Sole trader insurance – what’s required, recommended & worth having?

As a sole trader, insurance can protect you from claims, mistakes or accidents that could otherwise put you out of business.

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

Quick Check – Which types of insurance do you need?

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 most 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

Many clients require you to have professional indemnity or public liability insurance before starting work. You’ll usually need to show proof of cover before the contract begins, and again at renewal.

Putting your mind at rest

Even if you’re not legally required to have insurance, it can still protect your personal finances. As a sole trader, you’re personally liable for business debts, so having cover in place could save you from severe losses.

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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

Typical trades and the insurance they might need

Here’s a quick look at what each policy type 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.

Importantly, some businesses are not legally obligated to have employers’ liability cover in place – including businesses that only employ family members.

You can find out if your business is exempt via the Health and Safety Executive (HSE) website.

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.

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.

Compare sole trader business insurance providers

For the sake of completion, here’s a simple table comparing some of the UK’s leading insurers…

*Prices are indicative starting points and vary by trade, location & cover limit.