There were a record number of new businesses set up in 2013, according to StartUp Britain. It would seem we’re becoming a nation of sole traders, and there’s a wide range of insurance available to help small business owners to impress their clients or simply to help them sleep more soundly at night. But if it’s just you, what sort of insurance could you benefit from?
Defining a sole trader
When we use the term ‘sole trader’ we are referring to both self-employed individuals who work on their own and also businesses which are set up as a sole trader legal structure (this means the individual who runs the business takes sole personal responsibility for any losses and can keep all profits after tax). This type of legal business structure makes up nearly two-thirds of all businesses, according to government figures.
The two types of sole trader are often lumped together, but plenty of sole trading businesses actually employ people, whilst on the other hand lots of freelancers with no employees set up limited companies rather than sole trading business.
In this article, we will be addressing the potential insurance needs of both groups, as most small business insurance considerations (apart from Employers’ Liability, of course) are relevant regardless of legal structure.
Having said that, many of the sole traders who buy insurance from Hiscox work as freelancers in the creative and professional industries. They have chosen to go it alone having worked in-house for a number of years. Many have made the leap because they want to get away from the rat race and have the freedom to work how and when they want.
When it comes to looking for insurance, in our experience, sole traders divide into two tribes. The first buy insurance because a client requires them to; the second buy it simply because they are aware of the risks they might face and feel more comfortable having insurance.
For many freelancers and professionals, the terms of their contracts stipulate that they must be insured. Many large corporates and local authorities expect their contractors to be covered as a matter of course, normally for Professional Indemnity and Public Liability.
Smaller companies and individuals can also require it, particularly if the work involves sharing sensitive information with a contractor, such as personal data or intellectual property.
It’s important to understand which kind of insurance your client requires, including the limit or amount of coverage they expect you to have. It can also be a good idea to find out if certain types of insurance are commonly expected in your industry or line of work and, if so, get an idea of prices and providers so you can budget accordingly.
Having the right cover in place may make you look more professional than your rivals when you pitch to potential clients, and thus potentially boost your chances of winning contracts.
The other group who commonly buy insurance is the “what if” kind of people – those who lie awake at night and think about what could possibly go wrong with their new firm. You might have heard stories about fires or professional disputes from friends or colleagues and thought, “What if that were me? What if I had an illness or injury that prevented me from working? What if my computer and laptop were stolen?”
There are many different types of insurance available to give sole traders peace of mind, from personal accident or income protection if you’re unable to work, to professional indemnity and public liability, which cover you against claims from other people. Even if your clients are not requiring you to buy the cover, having peace of mind that your business is being looked after by specialist insurer can give you the confidence to grow and develop.
What to think about
Here are some issues to consider before deciding which coverage you should buy:
- What’s the worst that could happen? It often pays to be pessimistic. The worst case scenario is very unlikely to happen, but it’s worth knowing that if it did, you’re covered. If you’re worried about damage to your office then add up how much it would cost to replace all your equipment in event of a fire or burglary and buy at least that amount of coverage. Or if you want insurance against being sued, then you should think what could be the worst-case scenario: perhaps a lawsuit from a major corporate client, or someone being paralysed, or worse, in an accident on your premises?
- Homeworkers beware. You shouldn’t assume that your home contents insurance would pay out if you spill coffee on your work laptop or if a flood in your basement destroys your stock. First, check the policy wording of your home insurance policy, and then think about a business insurance policy to plug any gaps in cover.
- Don’t always skimp. You can buy liability insurance coverage up to £1 million, £2 million, £5 million or £10 million. These might sound like huge amounts, but often the difference in price between several million pounds of additional coverage is tens or hundreds of pounds, so it’s worth getting a range of quotes to see which you can best afford.
- The bigger your contract, the bigger your downside. A good rule of thumb for thinking about your potential liability is the value of your largest contract. The bigger it is, the more important it’s likely to be to your client. That means there’s a bigger downside if something goes wrong. Also, who is your client? A multinational corporation with a large team of in-house lawyers is more likely to sue if a dispute arises than a small firm in your local area who you’ve been working with for many years.
All sole traders are, in their own way, unique and while your business will have different needs, there are often common themes when it comes to ensuring you have the right cover. If you’re not sure what you might need, it’s worth taking stock of the contracts you have and the risks to your business. Having the right cover in place can provide peace of mind to let you concentrate on other aspects of your business, whether you’re a freelancer or a business with several employees.