Do sole traders need business insurance by law?

Do sole traders need business insurance by law?

If you’re a sole trader, you’re probably used to wearing every hat in the business: salesperson, service provider, bookkeeper, customer support, and everything in between. With so much on your plate, it’s normal to wonder whether business insurance is just another “nice-to-have” expense—or whether it’s something the law actually requires. The honest answer is: it depends. Some types of cover are legally required in specific situations, while other policies are not legally mandatory but may still be essential for your business to survive a costly claim or unexpected event.

This article breaks down what “by law” really means for sole traders, which insurances can become compulsory, and how to decide what cover makes sense for your particular work. While the details can vary by country and industry, the practical principles are remarkably consistent: legal requirements usually connect to protecting employees, the public, regulated professions, or contractual obligations. Everything else is about managing risk, protecting your income, and safeguarding the assets you’ve worked hard to build.

What counts as a “sole trader” for insurance purposes?

A sole trader is an individual running a business in their own name (or a trading name) where the business and the person are not legally separate. That last part matters a lot for insurance. Unlike a limited company, where there’s typically a separation between company liabilities and personal assets, a sole trader often has personal exposure. If your business owes money after a claim, it can potentially affect your personal finances. That doesn’t mean you’re doomed without insurance, but it does mean that “business risk” can quickly turn into “personal risk” if you’re not prepared.

Insurance companies may use different labels—self-employed, freelancer, independent contractor, sole proprietor—but the key idea is that you are the business. The more direct the connection between you and the work, the more important it becomes to understand what risks you’re taking on and whether any of them trigger legal insurance requirements.

Do sole traders need business insurance by law in general?

In most places, there is no single blanket law stating that every sole trader must have “business insurance.” If you’re working alone, offering low-risk services, and not operating in a regulated profession, you may be able to run legally without any business insurance at all.

However, that’s not the same as being safe or sensible. “Not required” doesn’t mean “not needed.” It only means you won’t be automatically breaking the law if you don’t buy a policy. The legal requirement usually kicks in when you do one of the following:

1) Employ people. Hiring staff often triggers compulsory cover that protects employees if they’re injured or become ill because of work.

2) Drive for business purposes. If you use a vehicle for work, certain motor insurance requirements may apply, and using the wrong type of cover can be a legal and financial problem.

3) Work in regulated industries or professions. Some sectors require professional indemnity or specific liability cover to obtain or maintain a licence, registration, or certification.

4) Enter contracts that require insurance. This isn’t “the law,” but it can function like a requirement if you want to work with certain clients, landlords, agencies, or venues.

So, the real question isn’t “Do sole traders need business insurance by law?” as a single yes-or-no. It’s “Which parts of my work might legally require insurance, and what else should I insure even if I don’t have to?”

Insurance that can become legally required for sole traders

Below are the most common ways insurance becomes compulsory for sole traders. Think of these as “legal tripwires.” If you cross one, you may need specific cover to comply with rules, regulations, or licensing conditions.

Employers’ liability (or worker injury cover) when you hire staff

One of the most common legal insurance requirements for small businesses is cover related to employees getting injured or ill because of their work. The name varies by location—employers’ liability insurance, workers’ compensation, workplace injury insurance—but the intention is similar: to ensure workers are protected and compensated without having to chase a business that may not have the funds to pay.

For a sole trader, this becomes relevant as soon as you hire someone who is legally classed as an employee. That might include part-time staff, casual workers, apprentices, or even someone helping you regularly if the relationship meets an employment definition in your jurisdiction. Some places also include “labour-only” subcontractors or people under your direction and control, even if they invoice you.

Common misunderstandings include assuming that:

• Hiring a friend informally doesn’t count. It often still counts if you’re directing their work.

• Using contractors means you’re exempt. Some contractors are treated as workers for insurance purposes depending on how the work is arranged.

• Having only one employee means you don’t need it. The threshold is often “any employees,” not “a minimum number.”

If you’re thinking about bringing help into the business—even occasionally—it’s worth confirming how the law defines “employee” and what insurance is required. The cost of getting it wrong can include fines, being barred from certain work, and personal liability if someone is injured.

