Telling the truth about SME life today

Sole Trader Insurance & When You Are Required To Have It

Sole trader insurance & when you are required to have it

Over the past few years, there has definitely been a significant jump in the number of sole traders in the UK. It appears as if more and more people are willing to take the risk and start working for themselves. That being said, sole traders should not be blind to the many risks that are involved when it comes to the intricacies of running a business. You could have your equipment stolen or damaged, your premises could catch fire, your clients could experience issues with your products, the list goes on.

So starting a business certainly does not come without its challenges, but one way to significantly reduce the risks involved with being a sole trader is to have a great insurance plan. There is a wide range of different insurance types available to sole traders to help you sleep soundly at night, knowing that you are covered in the case of common emergencies.

In this article by Real Business, we look into the different types of sole trader insurance and when you are required to have it. If you are a sole trader yourself, this is definitely a topic that you should be well informed on.

Defining a sole trader

The first thing we should do is define a sole trader. There are two types of sole traders in the UK: those who are self-employed and work for themselves (usually freelancers and contractors), and businesses that are set up as a sole trader legal structure. The sole trader business structure requires that the owner takes sole responsibility for any profits and losses. This does put the sole trader at somewhat of a risk, for if things don’t work out with your business, you could be responsible for significant losses that will affect your personal finances.

When sole traders need insurance

There are usually three reasons why sole traders would get insurance. The first reason is legal obligations, where the sole trader has to get certain insurance policies in order to be compliant. The second is because certain clients and contracts require insurance. And the third is simply for peace of mind.

Legal obligations

Here in the UK, sole traders are not obligated to have every type of insurance. In most cases, it is totally up to the sole trader whether they want to have insurance or not. But there are scenarios in which you are legally obligated to get insurance.

If you hire any staff, you will be seen as an employer. And if you are an employer, you will need to get employers’ liability insurance. Whether your staff are full-time, part-time, or casuals, you will be legally obligated to get this type of insurance. The only exception to this legal obligation is if your staff members are close family members.

What if you don’t get employer’s liability insurance? Well, you could be in for fines for as much as £2,500 a day — definitely not worth the risk! You also want to ensure that your employers’ liability insurance certificate is at your premises at all times, or you could be facing a fine of £1,000. The government takes this insurance very seriously as it protects your employees.

The other type of insurance that you are obligated to have is business vehicle insurance. This insurance will only apply to you if you have a car that you use for business-related purposes. If you use your personal car and have personal car insurance, you will only be covered for personal-related driving. If you don’t have business vehicle insurance, your claim will most likely be refused. More seriously, you may be at risk of being prosecuted, especially if your employees are using their personal cars for business purposes without the proper insurance plan.

Contractual requirements

Contractual requirements usually apply to freelancers and contractors who work on a contractual basis, often with large corporate companies. In these contracts, it is typically stipulated that the sole trader needs to be insured, often for professional indemnity as well as public liability insurance.

While these types of contractual requirements are very common with larger companies, smaller businesses hiring sole traders may also have certain insurance requirements, especially if the handling of sensitive data is involved in the contract.

So while it is not a legal obligation to have these types of insurances, sole traders could be cutting themselves off from a wide variety of potential work by not having the kind of insurance that their typical clients would require. It is a good idea to learn what types of insurance policies you are expected to have in your line of work, and which policies may help you gain opportunities and clients.

For peace of mind

The third type of insurance is not for legal obligations or to satisfy potential clients; it is simply for the sole trader’s peace of mind. Many sole traders make use of a wide range of insurance policies even if they don’t necessarily need to. For them, obtaining insurance gives them peace of mind.  There are so many different types of insurance available, including income protection, professional indemnity, personal accident protection, and so much more.

The more you learn about business, the more you may realise that there are a lot of risks involved with being a sole trader, and taking out insurance policies can be a good way to minimise these risks.

Why would I get insurance if I’m not obligated to?

Insurance can be expensive, very expensive at times. And more often than not, you don’t ever end up making claims on your insurance policies. So then why get insurance? Well, there are many instances in which getting insurance would be advantageous to your business, even when you are not legally obligated to.

Things can always go wrong, and many years of hard work and dedication could be gone in an instant should something go wrong. In the case of an emergency, you will be thankful that you took out an insurance policy.

