Unless you've got a Scrooge McDuck money pit you can dive into and draw out a couple of million at will, your business will likely need to raise some...
This particular guide breaks down everything you need to know about business insurance.
While there are many forms of business insurance, startups and SMEs certainly don’t need to invest in every type (phew!).
Still, some forms of insurance are legally required, such as employers’ liability insurance when a business starts employing people.
Plus, securing the right type and level of protection before you start trading will protect you from the unexpected – and that can prove critical if something goes wrong.
So let's get into it.
Business insurance: What are the options?
As mentioned, there are many types of business insurance, though not all are relevant to your typical startup. Insurance is based around the concept of risk – in this case, business risk.
So, virtually any form of business risk can be assured against. Riskier businesses (e.g. manufacturing or construction) are subject to more frequent and intense risks than others, so their insurance demands are naturally higher.
But with that said, all businesses are subject to some level of risk, so it’s unwise to dismiss the usefulness of insurance just because you interpret your risk level as low.
Here are eight core types of business insurance:
1. Public liability insurance
Public liability insurance handles the legal costs and compensation payments if a member of the public suffers an injury or property damage due to your business's operations.
This coverage isn’t restricted to incidents on your premises – it can also include events away from your business, such as damages caused by your products or services.
For instance, imagine a customer slips and falls while visiting your retail store or someone gets food poisoning from your restaurant – public liability Insurance would step in to cover the associated costs in these cases.
Public liability insurance is essential for businesses that regularly interact with the public, such as retail stores, restaurants and construction companies.
2. Professional indemnity insurance
Professional indemnity insurance (PII) covers legal costs and expenses incurred in your defence, as well as any damages or costs that may be awarded if you’re alleged to have provided inadequate advice, services, or designs that result in a client losing money.
Professional indemnity insurance claims are common, accounting for over a quarter of total insurance claims made in the UK in 2021.
For instance, if you run a marketing consultancy and your campaign strategy results in a significant financial loss for your client, they may claim against you. PII would help cover the costs associated with such claims.
While not required by law for all businesses, PII is typically mandatory for certain professions, including solicitors, accountants, architects, mortgage intermediaries, surveyors, insurance brokers and financial advisers.
3. Employers' liability insurance
Employers' liability (EL) helps cover the cost of compensation if an employee gets injured, falls ill, or suffers a loss due to their work for you.
If you employ one or more people, you’re legally required to have employers' liability insurance.
For example, if an employee slips and falls at work or develops a health condition related to their job – employers' liability insurance can help handle the associated costs.
As per the Employers’ Liability (Compulsory Insurance) Act 1969, you must have at least £5m of EL insurance. Failure to have adequate EL insurance can result in hefty fines.
The Health and Safety Executive (HSE), which enforces the law on Employer’s Liability Insurance, can fine you up to £2,500 for any day you were without suitable insurance. Additionally, you can also be fined £1,000 if you don’t display your Employer’s Liability Insurance certificate or refuse to make it available to HSE inspectors when they ask.
Luckily, this form of insurance is typically inexpensive for small teams, costing as little as £5 a month.
4. Product liability insurance
Product liability insurance protects businesses that manufacture, sell, or supply physical products. This coverage helps with the cost of compensation claims if someone is injured or their property is damaged by a product your company has supplied.
If, for instance, a child is injured by a toy your company produces due to a manufacturing defect or a customer's house is damaged by a faulty appliance you sold, product liability insurance would help cover the resulting costs.
5. Commercial property insurance
Commercial property insurance safeguards your business's physical assets against damage, loss, or theft. This includes your business premises – whether owned or rented – as well as its contents, such as furniture, equipment, and inventory.
Commercial property insurance would step in to cover the repair or replacement costs in case of a fire, flood, vandalism or theft.
6. Cyber insurance
With cyber-attacks rising, cyber insurance is an increasingly necessary precaution for all businesses and industries.
Cyber insurance protects your business against damages resulting from cyber threats, such as malware attacks, ransomware or data breaches. Some policies also protect from data leaks originating from within the business, including GDPR non-compliance if it were to result in fines. The exact coverage depends on the policy.
For instance, if a hacker breaches your business's online security and steals sensitive customer data, costs may include notification and credit monitoring for affected customers and PR efforts to restore your company's reputation. Cyber insurance helps mitigate these risks.
7. Directors and officers insurance
Also known as management liability insurance, this form of insurance protects the directors, officers and key managers in your business against the cost of compensation claims made for alleged wrongful acts.
These could range from breach of trust or duty to misrepresentation or neglect. For example, if a director is accused of making a decision that led to financial loss, this form of insurance can help cover the legal fees and potential compensation payouts.
While few startups would need to consider this from the outset, it becomes a consideration as the business grows and adds key personnel to its managerial teams.
8. Motor insurance
If your business uses vehicles, the law requires you to have third-party motor insurance at the very least. This covers costs related to damage or injury to any other person, vehicle, animal or property caused by your vehicles.
