Sole trader insurance – what cover should you have in place?

While nobody likes to think about it, things can and do go wrong when you’re in business, no matter how cautious you are. An employee could get hurt on the job. An unhappy customer could sue you. Or a burst water pipe could flood your premises and damage expensive equipment.

As a sole trader, you are the business. So, should any of this happen, having a safety net could be the difference between weathering the storm and shutting your doors permanently (and getting into serious debt in the bargain). This is why insurance could be the best business purchase you ever make.

So what insurance policies should you have in place as a sole trader? And how would they protect you should the worst happen?

Why buy business insurance as a sole trader?

There are three main reasons to buy business insurance as a sole trader:

1. It’s the law
2. Your clients require it
3. For peace of mind

Meeting your legal requirements

In the UK, two types of business insurance are compulsory for all businesses:

• Employers’ liability insurance

As a sole trader, you need to have employers’ liability insurance if you hire any staff, whether it’s on a full-time, part-time, or casual basis. The only exception is if your employees are close family members.

You could get fined £2,500 a day for not having employers’ liability insurance. On top of that, you risk a £1,000 fine if you don’t display your employers’ liability insurance certificate at your premises or refuse to show it to inspectors who have asked to see it

• Business vehicle insurance

If you own a car, you already have car insurance. But this will only cover you for personal journeys and your commute to the office. Business-related driving is rarely covered by standard motor insurance.

As a result, if you use your car for any business-related activities — deliveries, visiting clients, or even trips to the post office — you’ll need business cover. Otherwise:

• Your claim may be refused
• You risk getting prosecuted. This could also happen if your employees drive their private cars for business-related reasons without the proper cover

While only employers’ liability and motor insurance are compulsory, your professional body may also require you to have insurance in place. For example, the Solicitors’ Regulation Authority — the body that regulates solicitors practicing in England and Wales — requires its members to have professional indemnity insurance.

This means that, if you work in a regulated profession, you may have to buy insurance even though it’s not required by law. The fact that your professional body requires it means that, in practice, it’s mandatory.

Meeting contractual requirements

Your clients may require you to take out insurance as part of your contract. Typically, you’ll need professional indemnity insurance. In some cases, they may also require you to buy public liability insurance. This is so they’re protected if you make a mistake on the job and someone tries to hold them responsible.

Most clients won’t let you start until they’ve seen proof you’ve complied with your obligations, such as a copy of the policy schedule. If the contract is indefinite, they may also ask for proof you’ve renewed the policy once a year.

Putting your mind at rest

So you don’t have any employees, don’t drive for business, and haven’t been asked to buy insurance by your professional body or clients.

Be that as it may, it’s still worth at least considering buying business insurance.

As a sole trader, because you do business in your own name, you’re personally liable for what happens in your business. In other words, business debts can become personal debts. Which means that, worst comes to worst, you could lose personal assets like your family home and be forced to file for bankruptcy.

Having insurance in place puts your mind at rest that you don’t have to bear financial losses yourself. There’s someone you can turn to should something go badly wrong.

What insurance policies should I buy as a sole trader, and what do they cover?

Depending on your circumstances, there are four types of insurance policy you may need to consider as a sole trader:

• Employers’ liability insurance
• Business car insurance
• Professional indemnity insurance
• Public liability insurance

Depending on the type of business you own and your circumstances, it may also be worth looking into:

• Products liability insurance
• Business interruption insurance

Here’s a quick look at what each of these types of policy typically covers.

Employers’ liability insurance

Employers’ liability insurance is one of two types of business insurance that are legally compulsory in the UK. It covers compensation and any legal fees if an employee gets hurt or becomes ill because of the job.

Employees are:

• Permanent staff, whether full or part-time
• Contract, casual, and seasonal workers
• Labour-only subcontractors. The Association of Business Insurers defines these as people who:
  • Have National Insurance contributions and income tax deducted from their salary at source
  • Are told where to work, what their working hours are, and under which conditions they need to do the work
  • Can’t send a substitute if they’re unable or unwilling to do the work themselves
• Temporary staff, including students and people on placements
• Volunteers

The law requires you to have cover of at least £5 million.

Business vehicle insurance

The second type of compulsory insurance, business vehicle insurance works like normal car insurance, except that it protects you when you’re on business-related journeys.

You’re covered if you:

• Use a vehicle for business reasons such as deliveries, or because you run a taxi business
• Regularly drive to several different locations for work
•  Have colleagues on board with you

Most policies will provide you with a replacement vehicle if you’re in an accident and your car has to go to the garage for repairs.

Many insurers will also give you the option to get legal cover as an add-on. This means your insurer will pay the cost of claiming compensation if you’re in an accident that isn’t your fault while driving for business.

Professional indemnity insurance

This type of policy pays for your legal costs and any court-ordered damages if a client sues you because they claim they lost money because of a mistake you made on the job. It typically covers:

• Negligence. This is when you make a mistake you could’ve avoided by paying more attention
• Breach of confidentiality, whether it’s intentional or not
• Breach of copyright, whether it’s intentional or not
• Loss of data or documents
• Defamation. This is when a client claims you’ve bad-mouthed them
• Breach of contract

Many professional bodies require their members to have professional indemnity insurance in place. Your clients might also make this a condition of your contract. That said, it’s worth considering it regardless if you:

• Provide a professional service, especially if it involves giving advice
• Come up with designs or other creative assets for your clients

Public liability insurance

Public liability insurance pays your legal costs and compensation if you cause an accident at work. It covers instances where:

• Someone gets hurt while at your premises, for example because they slip on a wet floor
• Someone at a client’s premises gets hurt because of something you did, for example because they trip on your briefcase
• Someone’s property is damaged at your premises
• You damage someone’s property while on a client’s premises, for example because you accidentally spill coffee on their laptop

Your clients may make public liability insurance a condition of your contract, especially if you need to go on site to deliver your service. But if you often work on site or see clients at your premises, it’s worth buying it regardless.

Many insurers offer this as an add-on to professional indemnity policies. So you could have both types of cover in place for a very reasonable fee.

Products liability insurance

Product liability insurance pays legal costs and compensation if a customer suffers damage because you’ve sold them faulty goods.

Customers may hold you liable for damages even if you didn’t manufacture the product yourself. So, this insurance is definitely worth having if you sell goods to customers.

Business interruption insurance

As the name suggests, business interruption insurance pays if you have to stop trading due to an unforeseen event such as a fire or a flood. The policy covers any financial losses you suffered as a direct result of the event, including lost revenue and staff salaries.

Unfortunately, business interruption insurance has been in the news for all the wrong reasons in 2020. Many insurers refused Covid-19 claims, arguing that, for cover to operate, it had to be shown that businesses closed because there were outbreaks on the premises.

In September 2020, the English High Court ruled that it was enough for outbreaks to be “in the vicinity” of the premises. The judgement was initially appealed, but the insurers dropped the appeal, which means business interruption insurance should pay Covid-19 claims moving forward.

You can’t put a price on peace of mind

The great Roman statesman Cicero once said you should “Hope for the best, plan for the worst.” Put more simply, while you should run your business with a positive attitude, it pays to be prepared in case things go wrong.

It takes relatively little effort to think about what insurance policies might make sense for your business and only a few minutes to buy them.

But that decision might prove invaluable down the line.

Get a business insurance quote here

If you’d like to get a no-ties business insurance quote, try Qdos. You can get tailored cover just for your business – and pay monthly. You could be covered in as little as 10 minutes. Find out more here.