In addition, having certain insurance policies in place can give your clients peace of mind, and attract more clients towards your business offering.

What are some of the most common insurance types for sole traders?

As a sole trader, there are dozens of types of insurance policies that you could take out. And the policies that you choose should all be determined by your line of work and potential risks. However, the most common types of insurance policies for sole traders include:

Public liability insurance 

Public liability insurance is one of the most popular types of insurance for sole traders. The reason for this is that public liability insurance covers all of your responsibilities to any third parties. If a claim is made against you, public liability insurance will protect you financially.

Professional indemnity insurance 

Professional indemnity insurance is another type of insurance that is definitely worth looking into if you are a sole trader. If you make a mistake and it causes financial loss to a client, this insurance policy will help you cover costs. While this doesn’t cover you being negligent and doing a bad job, it will cover genuine mistakes.

Product liability insurance 

If you are a sole trader that offers a product, you may want to look into getting product liability insurance. If your product were to cause injury, damage, or loss (whether this product was manufactured, sold, installed or maintained), you would be covered by this type of insurance. If you are someone that sells products, maintains products, or simply supplies products, this is definitely a good policy to look into.

Cyber insurance 

A lot of business has moved onto the digital sphere. More and more businesses are selling their products online than ever before. But unfortunately, by having everything online, you put yourself at risk of a data breach or cyberattack that could be truly detrimental to your business. Cyber insurance thus gives you adequate coverage should you experience an unwanted cyber attack.

Employer’s liability insurance 

We have already mentioned employer’s liability insurance briefly. By now you should know that this type of insurance is essential should you want to hire any staff members. While most sole traders work alone, this does not mean that you will never employ staff in the future. Having this type of insurance shows that you are responsible for your employees, and it will also cover you in the event of a related claim.

Do I need insurance if I run my business from home?

Many sole traders run their businesses from home, and many of these sole traders do not prioritise business insurance as they assume that their home insurance will simply cover everything. But this is not always the case. It is recommended that you speak to your home insurer and ensure that the policy you have covers all of your current business assets.

Even if your home insurance policy does cover your business assets, you may still want to look into public and product liability insurance to further protect yourself as a sole trader.

What about if I’m a tradesperson?

The work that tradespeople do can be very diverse and spread itself across multiple industries. If you are a tradesperson operating as a sole trader, it is advisable that you speak to an insurance broker and be very specific with the type of work that you do. Think about what risks are very specific to your type of job. Do you work with heights? Do you work at depths? Do you work with heat?  If you use subcontractors, you’ll also need to ensure that they have the right type of insurance too.

It is very important for tradespeople to have adequate insurance, especially if their work is dangerous.

What to think about when choosing sole trader insurance

There are so many different insurance policies available to sole traders and freelancers, and there are so many different insurance companies to choose from. Choosing which policies you should take out as a sole trader can be very challenging. Here are a few things to consider.

Worst-case scenarios

While you may not want to be pessimistic, it is a good idea to sit down and think about all of the worst-case scenarios that could happen to your business. Also, add up the expenses that these worst-case scenarios would cause for you and your business. Look at these scenarios carefully and decide which ones you could realistically handle without having an insurance policy to back you up. This exercise is a good starting point.

What does your home insurance cover?

There is no point in taking out additional insurance policies for things that your home insurance already covers. Speak to your home insurer and find out whether they cover your commercial property and business assets. Now you can start filling in any gaps with specific business insurance policies.

What can you realistically afford?

While it is all good and well to get all of the insurance policies available to you, it would probably be a very large monthly expense for your business if you had to do this. Look at what you can realistically afford to pay for insurance every month. It would also be a good idea to look at a variety of quotes to see which ones would be the most valuable to you and what you offer as a sole trader.

When looking at quotes, you also want to make sure that you are only asking for quotes from respected and trusted insurance brokers. So do your research!

Look at potential liabilities

All sole traders are different in their own way and what they offer as freelancers, contractors, or business owners. This means that you will have different potential liabilities even from your closest competition. By knowing your business inside out, and what type of clients you are most likely to serve, you’ll be able to assess what your biggest potential liabilities may be, and find the best insurance policies that cover these liabilities.



Related Stories

More From

Most Read


If you enjoyed this article,
why not join our newsletter?

We promise only quality content, tailored to suit what our readers like to see!