If the two certainties in life are death and taxes, then for small businesses there's a third: insurance. Insurance can be a significant burden for many SMEs, but there are ways of reducing the bill.

There are two kinds of compulsory insurance for businesses. The first is third-party motor insurance for any vehicle used by your business. The second is employers' liability insurance, which covers you against compensation claims by your employees if they become injured or sick through work, and this is compulsory by law. All paid employees need to be covered by the insurance, but you don't need cover for self-employed contractors or volunteers. The legal minimum cover is £10m.

In recent years, the cost of liability insurance for small businesses has soared. One reason for this, says David Bishop, a spokesman for the Federation of Small Businesses, is the poor performance of the stock market. Another is an increase in "long-tailed" diseases - illnesses such as asbestosis that don't show up for many years but then require huge payouts. "Insurers are particularly nervous because they find it difficult to calculate the risk of something which perhaps won't show up for 25 years," says Bishop.

A survey by insurance company Axa in 2002 found that 210,000 SMEs in the UK hadn't taken out employer liability insurance. However, this really isn't a good idea. When the Health & Safety Executive inspects your premises, it will ask to see your certificate of employer's liability insurance: you can be fined £1,000 for failing to produce the certificate, and a further £2,500 a day for every day you don't have cover.

To minimise the cost, you should carry out an assessment of the risk your employees face, and make sure that they have got all the right equipment and training. It can be worth hiring an independent health and safety adviser to carry out this assessment for you.

Unfortunately, for very small businesses, this may not make much difference, says Bishop, because it's not cost-effective for insurers to visit every small business and assess the risks. "More responsible businesses don't get the rewards for their responsible behaviour."

Although not compulsory, most businesses will want to cover both their premises and their contents against criminal damage (such as arson or theft) and weather damage, such as floods or lightning strikes. Many small businesses make the mistake of underinsuring their premises - you need to insure them for the full rebuilding cost, not just the market value. The best way to find out the rebuilding cost is to consult a chartered surveyor.

Crime is on the increase, and the cost of crime is rising, says Neil Mercier, property insurance manager at Axa. "The average amount of a claim for crime [by business] is running at £4,200 in 2004, which is double what it was two years ago." You can reduce your premiums by taking sensible precautions. Begin by auditing the risks of your own premises. Install burglar alarms, fit window locks and make sure doors and windows are locked at the end of each working day. The longer you go without making a claim, Mercier points out, the cheaper your premiums will be.

It's easy to become complacent. RM2, a firm that administers share option schemes for SMEs, recently became the victim of a particularly audacious crime when a burglar took a laptop and projector from a conference room in full view of staff. "He just walked in, packed it all up and just walked off with it," says Geoff Bond, senior partner at RM2.

"We thought: 'he's just come in to fix something', and he basically packed it all up in the bags provided and just walked out." The burglar left the office via the back stairs, got into a car and drove off. Luckily, RM2 had not made any previous claims, and although the insurance company initially asked awkward questions about why the front door wasn't locked, it paid up in full within four weeks.

Increasingly, businesses are taking out other kinds of liability insurance. If you have premises, you should seriously consider public liability insurance. "The no-win no fee solicitors have encouraged people looking for compensation," says Mercier. "Every person that comes into your premises has the potential to have an accident. You have to make sure that your aisles and alleyways are clear, and that if you spill things on the floor they're cleaned up."

Professionals such as accountants should also look at indemnity insurance. "This covers your legal liability if you're giving advice, and if as a result of your negligent advice someone suffers financial loss," says Malcolm Tarling a spokesperson for the Association of British Insurers. If you make or sell a product, you may want to take out product guarantee insurance, in case you are sued for damages as a result of faulty design.

What is the best way to reduce your insurance? Tarling is succinct. "Assess your risks, and get expert advice." Instead of going directly to an insurance company, consult an insurance broker - you can find one through the British Insurance Brokers' Association.

Brokers can advise on what types of insurance you need to take out, and hunt around for the best insurance for your kind of business. This may often be in the form of a tailored package rather than a set of individual policies. Bishop points out that good advice is also available from trade associations, such as the Federation of Master Builders or the Federation of Small Businesses itself.

And don't neglect the risk assessment. As Mercier points out, it is to your own advantage to minimise the risk to your employees and others. "If you've got employees off sick, it's going to affect the success of your business as well as what it might cost you in insurance terms."

Insurance options for SMEs

·Employers' liability insurance:
This covers you against compensation claims by your employees for ill-health or accidents, and it is compulsory.

·Third-party motor insurance:
This is compulsory.

· Buildings insurance and contents insurance:
This covers your premises and contents against criminal or weather damage. It is not compulsory, but it's highly advisable.

· Public liability insurance:
This type of insurance covers you against being sued by a member of the public who suffers an injury on your premises.

· Professional indemnity insurance:
This covers you against being sued for giving out bad professional advice to clients.

·Product liability insurance:
This insurance covers you against being sued for a faulty product.