[Updated June 2, 2023]
For some time now, about 62% of Australian businesses are sole traders without employees, comprising the majority of businesses in the country.
Industries, such as transportation and carpentry, saw a remarkable increase in the number of sole traders in the country over the last five or so years. This growth confirms one thing: proprietorship continues to thrive in Australia.
Are You a Sole Trader?
Being a sole trader (also known as a sole proprietorship or simply proprietorship) typically pertains to self-employed individuals. However, the term also means running a business that meets the sole trader legal structure in which an individual takes sole responsibility for losses and receives all profits after tax.
The two types of sole proprietorship are often joined together, even though plenty of sole traders have employees. On the other hand, freelancers without employers generally set up their activities in the form of Pty Limited company, instead of going for a sole trading business. Nevertheless, both circumstances call for understanding the insurance cover required.
Why Do Sole Traders Need Insurance?
So, you’ve made a critical decision, which is to start your own business. Upon comparing the pros and cons, you have chosen to operate as a sole trader rather than form a company. Now, the next step is to decide which insurance your business needs.
- The business world is not without significant risks. And as a sole trader, you are not exempt of this fact. Having insurance can protect yourself against issues that could arise, such as liabilities, debts, and lawsuits. You could face anything from a damaging natural disaster to theft to an accident.
- Sometimes, legal liabilities crop up that if unfulfilled, can cause a profit loss. They are a common occurrence for businesses that deal with expensive items, such as computers, vehicles, and real estate.
- Another reason why a sole trader should have insurance is that most clients require them to. Certain contracts specify that sole proprietors and freelancers should be insured before the transaction or business dealing is carried out.
- If you rent a facility under your proprietorship’s name, the landlord may look at the sufficiency of your insurance before signing the lease agreement. Similarly, applying for a loan may require appropriate insurance coverage.
- One thing that many sole traders should know is that there is no such thing as a sole trader workers compensation. Its absence makes it difficult for professionals like you to receive financial assistance even if you got injured while on the job.
- Having sole trading insurance protects the most vital asset in your business – YOU. You cannot keep running the business without you in case of serious injuries, accidents, or financial losses. When you’re covered, it is easier to manage risks and reduce uncertainties while protecting your livelihood.
Sole Trader Insurance Comparison
It’s a good idea to know the types of insurance you can purchase as a sole trader to protect your business and reputation. We’ll discuss all these sole trader insurance types below.
1. Professional Indemnity Insurance
Professional Indemnity is a type of business insurance that sole traders can purchase to protect them against the costs of legal claims if a third party sues or claims for damages due to breach of professional duty.
In other words, if you do or do not accomplish a particular responsibility covered by your work or contract with a client, you could face legal action. Professional Indemnity Insurance protects you from such a situation. If the customer suffers financially or physically, you can defend your business. At the same time, this sole trader insurance can help prevent financial loss.
Why do you need this insurance? Professional Indemnity Insurance is applicable for you if you provide expert advice or any service that has a chance of getting sued for professional misconduct and malpractice.
Never underestimate the costs of legal action due to negligence. Often, the defence alone can go over $100,000. If you’re struggling to keep your business afloat, it’s challenging to find the necessary expenses. With Professional Indemnity Insurance, you have a helping hand in covering for the legal costs.
2. Public Liability Insurance
For many self-employed and proprietorships, it is often unclear why Public Liability Insurance is beneficial. The work you do could directly and unexpectedly impact a client or a member of the public. With this type of insurance, you can protect your business against claims of damage, injury, and other detrimental issues caused by your job or business. Read on below for a brief explanation, or read our Public Liability Insurance for Sole Traders blog to learn more.
You do not need to work in an office or public space. Even those who work from home can benefit from this insurance. If an accident takes place relating to your workspace, which causes harm to another person or property, you will typically be held accountable.
Let’s say that you’re an electrician and you left your toolbox on the floor, causing someone to trip over. Perhaps you’re working with a client, and you ended up damaging their laptop during a consultation in your home office. These issues require you to make them right on your own.
