurers charge extra for the convenience of spreading the cost.
Small business average insurance costs
While it's challenging to provide specific figures without knowing the details of a particular business, here are some average cost ranges for common types of small business insurance in the UK:
Public Liability Insurance: Generally ranges from £60 to £500 per year, depending on cover levels and business risk.
Professional Indemnity Insurance: For small businesses, premiums can range from £100 to over £1,000 annually.
Employers’ Liability Insurance: The legal minimum cover is £5 million but £10 million is nearly always provided, and costs typically start around £80 per year - but can increase based on the number of employees and risk factors.
SME industry specific insurance
Each industry comes with its own set of risks. For example, a restaurant faces risks like kitchen fires and food poisoning incidents, while a construction company deals with hazards like on-site injuries and equipment damage. Recognising these specific risks is the first step in understanding why tailored business insurance is crucial.
Manufacturing and Wharehouses: Commercial combined insurance often combines public liability, employer’s liability, and property insurance, with added cover for risks like equipment breakdown and engineering inspection.
Professional Services Insurance: For businesses providing services like consulting, legal advice, or accounting, professional indemnity insurance is key. It protects against claims of professional negligence or inadequate service.
Construction Insurance: This type of insurance typically includes public liability, employer’s liability, and cover for tools, equipment, and ongoing work. It may also include contract works insurance, which covers construction projects in progress.
Technology and IT Insurance: Tailored for businesses in the tech sector, this insurance often includes professional indemnity, cyber liability, and intellectual property insurance.
Healthcare Professional Insurance: For medical and health-related professions, this insurance usually combines professional indemnity with public liability and can include specialised coverages like medical indemnity.
Retail Insurance: Designed for businesses that sell goods directly to customers, retail insurance typically includes public liability, product liability, and property insurance. It can also cover risks like shoplifting, employee dishonesty, and business interruption.
Considerations when choosing small business insurance
Understand your risks: Evaluate the specific risks associated with your business type and industry.
Seek expert advice: Consult with insurance brokers or agents who specialise in your industry. They can provide insights into what covers are essential.
Compare policies: Don’t settle for the first quote you receive. Compare policies from different insurers to find the best fit for your needs.
Review regularly: As your business evolves, so do your insurance needs. Regularly review and adjust your cover to ensure it remains relevant.
About the author
Simon Taylor is a respected senior industry professional and a Chartered Insurance Broker with over 20 years’ of experience in the commercial insurance sector as an underwriter, broker and director.