While not legally required, comprehensive motor insurance can provide additional coverage, including damage to your own vehicles.
Customised insurance packages
Navigating the vast array of business insurance options can often be overwhelming, especially if your business requires protection on multiple fronts. Some 70% of UK SMEs bought packaged insurance in 2021.
To simplify proceedings, many insurance providers offer mixed or combined insurance packages tailored to your specific requirements.
What's mixed business insurance?
Mixed business insurance, often called a Business Owner's Policy (BOP), combines several types of coverage into one package.
BOPs typically include public liability, professional indemnity, employers' liability, and contents or property insurance. These flexible packages allow you to add or remove coverages based on your changing needs.
Can you get industry-specific insurance?
Some insurance providers offer customised packages based on your business's industry. These packages are designed to cater for the unique risks associated with different sectors.
For instance, a mixed insurance package for a tech startup may include professional indemnity insurance (to cover risks associated with service or advice) and cyber liability insurance (to protect against data breaches and cyber threats).
On the other hand, a construction company might be offered a package that includes public liability insurance, contractors' all-risk insurance (a type of construction-specific insurance not mentioned above), and plant and machinery insurance (a form of commercial property insurance).
According to 2022 data, around half of the UK’s businesses are underinsured.
Running any business comes with inherent risks, and operating without suitable insurance coverage can have severe legal and financial implications.
But this isn’t just about financial protection and peace of mind – clients, contractors or customers you interact with may ask about your insurance protection. It feeds into trust and accountability.
While the upfront costs of business insurance may feel burdensome, particularly for startups working within tight budgets, the fallout from being uninsured is potentially catastrophic.
Here are three hypothetical examples that highlight the significance of having appropriate insurance:
1. An e-commerce disaster
An up-and-coming e-commerce business decided to forego product liability insurance to save costs. As it happened, one of the products they sold had a defect that caused harm to a customer.
The customer filed a lawsuit, and the e-commerce company was saddled with substantial legal fees and compensation payments. These unexpected expenses could total hundreds of thousands of pounds, risking bankruptcy.
2. A cyber security nightmare
Cyber insurance can’t be overlooked in today’s highly digitised business landscape. Only 40% of small businesses in the UK possess cyber insurance despite over 95% of attacks being directed at SMEs.
A tech startup believed their in-house security measures were robust enough to protect them. However, a sophisticated cyber-attack led to a massive data breach, compromising their clients' sensitive information.
This incident resulted in costly fines imposed by data protection authorities and a significant loss of business continuity and trust.
3. Paying the price for bad advice
A consulting firm chose not to take out professional indemnity insurance.
Unfortunately, one of their clients suffered significant financial losses due to an error in the advice provided by the firm. The client sued the firm for negligence, and the firm had to bear hefty legal costs and a substantial compensation payment.
What does it cost?
The cost of business insurance is not one-size-fits-all varies considerably based on the size of the business, the industry it operates in, its activities, and the potential for future expansion.
Generally, the costs will depend on:
- The type and level of coverage
- The nature of your business
- The size of your business
Business insurance is not a monolithic entity but addresses different aspects of business risk. The total cost will depend on the combination of coverages that best suits your business needs.
Moreover, within each type, the cost can also vary based on the level of coverage, i.e., the amount of risk you want to insure against. High-risk industries and certain business activities significantly impact insurance costs.
For instance, a software development company with minimal public interaction and no physical products has very different insurance needs than a construction company that operates heavy machinery and has extensive public and employee interactions.
The size of your business, typically measured in terms of employees and annual turnover, has a significant bearing on insurance costs too. That's because larger businesses often have more assets at risk and larger workforces, leading to a higher risk of liability claims.
Let's run through an example...
Consider a tech startup with no physical products or customer-facing operations as an illustrative example.
The risks associated with this kind of business are primarily focused on cyber threats, professional indemnity, and employers' liability if they have employees. For such a company, annual insurance costs might fall in the range of £500 – £1,500 for comprehensive coverage.
In contrast, a small manufacturing business that produces physical goods interacts with the public and employs a small team will have more extensive insurance needs.
They would need to consider product liability, public liability, and employers' liability insurance, among others. For such a company, annual insurance costs could be in the region of £3,000 - £7,000.
These figures are estimates, and actual costs can vary based on your business's specific details and requirements. Speak to a professional to get accurate quotes.
If you're unsure, consult with an insurance professional to find the best cover for your business.
Future-proof your startup
Yes, business insurance is another expense. But failing to protect your business could cost you dearly if something were to go seriously wrong. Luckily, for small startups engaged in low-risk business activities, the cost of insurance is typically low.
With any new business, laying solid foundations is key to stability and ultimately, success.
Insurance aside, you need time-saving tools to take care of activities like equity management too. That's where we come in. Our software and digital cap tables will help propel your business forward and prepare for investment when the time is right.
Discover our Launch plan today.