1. Meet your legal obligations

1.1. Purchase employers' liability insurance if you take on employees.

This covers you against claims from employees for accidents or sickness they might suffer as a result of working for you.

Employees include trainees and contract staff. There is an exemption for members of your immediate family if they work for you, but it's wise to have insurance for them anyway.

If you are the only employee of your own limited company, you do not need to purchase employers' liability (EL) cover.

By law you must have EL cover of £5m, though most policies automatically provide £10m cover.

You must exhibit a Certificate of Employers' Liability Insurance at each place of business - and keep it for 40 years. Your policy must be issued by an authorised insurer.

1.2. Obtain at least third-party cover for motor vehicles.

All vehicles used on the road, or in a public place in the course of your business, must be insured for a minimum of third-party liability.

Check employees are sufficiently insured under their private policies to cover use for their employer's business if they use their own vehicles for business purposes.

• This covers your business's liability for personal injury to someone else or damage to property.
• Comprehensive insurance also covers any damage to, or theft of, your own vehicles.
• Your business's liability for any damage caused by an employee's private car while on business will be covered by public liability insurance (see section 4.7) - if you choose to take out such a policy.

2. Assess the risks you wish to cover

2.1. Identify risks to your business infrastructure.

This can include damage to the contents of your business premises and the 'bricks and mortar' of the premises from hazards such as fire, flood and theft (see section 3).

You can also cover any consequential losses suffered as a result of an incident, such as loss of profits following a fire (see section 4.1)

• Most businesses buy an all-risks policy that protects buildings and contents against fire, flood and theft.

2.2. Consider operational risks.

Problems with equipment failure (see section 4.4) or goods in transit (see section 4.5) can be insured against.

Your business's liability if something goes wrong with your product or service, or if you or your employees makes a mistake, should be covered by insurance (see sections 4.7, 4.8, 4.9 and 5.2).

You can also cover the possibility of your debtors going out of business when they owe you money (see section 4.3).

2.3. Insure yourself and your staff.

A small business is often dependent on its people, particularly its owner. Protecting people can often prove as valuable as covering premises and stock.

• There is a variety of insurance options to protect you and your staff (see section 5).

3. Insure your premises and equipment

3.1. Make sure your premises are insured.

If you own your premises, insure them for the full cost of rebuilding.

If you licence or lease your premises, check what insurance cover your landlord has.

Consider security from the start, because it will affect the premium you will pay.

• This includes professional fees and site-clearance costs.
• Insurers generally want to see a reasonable minimum standard of security.
• Make sure that your property is locked whenever it is left unoccupied. Insurers will require you to show evidence of forcible, or violent entry or exit before paying a claim.
• Theft by employees usually needs to be covered by a separate, dedicated policy.

3.2. If you are starting your business from home, do not rely solely on household or personal insurance.

Ordinary household insurance policies will not usually cover business risks.

3.3. Cover your contents, stock and fixtures.

You should insure any stock or equipment your keep on your premises, even if you do not own it.

3.4. Consider an all-risks policy.

Most businesses buy an all-risks policy that protects buildings and contents against a range of risks, such as fire, flood and theft by outsiders. This saves time in arranging and negotiating cover and can also save money.

4. Protect your business from day-to-day risks

4.1. Consider business interruption insurance.

This covers you for any consequential loss suffered following an incident, for example, the disruption caused after a fire.

Many business insurance packages combine cover for loss of profits.

The amount of business interruption cover should be adequate to protect the gross profit of your business, including any growth forecast during the term of the insurance.

Cover should include fixed costs (such as rent), as well as the extra costs of getting your business operational again.

Make sure the insurance lasts long enough.

• Many businesses need more than the standard 12 months to make good the damage. Work out how long it will take you to fully recover, including regaining lost customers.

4.2. Protect your business's cash.

Money (including cash, cheques, stamps and other negotiable documents) is usually covered by a single all-risks policy, but you should check how much cover you will have.

• Different cover limits will apply to money on the premises, in safes and in transit.
• The level of cover also varies according to the nature of your business and opening hours.
• Your policy might also require you to vary banking times and routes, or take other precautions.

4.3. Safeguard against bad debts.

Credit insurance covers you against the risk of your customers going out of business when they owe you money.

You can choose to insure whole or partial turnover and you might be able to insure selected accounts.

Insurers will require you to carry at least ten per cent of the risk yourself.

4.4. Insure against equipment failure.

If your business will be dependent on equipment, its failure can cause serious problems.

Specialist computer policies protect you against the costs of breakdown and loss of data, but they will not cover the cost of upgrading to new equipment.

Engineering policies cover most machinery including computers against breakdown.

Equipment can be insured for the item's value, less a deduction, for appropriate wear-and-tear or on a 'replacement as new' basis.

• Comprehensive engineering policies will often include inspection and certification of your equipment as necessary, organised by the insurer.
• Assess which of these levels of cover is most suitable for you.

4.5. Cover any goods you transport.

Goods-in-transit cover protects the value of goods lost or damaged while in your vehicle or when sent by carrier.

The sum insured is usually limited to a fixed amount for each vehicle or each consignment.

Marine cover might be needed if goods are going to or from overseas locations.

4.6. Insure against theft by staff if necessary.

Staff honesty policies (also called fidelity policies) cover against theft and other forms of dishonesty by employees.

4.7. Consider whether you require public liability insurance.

Public liability insurance covers damages payments and legal costs to members of the public for death, bodily injury or damage to their property caused by your business activities.

• Consider the maximum claims that could be made against you, because awards for serious injury can exceed £1 million. Standard policies provide between £1 million and £5 million cover, but more can be negotiated.