Sole trader Public Liability Insurance in Australia is helpful for any proprietorship. It can cover the cost of the claims, which mostly include expensive legal fees and compensation payouts.
Public Liability Insurance Cost for sole traders can differ depending on a few factors, such as the size and type of business you’re running. It is best to get a quote first to learn how much you can afford. Usually, however, it does not take much, starting from as little as $300 annually to several thousands of dollars.
3. Sole Trader Income Protection
Because Sole Trader Work cover does not exist in Australia, you may want to consider Income Protection instead. This type of insurance, also called salary continuance, provides financial support if you suffer from an injury or illness that stops you from working. It covers a part of your regular salary or business share while you recuperate.
The government recommends having Income Protection Insurance, which works as some sort of a financial lifeline. It can give you the peace of mind you need during a stressful time. While you stay at home or stop working temporarily, this insurance will help you deal with your expenses, such as childcare, mortgage repayments, groceries, and utility bills.
If you’re lucky and smart with money, you probably have all these things covered. However, most people find it challenging to make ends meet after a few months. This survey found that 21% of Australians have less than $1,000 in their savings account. Even worse, only 32% of homeowners could have the same lifestyle after three months since losing their income.
With Income Protection, you can get a monthly benefit, which is close to your regular income. Even if you’re unable to work, you have some money to get you through the ordeal. You can also opt to get a lump sum of the amount if it is available. However, it is more common to get paid after specific waiting periods.
4. Personal Accident and Illness Insurance
This insurance cover is similar to Income Protection. It’s ideal for sole traders and helps you get through the challenges brought about by an illness or accident. You can apply for this insurance if you find it more suitable for you compared to the other. How these two differ mostly depends on the insurer. But technically, Personal Accident and Illness Insurance grant a one-off payment while Income Protection is given on a set period based on the percentage of your monthly income.
Another difference is that Personal Accident and Illness Insurance is applicable even if you do not sustain the injury or illness. It may also cover death or disablement, although terms and conditions apply. Not all insurers provide this benefit, however.
This insurance offers extensive coverage if you have lost income because of an accident, debilitating disease, or a combination of both. Be aware that it does not cover the inability to work because of a pre-existing condition that you have had before starting your business and purchasing the insurance. It typically does not entail pregnancy and childbirth, crime, and alcohol. Make sure you know the limitations, so you buy the right insurance.
5. Property and Tools Cover
As a tradesman, you know how important it is to protect your tools and equipment. You probably have a substantial collection, which is often a hefty investment for most traders. You rely on these tools to earn money, so you should sort them out properly if a problem has arisen.
Many Australians experienced tool theft and property vandalisation. Thieves have become quite creative in breaking, entering, and robbing. That’s why it is necessary to have tools and equipment insured, as well as any assets that you use for work.
Property and Tool Insurance for sole traders does not just protect against theft. It’s also beneficial if you ever become a victim of fire damage, attempted burglary, violent entry, and vehicle collision.
When buying this insurance, always look at the items covered. Some policies have value requirements, typically up to $3,000 or $5,000. Others have strict limitations, such as you cannot claim the payment if you only lost a single item valued at the maximum amount.
Property and Tool Insurance is often combined with other policies, especially Public Liability Insurance. If you’re searching for this insurance but can’t find it, you may want to try its other popular name, which is General Property Insurance.
6. Mining Contractors Insurance
This insurance type is pretty straightforward. If you’re working in the mining industry and clients contact you to perform a series of jobs for a particular period, you may want to get Mining Contractors Insurance. Clients in this sector prefer mining contractors, consultants, and proprietors that are insured.
As a sole trader, you’re responsible for finding solutions to the risk you constantly face at work. Therefore, you may want to take out the necessary type of insurance relative to your profession. Public Liability and Professional Indemnity Insurance are two of the best choices to gain protection against claims made against you or your service.
