Business insurance is bought in one of two states of mind. Either a client has demanded evidence of cover by Friday, or something has gone wrong, and the founder is finding out what they were not covered for. Neither is a good position from which to make a decision, and both are avoidable with about an hour of thought.
Here is the uncomfortable truth that most insurance content soft-pedals: almost all of it is written by people who sell insurance, and the incentive runs one way. You will be told, sincerely and with genuine examples, that you need cover for scenarios that are rare in your sector and cheap to absorb if they happen. Meanwhile the cover that is legally compulsory, and carries penalties severe enough to close a small business, is often mentioned in the same tone as everything else.
This piece separates the three categories properly: what UK law requires, what your clients and landlords will contractually demand, and what is genuinely optional risk management.
Legally required
There is one that applies to almost every business with staff.
Employers’ liability insurance. Required under the Employers’ Liability (Compulsory Insurance) Act 1969 for most UK businesses employing one or more people, whether full-time, part-time or on zero-hours arrangements [1]. The statutory minimum cover is £5 million, though in practice most policies offer £10 million as standard because the price difference is negligible [2].
The enforcement position is the part founders should absorb. Operating without valid cover is a criminal offence, and the Health and Safety Executive can issue fines of up to £2,500 for every day you are uninsured [1]. There is a separate penalty of up to £1,000 for failing to display the certificate [2]. Cover for a small business typically costs somewhere between £100 and £300 a year [2], which makes the arithmetic of going without indefensible rather than merely risky.
Your policy must be with an insurer authorised by the Financial Conduct Authority or the Prudential Regulation Authority [2].
Exemptions exist and are narrower than founders hope. Sole traders working alone, and some family businesses that are not limited companies, may fall outside the requirement [3]. Businesses using only genuine contractors may not need it, though that turns on whether those contractors are genuinely contractors, which is a question with its own expensive history.
The area that causes most confusion is who counts. Volunteers, apprentices and labour-only subcontractors frequently do, because the test is about control over how the work is done rather than what the paperwork calls the person. If you direct how, when and where someone works, assume they count and check.
Motor insurance where vehicles are used for business, on a commercial rather than personal policy.
That is the compulsory list for most businesses. Everything else in this article is either contractual or discretionary.
Contractually expected
These are not required by law and are frequently required by someone you want to do business with, which amounts to the same thing in practice.
Public liability insurance. Covers injury to a third party or damage to their property arising from your business activities, including legal costs. Not legally required for most businesses, but routinely demanded by clients, landlords and event venues, and many trade and professional businesses cannot win contracts without it [4].
Professional indemnity insurance. For businesses providing advice, services or designs. It responds to claims that your work caused a client loss. Some professional regulators require it as a condition of practice, and a great many corporate and public sector clients require it as a condition of contract, frequently at a specified level. If you sell expertise, expect to be asked.
Product liability insurance if you manufacture, import or sell physical products.
The practical point about this category is that the cover you need is often defined by the contracts you want rather than by your own risk assessment. Read the insurance clause in a client contract before you sign it, because agreeing to carry £5 million of professional indemnity you do not have is a problem you have created for yourself.
Genuinely optional
Worth considering on the merits rather than because someone insisted.
Business interruption insurance, which covers lost income when you cannot trade. Most relevant where you depend on a physical location or specific equipment.
Cyber insurance, which has moved from exotic to mainstream for any business holding customer data or dependent on systems. Consider it seriously if a systems outage would stop you trading or if you hold significant personal data.
Directors’ and officers’ insurance, which covers claims against directors personally. Worth noting that this is a different product from personal guarantee insurance: D&O responds to claims such as wrongful trading allegations and misfeasance, whereas personal guarantee insurance responds to a lender calling a guarantee [5]. Founders sometimes assume one covers the other. Neither does.
Stock, contents and equipment cover, straightforward and priced accordingly.
Legal expenses insurance, which funds disputes and often includes an advice line that small businesses use more than the cover itself.
Key person insurance, which pays out if someone the business genuinely cannot operate without dies or becomes seriously ill. Frequently relevant to exactly the founder-dependent businesses least likely to consider it.
The mistakes I see most often
Assuming public liability is the compulsory one. It is the most talked-about, and it is employers’ liability that carries the daily fine. Founders regularly have the optional cover and not the mandatory one.
Buying on price without reading the limits. A £5 million limit is a per-occurrence figure covering legal defence costs and any award together. In a complex claim, defence costs alone can consume a meaningful share before settlement is reached [1], which is why most insurers now offer £10 million as standard.
Not telling the insurer what the business actually does. Cover is priced on the described activity. Businesses evolve; the policy does not follow automatically, and the discrepancy surfaces at claim stage. Review the description annually.
Missing the contractual requirement in a client agreement. Signing a contract requiring a level of professional indemnity you do not hold is a breach from day one.
