Do I Need Insurance to Run a Small Business

Introduction

Every small business, whether it operates from home, online, or on the high street, faces potential risks. These might include injuries to employees, claims from customers, or loss of property. Having the right insurance in place ensures you can recover financially and continue trading if something goes wrong.

Some types of insurance are legally required, while others are optional but highly recommended. The right combination depends on the size of your business, the industry you work in, and whether you employ staff or deal directly with clients or the public.

Legally required insurance for small businesses

In the UK, there are certain types of insurance that you must have by law.

Employers’ liability insurance

If your business employs anyone, even part-time, you are legally required to have employers’ liability insurance. This covers compensation claims made by employees who are injured or become ill because of their work.

Minimum cover: £5 million.

Proof of insurance must be displayed where staff can see it.

Penalties: You can be fined £2,500 for every day you do not have valid cover.

Even if you only hire temporary or casual staff, you still need this insurance.

Motor insurance for business vehicles

If you use vehicles for business purposes, such as deliveries or visiting clients, you must have motor insurance that includes business use. Personal car insurance is not sufficient if the vehicle is used for work.

Failing to have the correct cover can result in fines, penalties, and even prosecution.

Optional but essential types of insurance

While not all policies are mandatory, many small businesses rely on additional cover to manage everyday risks and protect against claims or losses.

Public liability insurance

Public liability insurance protects your business if a member of the public is injured or their property is damaged as a result of your business activities.

For example, if a customer trips over equipment in your shop or you accidentally damage a client’s property while working, this insurance covers compensation and legal costs.

It is particularly important for businesses that interact directly with customers or work on client sites, such as tradespeople, retailers, or cafes.

Professional indemnity insurance

Professional indemnity insurance covers you if a client claims they suffered financial loss because of your professional advice, designs, or services.

This type of insurance is essential for consultants, designers, accountants, solicitors, and anyone providing professional services.

Some regulatory bodies, such as the Solicitors Regulation Authority (SRA) or Financial Conduct Authority (FCA), require professional indemnity insurance as part of their membership conditions.

Product liability insurance

If your business manufactures, sells, or repairs products, product liability insurance protects you against claims that your products caused injury or damage.

This cover applies even if you did not make the product but were involved in supplying or repairing it.

Business contents or equipment insurance

If your business owns valuable equipment, machinery, or stock, business contents insurance protects against theft, fire, or accidental damage.

Home-based businesses can also benefit from this cover, as standard home insurance rarely covers business equipment.

Business interruption insurance

Business interruption insurance covers loss of income if your business is forced to stop operating temporarily due to an insured event such as fire, flood, or burglary.

It helps you pay bills, wages, and other expenses while your business recovers.

Cyber insurance

With many small businesses relying on technology, cyber insurance is becoming increasingly important. It protects you against losses caused by data breaches, hacking, or cybercrime.

Cyber insurance can cover data recovery, legal costs, and compensation if customer data is compromised.

Key person insurance

Key person insurance protects your business financially if a crucial employee or director becomes seriously ill or dies. The payout can help with recruitment costs or cover lost income while the business adapts.

Industry-specific insurance requirements

Certain industries have additional insurance needs depending on the type of work performed.

Construction: Contractors and tradespeople may require public liability and employers’ liability insurance, plus cover for tools and plant equipment.

Hospitality: Restaurants, cafes, and pubs need public liability and stock insurance, and often product liability for food safety.

Healthcare: Practitioners may require medical malpractice insurance.

Professional services: Consultants, solicitors, and accountants often need professional indemnity insurance.

Your accountant or business adviser can help identify which policies apply to your sector.

How much does small business insurance cost

The cost of business insurance depends on factors such as:

The type of business you run.

The number of employees.

Your annual turnover.

The level of cover you need.

Claims history and perceived risk.

Basic cover such as public liability insurance can start from around £50 to £100 per year, while professional indemnity insurance for consultancy or design work can range from £150 to £500 per year.

Bundled business insurance packages are often more cost effective and can be tailored to your needs.

Why small businesses should not skip insurance

Many small business owners see insurance as an unnecessary cost, especially when budgets are tight. However, one unexpected event or claim can have a serious financial impact. Insurance provides:

Protection against lawsuits and compensation claims.

Financial stability during business disruption.

Confidence when dealing with clients or contracts.

Compliance with legal and contractual obligations.

Some clients or suppliers will not work with uninsured businesses, especially where professional indemnity or public liability insurance is expected.

Example

A self employed plumber accidentally floods a customer’s kitchen, causing £5,000 of damage. His public liability insurance covers the repair costs and legal fees, saving him from paying out of pocket.

How an accountant can help

Accountants can help you choose insurance policies that align with your financial plans and risk profile. They can:

Identify mandatory and recommended policies for your business.

Help budget for insurance costs in your financial forecasts.

Advise on tax deductibility, as most business insurance premiums are allowable expenses.

Connect you with specialist brokers familiar with your industry.

Including insurance in your financial planning helps manage risks and ensures you stay compliant with legal and tax obligations.

Common mistakes to avoid

Assuming home insurance covers business equipment.

Choosing the cheapest policy without checking exclusions.

Forgetting to update cover when the business grows.

Failing to declare all employees to the insurer.

Not reviewing policies annually to ensure they still meet your needs.

Keeping your insurance policies current protects your business as it evolves.

Example scenario

Emma runs a small graphic design studio from home. She takes out professional indemnity insurance to cover client disputes and business contents insurance to protect her computer equipment. When a client claims financial loss due to a design error, her insurance covers the legal costs, protecting her business finances and reputation.

Conclusion

Most small businesses need at least some form of insurance to operate safely and legally. Employers’ liability insurance is mandatory if you have staff, while other policies such as public liability or professional indemnity provide essential protection against financial and legal risks.

By investing in the right cover, you protect your business, your clients, and your future. An accountant or business adviser can help you choose suitable policies, budget effectively, and ensure your insurance fits seamlessly into your overall business strategy.