Self Employed Tradesman Insurance by State
In Australia where sole traders are required by law to have workers compensation as a minimum. You can protect yourself and business by understanding insurance regulations, which can differ depending on your location.
Here is a look at how Aussie states deal with insurance for proprietorship:
1.Queensland
Queensland has a great climate and resources, which have encouraged businesses to take their chance in this energetic state. Sole traders are mostly in the construction industry, making up 15.8% of non-employing businesses in the state in 2019. It’s followed by those who are in the real estate sector, finance, and technical service providers.
Sole Trader Car Insurance is compulsory, specifically if you use a motor vehicle to operate. Note, however, that this insurance does not cover vehicle damage that you or someone else caused.
The state does not impose other types of insurance for sole traders. Still, it is common to have at least Public Liability, Professional Indemnity, and General Property or Property and Tools Insurance.
An exception, however, applies to electricians that can only operate with an Electrical Contractors Licence. If you are among them, you should have a special Public Liability Insurance that includes Consumer Protection.
2. New South Wales
Like QLD, sole traders in New South Wales are not obliged to hold insurance for their business. If there are employees, however, it is required by law to have Workers’ Insurance. Other than that, insurance policies to purchase are up to the owner.
It is recommended to have Public Liability at the very least to protect different types of transactions and activities. If you work as a cleaner, miner, tiler, or you are self-employed, sole trader Liability Insurance will cover claims involving injuries, property damage, and negligence, among others.
If you have Workers’ Insurance, you cannot use it to claim for injuries even if they occurred while you’re at work. Sole traders are like partnerships in New South Wales, where compensation for workers cannot be applied. A good alternative is either Personal Accident and Illness Insurance or Income Protection Insurance. Both of these options are not required by state law.
3. Western Australia
As of 30 June 2019, most start-up businesses in Western Australia (64.4%) comprise sole traders. Non-employing businesses totalled 149,988. Construction has been the most prominent industry for proprietorship with 17.2%, followed by scientific and technical services (12.1%), rental and real estate (10.8%), and finance (9.2%).
WA has always been a dynamic place for all sizes and many kinds of businesses. It has opened doors for hundreds and thousands of sole traders. If you’re among them, you probably already know that you’re responsible for any risks your business may potentially encounter. Additionally, you have liability to think of, which can include all your assets, such as a house and other properties shared with other people.
Once again, you cannot use the Workers’ Compensation to pay for any damages or injuries at work. However, Motor Vehicle Personal Insurance is Compulsory Third Party (CTP) insurance, meaning the law requires you to have it. This coverage is automatically added to the cost of your vehicle licence.
Other policies are not a prerequisite but can be very beneficial. WA state recommends having Professional Indemnity, Property and Tools Cover, Public Liability Insurance, and Events Insurance.
4. Victoria
Sole traders in Victoria have to take care of their business’ liabilities. Sometimes, the risks can be difficult to manage, especially when they involve the remuneration of unhappy clients. If you do not employ any individual, you do not need to get WorkCover Insurance. However, the state government advises sole traders to have the following:
- Personal Accident and Sickness Insurance or Revenue Policy
- Property and Assets Insurance
- Professional Indemnity Insurance
- Public Liability Insurance
It’s unlikely that you would require a third-party Personal Injury and Vehicle Insurance Policy. If you have employees, you may have to be insured, mainly if they use motor vehicles to carry out tasks.
5. Tasmania
The same rules apply for sole traders in Tasmania. There are no compulsory policies to buy unless you have employees. They need to be insured in case they get into an accident while working for you. Since sole traders are not treated the same way as other common business structures, you cannot use your employees’ WorkCover for yourself. Even if you are injured in your home office or your designated business space, these events are not covered.
To ensure that you are prepared for any risk, you should have the proper cover for a sole proprietorship. The most commonly utilised insurance in Tasmania is Public Liability Insurance. If you’re covered, you can receive compensation for your injuries acquired due to the negligence of a customer, visitor, or supplier.
