Why do sole traders need insurance?
Everyone who works for themselves should have some form of liability insurance. Remember, as a sole trader, you won’t have the same limited liability status that comes with operating through an LTD company, so buying insurance is essential.
Liability claims
Being sued is a risk for every business, but a legal claim could have a significant financial impact on a sole trader without the right insurance. Accusations of causing an injury, property damage or financial loss can come from clients, employees and third parties.
Damage or loss to business premises and equipment
Whether you own a laptop, a box of tools, or have business premises with specialist equipment, the cost of repair or replacement may only be possible if you have insurance as a backup plan.
Contract disputes and unpaid invoices
As a sole trader, you enter into contracts and become solely responsible for the promised services. Clients often feel entitled to refunds, free extra work or goods, and they’re not afraid to pursue their claims in court. Alternatively, they can refuse to pay your invoice and leave you in a financial lurch.
Inability to work
One of the biggest worries for sole traders is their inability to provide for themselves and their loved ones. The impact of falling ill or getting seriously injured is a risk for every business owner, which can be reduced with the right insurance.
Contract disputes
Sometimes, poorly defined expectations at the outset of a job result in contract disputes. Disputes over deliverables can result in extra make-good work or unpaid invoices.
Unpaid invoices
Frequently, sole traders have to deal with bad debt. Customers either unduly delay payments or try to wriggle out of paying altogether.
What is sole trader liability insurance?
Sole trader liability insurance is an umbrella term for several legal liability products, including public liability, professional indemnity, employers liability and commercial legal expenses insurance.
Legal liability insurance protects sole traders against legal actions arising from your business activities. Depending on your business needs, you may need to purchase one or more of these liability products.
Sole trader professional indemnity insurance
Professional indemnity insurance is a specialist legal cover that protects sole traders from accusations of poor advice, professional mistakes, negligence, and other claims.
Suppose a client accuses you of a mistake that resulted in a loss. In that case, your professional indemnity insurance can provide a qualified legal defence and pay the compensation if due.
It's easy to see how professional indemnity can help with some professions. Suppose an accountant makes a mistake, and their advice leads to a fine from HMRC; there is a clear connection between the professional advice and the loss.
In other professions, the connection is sometimes less clear. Suppose a hairdresser recommends a specific treatment or product that goes wrong; in the eyes of the insurance, this could be considered professional advice.
What does professional indemnity insurance for sole traders cover?
Professional Indemnity Insurance protects sole traders from claims or allegations of wrongdoing from their professional advice or work product.
Cover includes:
- Providing the wrong advice or recommendation
- Failing your duty of care
- Making a mistake
- Acting negligently
For example:
- A mistake can lead to a loss of earnings, extra costs to put things right or a damaged reputation. If clients believe your work is the cause, they may take legal action against you.
- A client may claim that your advice or instructions were the cause of their injury, and they’re demanding compensation.
How much professional indemnity does a sole traders need?
The professional indemnity limit you need will reflect your particular business activities. When choosing a limit, consider several factors, including the value of your client contracts, your contractual requirements, and possible financial impacts if your advice goes wrong.
Switching your professional indemnity insurance
Typically, in the UK, if you cancel a professional indemnity policy, you can no longer claim against it.
Therefore, if you switch your sole trader insurance provider, be sure your new policy covers your past work; this is called “retroactive cover”.
Should I keep professional indemnity insurance if I take a pause or retire?
It’s wise to keep your professional indemnity if you stopped, either for a while or indefinitely, from your sole trader work. Claims against professional misconduct can surface months or years after you deliver your work.
If a past client sues you for damages and you have cancelled your professional indemnity, you will not be covered.
How long you keep your cover in place is up to you; consider the type of work you did and the likelihood that a client might bring a claim against you.
Sole trader public liability insurance
Public liability insurance is the first cover most sole traders will look for. However, just like there is a case for buying other insurances, you must consider your work circumstances before opting for sole trader public liability insurance.
Do Sole Traders Need Public Liability Insurance?
Public liability insurance could be a crucial consideration for many sole traders who have physical dealings with customers and other people's property.
As a sole trader, you are personally responsible for your business activities, and public liability insurance provides essential protection in the following ways:
Third-Party Claims: A customer, client, or a member of the public make a claim against your business for an injury or property damage caused by your actions or negligence.
Legal Expenses: Without insurance defending a claim from a third party could be very costly.
Peace of Mind: Having public liability insurance can offer peace of mind, allowing you to focus on your work without constant worry about potential legal claims.
