What is Business Insurance, and Why Do you Need it?

Business insurance is designed to protect you from the risks that come with running a business, covering the costs of any claims made against you. 

Whether you’re a sole trader, or running a partnership or limited company, it’s your responsibility to think about the risks you face as a business – and to get them covered. This might seem daunting, but it doesn’t have to be.

Together with Superscript, we’ve put together this simple guide to help you get started with all things business insurance. 

Why do I need business insurance?

In the UK, the only type of business insurance that’s required by law is employers’ liability insurance – although this doesn't apply to businesses without any employees.

Although other types of business insurance aren’t mandatory, there are many reasons to get additional covers.

Firstly, most businesses are unlikely to be able to afford the cost of a claim, which is usually much more expensive than the cost of insurance. Secondly, many investors will check that you have suitable insurance as part of any due diligence.

What does business insurance cover?

Business insurance is an umbrella term that covers the different insurance products designed to protect your business from a range of risks.

Professional indemnity insurance

Professional indemnity insurance protects businesses from a range of risks, such as professional negligence, copyright infringement, defamation, unpaid client fees and reputational damage. It’s also known as errors and omissions insurance or simply PI insurance.

While it’s not a legal requirement, professional indemnity insurance is often considered a must-have for businesses that work on a contractual basis or do at least one of the following:

• Provide a professional service
• Handle client data
• Work with intellectual property

Many clients will only work with freelancers or contractors who have professional indemnity insurance, and some regulatory bodies require their members to have it.

Directors and officers’ insurance

Also known as management liability insurance, directors and officers’ insurance protects people in management positions from the risks that come with being in charge of a business: Fines, penalties, allegations of mismanagement, legal action and disqualifications from being a director.

There’s a common misconception that these sorts of claims are covered by professional indemnity cover – but this often isn’t the case.

Directors and officers’ insurance is three sided. One side protects directors from being personally liable for fines, penalties and legal expenses. The second side reimburses the company if they pay these costs on behalf of its directors. And the last side covers the company if it gets named in a lawsuit. 

If you’re looking to raise funds from investors, you’re likely to need directors and officers’ insurance as many investors will only be interested in businesses with some level of cover.

Cyber insurance

Almost all businesses rely on technology – whether that’s websites, data servers or software. And whenever you use technology, you’re at risk of data breaches and cyber-attacks.

Cyber insurance protects you from these risks concerning your data and computer systems. If the worst does happen, it can cover the cost of legal fees, compensation claims and costs related to notifying those affected. It can also provide cover for extortion, breaches of data protection laws, and PR expenses and financial loss resulting from system downtime.

Cyber insurance has mainly been embraced by larger, more technologically-focused businesses – but it’s a cover that all businesses should consider, especially if you collect, store, or process information about customers or other stakeholders.

Business contents insurance

Much like home contents cover, business contents insurance covers key assets (such as stock, equipment and furniture) if they’re damaged or stolen. It usually includes some level of portable equipment cover, which protects things like laptops and mobile phones when you’re on the move or working remotely.

Public liability insurance

If your work involves interacting with members of the public, there’s always a chance that an accident could happen – even if you run a web-based business or primarily work from home. Public liability insurance covers legal and compensation costs if your business’s negligence causes injury or property damage to a third party (someone who isn’t an employee).

Because it’s relevant for any business that works with third parties, public liability insurance is one of the most popular covers across all sectors.

Employers’ liability insurance

As an employer, it's your responsibility to look after the health and wellbeing of your workforce. And even if you have only one employee, you’re legally required to get employers’ liability insurance – whether your staff are full-time, part-time, temporary, or unpaid. The one and only exception is businesses that solely employ immediate family members.

Employers’ liability insurance covers legal and compensation costs that result from any accidental injuries to your employees while they’re carrying out the actions and tasks the business asks them to undertake. In this sense, it’s quite similar to public liability insurance in terms of what’s covered – but concerning employees rather than members of the public.

It’s worth remembering that if you don’t have employers’ liability insurance, you could receive a fine of up to £2,500 for each day without it!

How do I get the right business insurance?

Getting the right insurance starts with getting the right cover, limits and excess – and a good insurance broker will be able to advise you on these.

Cover

Business insurance policies are made up of different products, known as covers, that protect you from different types of risks. While some risks are shared by all businesses, others are specific to particular industries or business types – so you should think about which risks your business faces, then make sure your policy has all the relevant covers.

Limits

A limit is the maximum amount that your insurer will pay if you need to make a claim, with higher limits typically costing more. Not all covers require you to choose a limit, but if you do, you’ll need to make sure it’s suitable for the level of risk your business might face. 

Insurance policies are usually made up of different covers with their own limits, so you’re likely to have multiple limits within one policy.

Excess

An excess is the amount you’ll need to pay if you make a claim. Just like limits, you’ll usually be able to adjust the excess for each cover. Typically, covers with higher excess cost less – so it’s important to find the right balance between your regular costs and how much you can afford to pay in case of a claim.

How do I pick an insurance broker?

When choosing an insurance broker, some of the main factors to consider are client reviews, reputation, industry specialisation and market access.

Client reviews

Client reviews and testimonials – particularly from companies similar to yours – can help you understand what a provider does well and not-so well. Take a look at the broker’s website to see if they’re displaying any reviews, or check out reputable third-party review sites.

Reputation

A good broker’s reputation will precede them, and asking around can help. Speak to peers to find out who they’re using, or ask VCs for recommendations.

Industry specialisaton

There are a lot of insurance brokers out there – but very few focus on scaleups or specialise in newer industries. Look out for a broker that can support your changing needs as you grow from an acorn to a unicorn.

Market access

Insurance can be pricey, so you want to make sure you get a lot of options. Check if the broker has ‘Lloyd’s broker’ status and ask how many insurers they worked with last year to make sure you’re getting the most choice.