By Kat StorrGoing solo can be a really exciting, but also daunting, prospect. But no one should start a business without first being aware of the risks and responsibility involved. Click To Tweet
Do I Need Professional Indemnity Insurance as a Sole Trader?
Going solo can be a really exciting, but also daunting, prospect. But no one should start a business without first being aware of the risks and responsibility involved.
In this article we’ll look at what being a sole trader means, who needs professional indemnity insurance and how a professional indemnity insurance product that matches your business’s needs could be key to giving you and your clients peace of mind.
What is a sole trader?
A sole trader is defined as a person who runs their own business as an individual and is self-employed. You are entitled to all of the profits you make, after tax has been paid, and are also liable for any losses made.
This is called ‘unlimited liability’ and obviously it can have big implications for the owner if things do go wrong. As a sole trader you are required to keep business and expenses records and file a tax return every year.
Government figures show that in 2021, 75% of businesses in the UK were sole traders with no employees. This was approximately 4.2 million businesses out of a total of 5.6 million.Government figures show that in 2021, 75% of businesses in the UK were sole traders with no employees. This was approximately 4.2 million businesses out of a total of 5.6 million. Click To Tweet
Advantages of being a sole trader:
- It’s quick and easy to set up
- It means you’re your own boss and can make all of the business decisions
- The set-up costs are low
As we mentioned above, disadvantages include the risk of having unlimited liability and a high level of responsibility which rests solely on your shoulders.
What is professional indemnity insurance?
The Association of British Insurers (ABI) states that sole traders who “offer skills, knowledge or advice” as part of their business should take out professional indemnity insurance.
This could include a range of professions from journalism and architecture to graphic design and accounting. Hairdressers, electricians, photographers and many other tradespeople and small businesses also often operate as sole traders.
The reason PI insurance is recommended by the ABI is because it gives you protection if you’re sued by a client. A legal claim could be launched if someone believes you made a mistake, were negligent when providing a service or offered bad advice which caused them to lose money.
While no one expects to make mistakes when running a business, it’s important you’re prepared for any scenario that could impact your company, finances and employees. PI insurance should ensure you can cover the cost of defending yourself and hopefully resolve the issues.
And we know that when you’re starting out as a sole trader every penny counts so you’ll be pleased to learn that PI insurance is tax deductible as an ‘allowable expense’. This is defined as an essential cost – that you don’t pay tax on – which is required to keep your business running.While no one expects to make mistakes when running a business, it’s important you’re prepared for any scenario that could impact your company, finances and employees. PI insurance should ensure you can cover the cost of defending yourself and… Click To Tweet
What does professional indemnity insurance cover?
- Professional negligence or a breach of a duty of care
- Breach of confidence
- Breach of copyright
- Lost or damaged documents
The amount of cover you’ll be offered and the price of your premium will depend on your occupation, the size of your business and perceived risks. You may find that some clients require you to have PI insurance in place before signing a contract. If you work in an industry that has a professional body or regulator, such as surveying or architecture, it may be a prerequisite that you have this type of insurance in place before you take on clients.
Every sole trader is unique and so are their business needs. Legal costs can ramp up fast so whether you are a freelancer, contractor or small business owner, holding £1,000,000 of PI insurance should cover the potential fees and damages you face if you are sued.
A search of professional indemnity insurance policies online will bring up a huge range of prices and quotes. If you’re not sure how much cover to get, it’s best to speak to a qualified broker who will have dealt with all kinds of businesses and scenarios.
Is professional indemnity insurance the same as public liability insurance?
Although they both cover compensation claims, PI insurance is very different to public liability insurance.
Public liability deals with claims made by a member of the general public for injury, illness or damage that occurs in connection with your business and its activities. Insurance for this will cover the cost of compensation for injuries, loss of property or death. You will need to consider this type of insurance if you own a business premises that clients use or visit, or if you organise events or activities for customers.
If you believe you need both types of insurance, you may be advised to purchase a business insurance package.
How can I find out more?
If you’re a sole trader, FinEdge’s insurance brokers can help you find a good-value professional indemnity insurance product tailored for you and your business. Our trained team is made up of industry experts who will be able to answer all of your questions. Request a callback for a no-obligation chat between you and one of our brokers today.