While it may not be legally required for sole traders to have public liability, it can be useful in safeguarding your business, reputation, and financial well-being in case of unexpected incidents.
What does public liability for sole traders cover?
If you have physical contact with your clients, their property or any other third parties during your work, you are likely to be a candidate for public liability insurance.
Public liability insurance is a legal cover providing you with legal defence and possible compensation payouts to the damaged party. A damaged party could be your client or a third party claiming that you have caused them injury or property damage.
Cover includes:
- accidental injury or death
- accidental property damage
For example:
- A customer trips and falls over equipment that a sole trader left out. The customer suffers an injury and claims compensation.
- A painter accidentally spills paint on a client's expensive rug, causing damage that requires professional cleaning or replacement.
- An electrician accidentally damages a customer's electrical appliance while working on their property, resulting in the customer claiming the repair or replacement cost.
- A plumber accidentally damages a client's water pipe while fixing another issue, causing water damage to the property and resulting in a compensation claim.
- A landscaper's equipment damages a neighbour's car while working on a project next to the neighbour's property, resulting in a claim for repairing the damage.
Other insurance sole traders buy
As a sole trader, it's important to consider whether you're financially equipped to handle legal disputes, protect expensive equipment, manage business expenses if you fall ill, and cover any employees you may have. These factors will determine the additional insurance coverage you may need.
Commercial legal expenses
Most commercial legal expenses insurance will protect sole traders against various tax and legal issues you may encounter due to your profession, which are not covered by professional indemnity or public liability.
At Suited, we combined £100,000 of commercial legal expenses insurance with helplines and other tools to better assist sole traders in dealing with these issues. We call this Business Legal Protect, and it’s part of your subscription.
Business Legal Protect offers qualified advice and assistance with:
- Legal and tax matters concerning your business
- Criminal prosecution
- Compliance & regulation issues
- Unpaid invoices (over £200)
For example:
- HMRC investigations into your tax affairs
- You need legal help chasing a client who has not paid a significant invoice.
- You wish to take a business partner or client to court over a breach of contract.
- You required guidance on compliance or regulatory issues for your business.
Electronic business equipment insurance
Electronic business equipment insurance is needed these days more than ever. Most trainers rely heavily upon electronic equipment to deliver their services. If this equipment is lost, damaged or stolen, it can seriously impact your business's bottom line.
Sole trader employers’ liability insurance
Employers’ liability is another legal cover that offers legal protection if you’re accused by one of your employees of causing them harm at work. The insurance will also pay any compensation if due.
The vital thing to note about employers’ liability insurance is that it is, in certain circumstances, required by law, and you need to understand whether you fall within the defined categories. You could be facing a fine if you’re not compliant.
Do I need employers’ liability insurance as a sole trader?
If you consistently work alone, you’re in the clear and don’t have to worry about this cover. However, anyone employing staff, using volunteers and subcontractors should check the government guidelines.
Tools and business equipment insurance
As a sole trader, you rely on the use of your equipment; this could be anything from a laptop to something more specialised.
Sometimes, items get dropped or damaged. The immediate cost of replacement or repair may be something other than what you want to be exposed to if an accident happens. Tools and business equipment insurance can be a helpful way of reducing unforeseen costs.
Sole trader income protection insurance
Sole traders, by definition, rely on themselves for income and, therefore, are a lot more at risk of financial hardship in the event of a severe illness or accident.
Sole trader income protection insurance can be a welcome safety net during those times. It is often judged as too expensive, and many sole traders would rather not pay the premium, but with certain modern-age illnesses on the increase, this could be a false economy. You don’t always have to buy a cover that matches your monthly earnings exactly. If you ever find yourself in that situation, you can buy just what you need to help with the most pressing outgoings.
Personal accident insurance
As the name suggests, this cover will provide a quick financial injection when you suffer a severe accident.
It is likely to stop you from working immediately, so having a backup plan of this type can be very useful. Personal accident cover provides a one-off quick payment to bridge over the worst, and it is usually very inexpensive cover.
Suited offers personal insurance as part of our Business Owner Protect product.
Sole trader life insurance
If you are working for yourself, you are not receiving any employee benefits such as death in service benefits. Therefore, protecting your loved ones against the worst is much more critical.
No one wants to think about the worst, but if you are a sole trader with a family, it’s essential to consider what would happen to them.
It can be helpful to talk your situation through a life insurance specialist whether or not you buy. They can take you through all the options and help you design the cover to protect your family if you decide to go down that route.
