Sole traders are the largest group of non-employing businesses. A sole trader can, however, be an individual who is self-employed and work on their own as well as a business that employ others but uses the sole trader legal structure. A sole trader, unlike a limited liability company (for example), is liable for any losses and profits that accrue as part of their business activity. Importantly, a sole trader is also liable for any damages or harm that occurs in the course of doing business. This is why it is important for a sole trader to have appropriate insurance.
Many sole traders buy insurance because the clients that they work for make it a requirement of their work contract while others are aware of the risks and losses a business might face and want to be prepared.
When considering insurance options a sole trader should always consider the worst possible circumstances and cover themselves accordingly. They need to ask what they would do if their tools or business premises are destroyed in a fire, for example. Could they continue to earn an income and, if not, what would the consequences be for their family of other dependents are situations are questions they need to ask. Sole traders working from home should also be aware that a home insurance policy may not cover them for losses relating to operating a business from home (such as having computer equipment or other home office items stolen or destroyed, for example) and a separate policy may be needed.
For most professionals and freelancers operating as sole traders, contracts they enter into with clients require them to be insured. Large corporate bodies and government authorities require public liability insurance as a minimum and, in some cases, professional indemnity insurance as well.
Public liability insurance covers a sole trader for any legal or compensation costs that arise if their clients or a member of the public experience personal injury or suffer damage to their property or other losses due to their actions. Accidents can happen (even when a sole trader thinks they have done everything correctly no-one can prepare for every eventuality) and when they do the costs can be significant. Even if a sole trader is not working with clients that require public liability insurance it is a good idea to have it since if an accident occurs and they are held liable it can potentially bankrupt the business and, in some cases, themselves. It is a sobering thought that a person could lose their house because of an accident that occurs while they are doing their job (and may not consider themselves to blame for).
Public liability insurance covers a policyholder from any damages arising from a range of circumstances including personal injury, damage to property, accidents caused by products sold or used by the sole trader as well as any incidents caused by their employees. This type of insurance comes in many forms and amounts for which it covers the holder. Sole traders should research what is most appropriate for their business and, where applicable, how much corporate or government clients require them to be covered for, and buy a policy accordingly.
Professional indemnity insurance protects a sole trader against damages or losses caused by work that they have performed. A client may allege negligence, breach of contract, disclosure of confidential data or bad advice that resulted in financial losses and sue the sole trader. Even where a sole trader does not consider themselves at fault they need to be able to mount a solid legal defense (which costs money) and, where they are, consider how much cover they need to protect themselves against a worst case scenario based on the type of services they offer.