Figuring out the type of insurance you need and the extent of cover required is an essential and ongoing process for any small business owner.
This article provides some initial guidance on what insurance covers and the types of insurance available to businesses.
What is business insurance?
Regardless of your business type, you need insurance, which will pay out if you suffer financial loss.
For example, if someone breaks into your business premises and steals valuable equipment, your contents insurance will cover replacing the materials.
Similarly, if an employee brings a compensation claim against you after suffering a personal injury, your Employers’ Liability Insurance will cover any legal costs and awards made by the court.
How do I get business insurance?
You can either purchase business insurance directly from an insurer (online or by phone) or use an insurance broker.
The latter's advantage is that they understand the insurance market and can advise you on the type and extent of insurance cover you need. They will also be able to secure the best premium rates for your organisation.
What should I consider when choosing business insurance?
The first thing to consider when deciding on the type of business insurance you need is the nature of your organisation. It is useful to ask yourself the following questions:
- Do you have employees, and if so, how many and where do they work?
- How many buildings does your business operate from, and do you own or lease the premises?
- What equipment/tools/computers do you have, and where are they stored?
- Do your business activities put you at risk of negligence claims from members of the public?
- How many and what sort of vehicles are used in your business?
- Do you use agents or distributors?
- Do you have stock and property located abroad?
- Do you process personal data?
- Would a disaster such as a flood, explosion, or riot result in your business closing for a period?
Is business insurance a legal requirement?
The only business insurance legally required is Employers’ Liability Insurance if you have staff, even on a casual basis.
However, having appropriate insurance cover and investors is a good business practice. Those advertising for tender contracts will want to know that you have the required cover to protect their interests.
Are business insurance claims taxable income?
VAT is not payable on business insurance. The insurance costs you pay can also be used against your taxable income, provided they are “wholly and exclusively” for the business.
Can I claim VAT on business insurance?
If the business is VAT registered, the insurance company will pay the claim net of VAT. The business then claims the VAT element from HMRC on its next VAT return.
Can I claim on my insurance if my business is insolvent?
This depends on your insurance policy. Some policies have express provisions setting out what they will and will not pay out if your business becomes insolvent.
If your company is in financial distress, it is sensible to carefully review your insurance policies to understand what will happen in the event of insolvency.
You must also check whether your insurer requires notification if your organisation has serious financial problems.
What are the different types of business insurance, and what do they cover?
The most common types of business insurance are:
- Professional Indemnity Insurance – protects your SME from claims related to mistakes, for example, a defective product
- Public Liability Insurance – provides cover if a member of the public brings a claim for damages caused by a negligent act or omission by your business
- Employers' Liability Insurance – is a legal requirement for most businesses that employ staff. It protects if one of your employees becomes ill or injured due to work
- Directors’ and Officers’ Insurance – covers you for specific claims made against you in your role as a company director
- Contents Insurance – protects against loss and/or damage to your company’s tools and equipment (including office equipment such as computers)
- Commercial Property Insurance – if you own the building you operate from, this insurance will cover loss or damage to that property
- Sole Trader and Self-employed Insurance – can be tailored to protect you from claims brought against you in your capacity as a sole trader
- Business Interruption Insurance - replaces business income lost due to a disaster
The cost of each type of business insurance will vary depending on the extent of cover you need and the market sector you operate in.
How do uncertain times affect business insurance?
Insurers are in the business of evaluating risk. Therefore, when times are tough, insurance companies will apply stricter underwriting criteria when assessing whether or not to provide a particular policy to an organisation.
In addition, if economic conditions enhance the risk insurers face, the prices of specific policies may increase.
Can bankruptcy affect getting business insurance?
If you have a company you have declared bankrupt, insurers will be aware of your bankruptcy through your credit report. They may refuse coverage for you or charge a higher premium.
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The above types of insurance are only a small selection of the variety of cover that is available to small businesses.