If the property where you conduct your business has been damaged, you can claim compensation for your expenses. It’s important to know that you’ll find it easier to get paid for the misfortune if the damage was caused by another person or group. You can claim the payment even if the accident or event is due to your business activities.
Some clients might decide to take you to a claims court. You can then hire a good legal team to defend your case using this insurance.
6. South Australia
There are a few legally required insurance policies in South Australia. However, most of them do not apply to sole traders, except if they describe your situation.
For example, Building Insurance is needed for those who own the premises where they perform business transactions. If you work from home, you should have this insurance as well. However, it is recommended that you notify the insurer of the house. That way, the policy can be updated, and the correct premium is applied.
Another example is Product Liability, which is not always purchased by sole traders. However, if you are distributing or manufacturing goods, you may want to get this type of insurance. It can protect you in case the product you’re selling causes injury to another person or property.
Public Liability and Professional Indemnity are two of the most common insurance types for sole traders in South Australia. Whether you conduct business at home or use a small office, you should have Public Liability Insurance to cover accidental injuries to clients, visitors, or the business facilities.
On the other hand, Professional Indemnity is for experts who deliver services, information, or advice to their customers. Negligence and accidents can happen anytime when a person follows your recommendation. You want to be prepared if ever the case or complaint is formally filed.
Tips for Choosing the Right Insurance for Sole Traders
Sole traders have unlimited liability, which pertains to their accountability regarding the debts of their business. Therefore, there is a chance that their assets may be seized to pay for the debt. If you have an angry customer or you got into a car accident, expenses can quickly add up. You could get caught in an unmanageable financial crisis, which could lead to your business closing. With sole trader insurance, you can handle unforeseen costs and ensure that you continue operating despite the challenges.
However, insurance does not work in the same way. You need to carefully choose the insurance product to purchase to get the best benefits out of your investment. Here are some questions to answer that will allow you to get the most suitable cover for your proprietorship:
What’s the Most Significant Risk in Your Business?
Find out the worst thing that could happen. While being pessimistic is not a good idea, you should try to envision the worst-case scenario. From there, you can come up with a strategy to manage it. You can figure out which insurance best suits your business.
For instance, you’re worried about fire damage, which could mean you need to replace expensive equipment in your workspace. Determine how much it would cost for the replacement and buy that amount of coverage at the very least.
If your biggest concern is getting sued by a corporate client, you should look for insurance that can help you with such an expense.
How Much Can You Afford?
You should try not to skimp on the insurance coverage you purchase. While you may have a limited budget, pick a policy that encompasses different scenarios. Most of the time, the bigger the scope, the more expensive it is. Sole traders tend to shy away from policies that they think are too costly. However, the difference in price between insurance with fewer limitations and buying additional coverage can be around several hundreds of dollars.
Always get a quote first before you commit. Research the provider and select the best policy that meets your requirements and budget.
How Long Do You Need to Wait When You Make a Claim?
When shopping for insurance, determine the waiting period first. Your business may need the payment as quickly as possible; otherwise, it can become difficult to deal with the issue. Often, insurance claims can take anywhere from 14 days to several months. As much as possible, choose the product that promises quick disbursement. You can request for a shorter waiting period in some cases, but you need to pay higher premiums.
Is Home Insurance Enough?
In most cases, home contents insurance does not cover commercial or business activities. If you spilt coffee on your laptop or a flood destroys the supplies you intend to sell, you may not receive any payment. That’s because most home insurance policies are centred on the residential purpose of the property. If you work at home or keep your stocks in the vicinity, you may want to check the wording of your home insurance policy carefully. Often, you need to purchase a separate business insurance policy to fill the gaps in your existing cover.
With insurance, you can be more at ease and set your focus on what you do best. All Trades Cover is your partner in operating a sole trading business that garners rewards. Speak with us today to ensure that you get the right insurance product for your unique situation.
