Business Insurance for Small Businesses: What You Need and What You Don’t
Only two types of business insurance are legally required in the UK. Beyond those, the right cover depends on your business. Here’s how to work out what you genuinely need, what it should cost, and where to buy it.
The two legally required policies
If you employ anyone — including part-time, temporary, casual workers, or apprentices — you are legally required to hold employers’ liability insurance with a minimum of £5 million cover (most policies provide £10 million as standard). The fine for failing to hold it is up to £2,500 per day per uninsured worker. You must also display your certificate—digital is acceptable. The sole exception is businesses where all employees are close family members.
If you or any employee drives for business purposes — visiting clients, attending meetings, travelling between sites — you need motor insurance that covers business use. Standard personal car insurance covers commuting and social use only. An accident during a business journey without appropriate cover leaves your business liable for uninsured damage.
Policies most small businesses should have
These aren’t legally required, but for most small businesses they’re either expected by clients, required by contracts, or cover risks significant enough that going without is a genuine gamble.
Covers claims from third parties — clients, customers, members of the public — if your business causes them injury or damages their property. Covers legal defence costs and compensation. If you interact with clients, visit premises, or have anyone visit yours, this is essential. Many clients and contracts require it as a condition of working together. Cover from £1m to £10m; most small businesses carry at least £1m. Typical cost: £40–£300 per year.
Covers claims that your advice or services caused a client financial loss. Essential for consultants, accountants, designers, marketing agencies, IT professionals, architects, and anyone else where a mistake could have financial consequences for the client. Some professional bodies require PI as a condition of membership — check your sector. Typical cost: £100–£500 per year for £100,000 of cover. Higher-risk professions pay significantly more.
With 43% of UK businesses experiencing a cybersecurity breach in 2024/25, and average incident costs for SMEs reaching £10,800, cyber insurance is now a serious consideration for any business holding customer data, processing payments online, or relying on IT systems. A good policy covers data breach response, ransomware, business interruption, ICO investigation costs, and legal and PR support. Typical cost: £200–£600 per year for businesses with turnover under £1 million.
Policies that are situational
The following cover types are genuinely important for some businesses and unnecessary for others. The key is matching the cover to your actual risk profile.
| Policy | What it covers | Most relevant for |
|---|---|---|
| Business interruption | Lost income if you can’t trade due to fire, flood, or another insured event | Businesses operating from commercial premises or dependent on specific equipment |
| Commercial property | Premises, contents, stock, and equipment | Businesses with commercial premises or significant business assets. Note: standard home insurance usually doesn’t cover business equipment or stock held at home |
| Directors’ and Officers’ (D&O) | Directors personally against claims for decisions made in their professional capacity — including HSE investigations and corporate manslaughter defence costs | Limited companies, businesses with external investors, or directors who want to protect personal assets |
| Key person insurance | A lump sum if a critical individual dies or becomes critically ill | Businesses where the loss of one person would materially impact revenue or operations |
| Legal expenses | Cost of legal disputes — contract disputes, employment tribunals, tax investigations | Most businesses — usually low cost and worth including given how quickly legal fees escalate |
| Tools and equipment cover | Tools, equipment, and stock on-site and in transit | Tradespeople, contractors, and mobile businesses. Standard property policies often exclude items away from your premises |
What business insurance typically costs
Premiums vary widely depending on your industry, turnover, claims history, and coverage limits. These are indicative starting points for UK small businesses:
| Policy type | Typical annual cost (small business) | Notes |
|---|---|---|
| Public liability (£1m cover) | £40–£300 | Higher for physical or trade businesses; lower for office-based |
| Professional indemnity (£100k cover) | £100–£500 | Financial services, legal, and architecture pay significantly more |
| Employers’ liability (£10m cover) | £50–£250 | Rises with payroll size and risk level of employees’ work |
| Cyber insurance (under £1m turnover) | £200–£600 | Influenced by data volume, IT security measures, and previous breaches |
| Legal expenses | £70–£200 | Often available as a low-cost add-on to other policies |
| Directors’ and Officers’ | From £300 | Varies considerably by company size and complexity |
| Combined package (PL + EL + PI) | £250–£700 | Bundling typically saves 10–20% vs buying separately |
How to buy business insurance
Suitable for straightforward, lower-risk businesses. Simply Business, Superscript, and Policy Bee are well-regarded for UK small business insurance. Good starting point for getting a sense of market rates quickly.
Hiscox is widely recommended for professional services and consultancy businesses. AXA works well for trade and construction. Zurich for larger or more complex needs. Going direct can offer more tailored cover than a generic comparison policy.
A specialist commercial insurance broker compares the full market, including specialist schemes not available online. Worth using if your business is higher risk, has unusual activities, or needs several policies. Brokers are paid by commission from the insurer — no direct cost to you. Find a regulated broker at biba.org.uk.
What to watch out for
- Read the exclusions carefully. The cheapest policy is often cheap because it excludes common claims. Make sure the policy covers the actual scenarios that could affect your business — not just the headline risks.
- Check the policy limits. A £100,000 professional indemnity limit may be adequate for a small freelancer; it won’t be for a business advising large corporate clients.
- Don’t underinsure. Insurers can apply “average” clauses that reduce payouts proportionately if you’re underinsured. Declare your turnover, payroll, and asset values accurately.
- Understand “any one claim” vs “annual aggregate” limits. Some policies limit the total you can claim across the year (aggregate); others limit each individual claim. For professional indemnity especially, understand which applies.
- Check retroactive cover when switching PI insurers. Professional indemnity claims often arise from work done years ago. If you switch insurers, check whether your new policy covers work done before the start date.
- Consider run-off cover if you close the business. PI claims can still arise after you stop trading. Run-off cover extends your protection beyond closure.
- Review annually. Your insurance needs change as your business grows. A policy that was right two years ago may leave gaps now.
Useful resources
- Simply Business — insurance comparison for UK small businesses at simplybusiness.co.uk
- British Insurance Brokers’ Association (BIBA) — find a regulated broker at biba.org.uk
- Health and Safety Executive — employers’ liability requirements at hse.gov.uk
- Association of British Insurers — consumer guides at abi.org.uk
More guides for UK small business owners
Right Hand Man covers everything from business insurance and legal compliance to VAT, hiring your first employee, and writing a business plan. Browse our guides or get in touch if you have a question.