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If you are considering starting your own business, you may have read that you must have business insurance before trading. Business insurance refers to several different and distinct insurance policies. However, they all have in common the purpose of protecting your business from unexpected risk and liability. This article will explain the different kinds of business insurance available so you can decide which kind of insurance is right for you.
What Are the Benefits of Insurance?
All forms of business insurance minimise the impact of specific risks to your business. This works by paying an insurer a premium in exchange for the insurer assuming the risk on your behalf. If an insured risk happens, the insurer will meet the liability on your behalf provided:
- the policy is in place; and
- you have not acted in a way to void the coverage.
While paying premiums may be a troublesome expense, insurance can save your business significant money if something unexpected happens. Additionally, paying a premium for a policy means your business does not have to retain sufficient savings to meet any loss. This means you can put your business’s capital to work to generate more wealth.
What Are the Legal Considerations of Insurance?
When you deal with insurers, you should always be:
- honest;
- act with the utmost good faith; and
- abide by all terms of the policy.
This is always relevant throughout the relationship with the insurer, including before you obtain the policy and if you make a claim. If you fail to be honest, act in good faith, or
abide by the policy’s terms, the insurer may deny coverage. Consequently, you must meet the risk yourself and potentially face civil and criminal liability.
Likewise, you must ensure your policy covers the loss in question. For instance, a property policy covering flooding damage may not cover water damage from a burst water pipe. Therefore, you should speak to a broker to ensure you obtain the right insurance.
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What Types of Business Insurance Should I Obtain?
Depending on your business, the law may require you to obtain some kinds of insurance, while others may be optional. We consider the primary kinds of business insurance policies below.
Liability Insurance
Liability insurance, or indemnity insurance, comprises the most relevant insurance policies for businesses. In general, a liability policy describes insurance that pays out if your business is liable for a third party’s loss or damage. In other words, the insurer covers the cost of your liability if an insured event arises.
There are several different kinds of liability insurance. The most relevant for businesses include the following.
| Type of Liability Insurance | Description |
| Employer’s Liability | By law, any business that employs individuals must have employer’s liability insurance. This protects your business from any liability you may owe to your employees if injured at work. |
| Professional Indemnity | Professional indemnity insurance (P&I) is relevant for solicitors, accountants, consultants, and financial advisers. P&I protects your business if it makes a mistake when providing a professional service, such as legal advice. As many regulatory bodies regulate certain professions, you may have to obtain P&I to operate in a regulated sector. |
| Public Liability | Public liability insurance protects your business from any injury a third party suffers in the course of your business. For instance, if a customer trips and falls in your shop. |
| Product Liability | Product liability insurance is relevant for manufacturers and some retailers. This policy will cover any loss if someone is injured or suffers a loss due to a faulty good you produced or sold. |
Property Insurance
Property insurance covers loss or damage to real property. This can include:
- land;
- buildings; and
- contents like computers and machinery.
If your business owns any land or buildings secured by a mortgage or fixed charge, the loan agreement terms require you to obtain property insurance. The same applies to any other real property that is secured.
Otherwise, in most cases, the law does not require you to obtain property insurance. But if your business owns any tangible property, ask yourself if you could afford to replace it if lost or damaged. If not, or it would be a significant outlay, it might be wise to obtain property insurance.
Business Interruption
Business interruption reimburses your business if you can no longer do business, such as if a fire damages your premises. Business interruption may be a standalone policy or part of another policy, like property insurance. However, business interruption is a distinct form of insurance because it insures against economic loss arising from some other event, such as a storm or a pandemic.
Key Person
Suppose your business employs highly skilled professionals that are essential to the business’s operation. In that case, critical person insurance will pay a fixed sum if they die or cannot otherwise work.
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Key Takeaways
While not always necessary, businesses should always have adequate insurance coverage. Nevertheless, different businesses have different insurance needs. The most common forms of insurance for businesses include:
- liability insurance, including employer’s liability and professional indemnity insurance;
- property insurance; and
- business interruption insurance.
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Frequently Asked Questions
Employers’ liability insurance covers claims by employees or former employees who believe they have suffered an injury or an illness due to their work with their employer.
You must get your employers’ liability insurance through an authorised insurer. Otherwise, you risk breaking the law.
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