Treating contractors as outside the employers’ liability requirement without checking. The control test does not follow the label on the invoice.
Assuming limited liability covers the gap. It does not cover employee injury claims, it does not cover professional negligence, and it does not survive a personal guarantee.
How to work out what you actually need
- Start with the compulsory item. If you employ anyone, arrange employers’ liability cover with an authorised insurer before their first day and display the certificate.
- Read the insurance clauses in every contract you have signed. This tells you what is contractually required, which is usually the real driver of what you must buy.
- List the three things that would genuinely stop you trading. Losing premises, losing a key system, losing a key person. That list determines whether business interruption, cyber or key person cover is worth the premium for you specifically.
- Establish whether you give advice. If clients act on your recommendations, professional indemnity is not optional in practice even where it is optional in law.
- Check the limits against realistic claim sizes in your sector, not against your turnover. The two are unrelated.
- Use a broker rather than a comparison site for anything complex. For straightforward covers, direct purchase is efficient. Where the business has unusual activities, a broker earns their commission by getting the description right.
- Review annually and after any material change. New service line, new premises, first employee, first overseas client. Each changes the position.
The principle underneath all of this
Insurance is not risk management. It is the transfer of risks you have identified and decided you cannot absorb, and it only works when the identification has actually happened. Founders who buy insurance because someone asked for a certificate end up with cover that satisfies a contract and a set of unexamined exposures elsewhere.
The compulsory item is not negotiable and is cheap. The contractual items are determined by the business you want to win. Everything else is a judgement about what you could absorb, which is a question about your balance sheet rather than about insurance.
Building a financial picture that includes the risks as well as the revenue? SGI has advised more than 2,000 businesses across 47 industries since 2014, and unexamined exposures are a recurring finding in business health checks. Book a conversation or read about Business Consulting.
SGI is not authorised by the Financial Conduct Authority and is not an insurance broker. This article is general information and not insurance advice. Speak to an FCA-authorised broker or insurer about your specific requirements.
Frequently Asked Questions
What business insurance is legally required in the UK?
Employers’ liability insurance for most businesses employing one or more people, at a statutory minimum of £5 million, under the Employers’ Liability (Compulsory Insurance) Act 1969. Commercial motor insurance where vehicles are used for business. Almost everything else is contractual or discretionary.
What happens if I do not have employers’ liability insurance?
Operating without it is a criminal offence, and the Health and Safety Executive can fine up to £2,500 for each day you are uninsured. There is a separate penalty of up to £1,000 for failing to display the certificate. Cover typically costs £100 to £300 a year for a small business.
Do I need employers’ liability insurance for contractors or volunteers?
Frequently yes. The test turns on control over how the work is done rather than on the label in the contract, so volunteers, apprentices and labour-only subcontractors often count. If you direct how, when and where someone works, assume they count and confirm with a broker.
Is public liability insurance compulsory?
Not for most businesses, but it is routinely required by clients, landlords and venues, so in practice many businesses cannot trade without it. Check the insurance clauses in your contracts before assuming you can skip it.
Do I need professional indemnity insurance?
If clients act on your advice, designs or recommendations, it is the cover that responds when they claim your work caused them loss. Some regulators require it, and many corporate and public sector clients require it at a specified level as a condition of contract.
Is directors’ and officers’ insurance the same as personal guarantee insurance?
No, and confusing them is a costly assumption. D&O responds to claims against directors personally, such as wrongful trading allegations. Personal guarantee insurance responds when a lender calls a guarantee you signed. Neither covers the other.
References
- WS Insurance, Employers liability insurance requirements UK: the 2026 compliance guide, June 2026. https://wsinsurance.co.uk/employers-liability-insurance-requirements-uk-the-2026-compliance-guide/
- Smart SMS Solutions, Employers’ liability insurance in the UK: rules, exemptions and costs, December 2025. https://smartsmssolutions.com/resources/blog/uk/employers-liability-insurance-requirements-uk
- Simply Business, Is employers’ liability a legal requirement? https://www.simplybusiness.co.uk/business-insurance/faq/is-employers-liability-insurance-a-legal-requirement/
- Artemis, Business insurance UK: the complete guide 2026, May 2026. https://www.artemisltd.co.uk/post/business-insurance-guide
- Company Debt, What is personal guarantee insurance?, 2026. https://www.companydebt.com/advice/personal-guarantee-insurance/
- Health and Safety Executive, Employers’ liability (compulsory insurance) Act 1969: a guide for employers. https://www.hse.gov.uk/pubns/hse40.htm
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Kurt Graver is the founder and CEO of SGI Consultants, a business consultancy that has helped over 2,000 entrepreneurs establish successful startups using systematic business development methodologies. An accountant with an MBA and 25 years of commerce and consultancy experience, Kurt specialises in strategic planning, market analysis, and sustainable business growth