As a new or even experienced business owner, insurance needs are often among your top priorities.
Many business owners see insurance as a safe form of risk transfer, with few downsides beyond the costs. However, that’s not necessarily the case. Insurers can and do fail and insurance premiums can be difficult to reduce without a good grasp of your business needs.
Before you ask “What insurance do I need for my business?” it’s worth the time to understand why you might need it in the first place, as well as what types you need by law and what types you don’t.
Below, you’ll find a useful guide to the most common types of business insurance, to help you in your business insurance buying journey.
Why Do I Need Business Insurance?
As a business owner or insurance buyer, sometimes it may not be clear why you need business insurance at all. After all, if you know you’re a good risk, and you have excellent risk management policies in place, why would you need outside insurance?
Do I Need Business Insurance?
In short, yes. Some policies are legally required and, unless you are exempted by statute, there’s no real way around them.
Additionally, sometimes it’s not a question of business insurance being required or not, but whether it’s obviously in your interest as a business owner. It would almost unwise to put your business at risk of ruinous claims, if there is insurance available – or if your clients, Regulators etc require insurance.
What Are the Different Types of Business Insurance?
Not every type of business insurance is meant to apply to every business. Your specific business needs will dictate the type and degree of coverage that you’ll need. Knowing the different types of business insurance and which types are best suited to your organisation will have a substantial impact on your insurance expenses.
Employers’ Liability Insurance (EL or ELI)
This is one of the (very few) types of business insurance usually required by law. If you employ any staff in your business, you’re probably required to have employers’ liability coverage. There are certain exemptions to this legal requirement; if an organization only employs close family members, is carrying out a statutory function or is a public body, it is exempt from the legal requirements.
In essence, EL insurance covers any claims resulting from injuries or diseases sustained by your employees in the course of their employment. Something as simple as an employee’s sprained ankle might fall under into this category, but EL insurance could also extend to cover costs and awards from employee lawsuits, for example class action claims from a group of injured employees.
It is often confused with Employment Practices Liability (EPL) insurance, which, in essence, covers any claims resulting from the (legality of) contracts you have with employees and whether those contracts meet statutory requirements eg equal pay, discrimination etc, rather than actual injuries or diseases whilst employed.
Public Liability Insurance (PL or PLI)
The other side of liability insurance is coverage that extends to members of the public (or other third parties) who have contact with your business. The losses associated with public compensation claims from clients, business partners, or other members of the public can be considerable.
For some types of businesses, such as shops and restaurants, this type of insurance may be a requirement of your licence to trade, and simply makes financial sense, since you are highly likely to deal with public liability claims, due to slips/trips etc. Additionally, some businesses require their clients or suppliers to have a certain level of PL coverage to even enter into a contract.
It is often confused with Public and Products Liability (PPL) insurance, which is PL insurance which also includes making good/repairing defects in any products you manufacture and any consequent losses that may cause (eg if you manufacture a defective pipe, which bursts causing flooding, then that is a loss caused by your Product, and would be covered by PPL insurance but not PL insurance).
Professional Indemnity Insurance (PI or PII)
Any business that offers professional services to individuals or other businesses should consider professional indemnity insurance; indeed some professions (such as solicitors) require minimum levels of cover. PI insurance covers any costs and compensation awards your business incurs as a result of providing inadequate services/advice to a client. This includes the legal costs associated with the defence of your business as well as any damages/remediation costs awarded to the injured party.
This can encompass a large variety of claims, from a simple error in a calculation (causing a small financial loss) to incorrect architectural advice (causing a building collapse).
Business Buildings and Contents Insurance (Property)
If your business operates out of a building, even if it’s a home office, Buildings insurance will cover damage to the structure of the property. It’s important to note, however, that as a renter you may not need Buildings insurance if your landlord already provides it – and many types of damage (eg accidental) come at a considerable extra cost.
Furthermore, you may choose to insure the Contents of your premises, as well as the Buildings (structure). Typically, Contents insurance covers the loss or destruction of equipment and tools from your office but does not extend to inventory or loss of revenue/business. The most valuable form of Contents cover (Personal Possessions) – covering your belongings away from the office eg whilst your are travelling – usually comes at a considerable extra cost.
Business Interruption Insurance (BI)
Whilst Building and Contents insurances can cover the losses of your property, they don’t cover the associated loss of business/revenue/profits. In some cases, the cost of business lost stemming from property damage could be significantly higher than the cost of repairing or replacing the property itself. That’s where BI insurance comes into play.
BI insurance covers income loss as a result of being unable to continue the normal course of business, due to a physical event (eg a break-in or water damage). Office space becoming unusable is just one example, but business interruption can encompass numerous causes and may depend on the exact nature of your activities. The most typical form of BI cover only covers interruptions to your business arising out of a related Buildings or Contents claim, ie physical damage to your building or its’ contents. BI cover for, say pandemic events, usually comes at a considerable extra cost.
Stock Insurance (Stocks/WIP)
To complement contents insurance (to replace/repair contents owed by you and not for sale), you may consider Stock insurance to cover the costs of replacing contents/stock owned by you but intended for sale in your business premises. For some businesses, the loss of some or all of their saleable inventory may amount to catastrophic losses.
However, if you manufacture goods for sale, only those items ready for sale are covered by Stock Insurance. If you want partially completed items (works in progress) included also, then you need to extend the policy to include Work in Progress (WIP) cover.
Business Legal Protection Insurance (LEX)
Just about any business is vulnerable to legal action – from disgruntled clients, suppliers, creditors and Regulators – which may incur considerable legal expenses (or LEX, for short). These legal proceedings can result in significant losses for your business and LEX cover is one of the types of business insurance you can use to cover those losses.
Great care needs to be taken to ensure that the cause of the claim is covered by the policy. For example, HMRC enquiries into your tax affairs are usually excluded, and require specialist “LEX-Tax Investigation” (or similar) cover.
Less Common Types of Business Insurance (E&O, D&O, PA, CAR, PSTL etc)
There is also a myriad of other, less common, types of business insurance you may come across for your specific situation, for example E&O (Errors & Omissions), D&O (Directors’ & Officers), PA (Personal Accident), CAR (Contractor’s All Risk), PSTL (Pension Scheme Trustee Liability) and so on. There is no “one size fits all approach” to these specialist covers; many business owners fall into the trap of thinking over-insuring is better than under-insuring, and end up paying more for insurance than they need to.
How to Choose the Right Business Insurance
The key thing to remember when buying insurance is that it’s not about the past. It’s a key factor insurance buyers often fail to consider.
It’s why many insurance buyers end up confused about their premiums. They insure far more than they need to and adopt the wrong position when configuring a policy (and negotiating the premiums), focusing on past claims experience, rather than potential future claims. Moreover, many businesses will find that their insurance claims are actually immaterial to their total operations, ie that they can safely operate with much less insurance – or even none at all, if they are exempt.
The coverage and type of insurance you need should be based on what you expect to happen in the future, and you should only insure the things that would lead to catastrophic failure. Insurance claims are more predictable than most business owners think, and with the help of an insurance advisory service, you may be able to significantly reduce your premiums.
A Holistic Approach
Above we have discussed the principal types of insurance available for businesses. There are many more, but that’s not to say you need to start insuring everything on your balance sheet. Nor do you have to remember all of the acronyms! We can help you with that.
We take a holistic approach to insurance that considers your real risk tolerance and quantifies risk in a way that’s easy to understand. At InsuranceInspect Services, we offer a consultancy product that looks at your balance sheet as a whole and helps you reduce premiums Substantially, Safely, and Strategically.