4.8. Protect your business against damage caused by your products.

Your business can be held liable for damage or injury caused by defects in your products' design or manufacture - even if you have not been negligent.

Product liability cover is often included with public liability insurance.

• For example if you sell an electrical appliance which short-circuits and starts a fire on a customer's premises, your business could be held accountable.

4.9. If your business provides advice, consider professional indemnity cover.

This type of cover is designed to protect businesses that give advice in a professional capacity, for example as a management or IT consultant.

If you are proved to have been negligent, without cover, damages and costs could put you out of business or even bankrupt you.

Some trade associations and professional bodies insist you have professional indemnity cover as a condition of membership.

5. Protect you and your people

5.1. Consider key person insurance if your business depends on you.

Businesses run by owner-managers can be particularly vulnerable to the impact of illness or injury to the owner manager.

Cover is usually equal to the estimated loss or profit that would result from that person's death.

5.2. Limit your personal liability for your business' actions with directors' and officers' cover.

In certain circumstances, directors or executive officers of a limited company can be held personally liable for their actions.

• For example, competitors could sue you personally for slander or libel, or a creditor could pursue you for payment if they believed it would be more successful than pursuing the company.

5.3. Protect against death or illness of key staff with critical illness cover.

This provides a lump sum in the event of one of the people covered having a serious health problem, such as a heart attack or stroke.

5.4. Consider private health and income protection insurance for key staff.

Private health insurance can help attract key staff to work for you, while prompt medical attention might help employees to return to work more quickly.

Income protection insurance protects individuals by paying their salaries while they are incapacitated. This can also help you to attract staff.

5.5. Purchase travel insurance for owners and employees travelling overseas.

Emergency overseas medical costs, in particular, can be very high.

6. Plan for the insurance policies you will need

6.1. Carefully calculate the monetary value of the cover you will need.

Insufficient cover is one of the main reasons insurance claims are not paid in full.

When calculating the amounts you wish to insure for, always allow for your business's projected growth.

Always insure your assets for their cost price.

Bear in mind the effect of inflation, or sudden increases in the value of your stock, equipment or liabilities.

• If you under-insure, your claim will be reduced by a similar percentage. For example, your claim will be reduced by ten per cent if your cover was ten per cent lower than it should have been.
• For example, get cover for the predicted value of your stock at the end of your first year, not the stock you start trading with.
• If cost prices vary, make sure you have cover up to their highest levels.

6.2. Understand the terms and conditions and their relevance to your business.

You must disclose everything 'material' to your business. For example, past thefts, bankruptcy or insolvency, or if an insurer has refused to cover you in the past. If you do not disclose these when required to by the terms and conditions, no claims will be accepted.

Bear in mind that most policies require a minimum level of security. You may have to install a burglar alarm or sprinklers according to your insurer's specifications.

An insurer might send an insurance surveyor to assess the risks accurately, and recommend improvements before giving you cover.

6.3. Remember that all insurance policies have exclusions - even all-risks policies.

For example, equipment failure because wear-and-tear is not covered; theft insurance excludes shoplifting; and buildings insurance may exclude cover for subsidence unless it is specifically requested.

6.4. To save time, consider buying a package.

Insurance for small and medium-sized businesses is often sold in packages that group together the most common requirements, such as employers' liability insurance, buildings and contents, money and business interruption.

Look out for packages specific to your sector.

Remember that other areas of cover can be bolted-on to packages to meet your individual requirements.

• Buying these packages can save time, because you only source and negotiate once for all your insurance needs.
• Some packages are tailored to cover specialist areas such as retail, construction or manufacturing.
• Each insurance provider offers packages comprising different core elements. Check the cover you require against the package contents and add other cover as necessary.

7. Find and choose an insurer

7.1. Consider dealing directly with an insurance company.

But remember that a company's agent or sales person can only recommend policies from the company's portfolio.

7.2. Find a broker or an intermediary.

Brokers and intermediaries should search a variety of providers on your behalf.

Some will receive a commission if you buy from them, while others will charge a fee.

7.3. Get advice from industry bodies.

The Association of British Insurers (ABI) and the British Insurance Brokers Association (BIBA) can both offer support and direct you to suitable members.

Visit www.abi.org.uk

Visit www.biba.org.uk

7.4. Make sure you're buying from a reputable source.

The sale of insurance is regulated by the Financial Services Authority (FSA). Check that your proposed insurer, broker or intermediary is registered with the FSA.

It is also worth checking if they are members of the Association of British Insurers or British Insurance Brokers Association.

8. Manage your insurance costs

8.1. Review the risks you insure against.

Many companies dispense with cover for risks that do not affect their business.

Never just cut the sum insured, because this will lead to under-insurance and a serious shortfall if you need to claim.

• For example, a software consultancy may not require goods-in-transit cover if it does not transport products.

8.2. Increase security.

Insurers often offer smaller premiums to businesses with good risk-management features, such as approved burglar alarms (unless this is already a policy requirement).

A poor claims record might lead to increased premiums. It might even result in your insurer refusing to renew cover.

A few policies offer no-claims discounts, achieved by not making a claim during a certain period of time.

8.3. Increase the amount you pay towards each claim - the excess or deductible.

Most policies have a standard excess. For example, you might have to pay the first £250 of any claim, but you can opt for a larger excess to reduce your premiums.

8.4. Investigate the best-value deals.

Pick a supplier that specialises in your type and size of business or policy need, because they are more likely to offer competitive rates.

Obtain competitive quotes. But once you have built a relationship with an adviser, it is always worth offering them the chance to match (or better) the quotes.

8.5. Ask how different payment methods can ease cashflow or control costs.

You can spread costs by paying monthly. Find out if you can make savings by buying longer-term cover.