Commercial motor insurance if you use a vehicle for work

Many sole traders drive as part of their work: visiting clients, carrying tools, delivering goods, or travelling between job sites. In many places, basic personal car insurance may not cover business use, and driving for work without the correct cover can void your policy. That can leave you personally liable after an accident and can also lead to legal trouble depending on local rules.

Examples of “business use” that may require an upgrade include:

• Driving to multiple work locations. Commuting to one fixed workplace is often treated differently from travelling between sites.

• Carrying tools or stock. Your standard policy may not cover business equipment or may exclude certain uses.

• Deliveries or courier work. This commonly requires specific cover due to the increased time on the road and higher risk profile.

• Using a van for trade work. Vans often fall under different policy types than private cars, even if you’re the only driver.

Even if the law only mandates a minimum level of motor cover, using the wrong category can still put you in breach of policy terms. So while the “insurance by law” element may relate to motor insurance generally, the “sole trader” element is about making sure your business activities are properly disclosed and covered.

Professional indemnity in regulated professions

Professional indemnity insurance (often shortened to PI) covers claims that your advice, service, or professional work caused a client financial loss. This can include negligence, mistakes, omissions, misrepresentation, or failing to meet a professional standard. For many sole traders, PI is not legally required by default. But in regulated professions, it can effectively become mandatory because you need it to practice legally, to hold a licence, or to be part of a professional body.

Roles where PI or equivalent cover is commonly required include certain types of:

• Financial professionals and advisers

• Accountants and tax practitioners

• Architects and engineers

• Surveyors and construction designers

• Healthcare-related providers in specific contexts

• Legal services in some settings

Even outside regulated roles, PI can become “required in practice” because clients demand it. A corporate client hiring a consultant, a local authority awarding a contract, or an agency placing freelancers may require evidence of PI at specific limits before they’ll sign anything.

Public liability where licences, venues, or permits demand it

Public liability insurance covers claims if a member of the public is injured or their property is damaged because of your business activities. For many sole traders, public liability is not legally required. But there are situations where it becomes mandatory indirectly:

• Working on client premises. The client may require proof of public liability to allow you onsite.

• Renting a workspace. Landlords and co-working spaces can insist on cover as a condition of your lease.

• Trading at markets, fairs, and events. Organisers often require public liability before giving you a stall or permit.

• Certain licences and permits. Some councils or authorities require insurance for specific activities.

So, while public liability may not be “by law” for all sole traders, it can become compulsory to operate in the places you want to work. If you’re a mobile hairdresser, a gardener, a photographer at events, a tradesperson entering homes, or a fitness instructor using hired venues, public liability is frequently treated as a minimum requirement by the people controlling access.

What insurance is not usually required by law (but still matters)

A large portion of business insurance sits in the “optional but sensible” category. Optional doesn’t mean you’ll never need it. It means the government typically won’t punish you for not having it. The punishment comes from reality: a claim, a loss, a lawsuit, or a sudden interruption that you have to pay for out of pocket.

Here are major types of insurance that are often not legally mandatory for sole traders but can be crucial depending on your work.

Public liability for low-contact businesses

If you work entirely remotely, with no client visits, no public-facing premises, and no physical products, your public liability risk may be low. For example, a sole trader doing purely online content writing might rarely need public liability. But “rarely” isn’t “never.” You might attend a client meeting, host a workshop, or rent a small studio. The moment you interact with the public or enter someone’s space, liability risk becomes real.

The biggest value of public liability is that it can cover not only compensation but also legal defence costs. Even if you believe you did nothing wrong, you might still need a solicitor to respond to allegations.

Professional indemnity for advice-based work

Professional indemnity is especially relevant if your service influences client decisions or outcomes. If you’re a consultant, designer, developer, marketer, coach, or anyone whose work could cause financial loss if it goes wrong, PI can be the difference between a manageable claim and a business-ending bill.

PI claims are not always about catastrophic mistakes. They can arise from misunderstandings, shifting expectations, or clients who suffer losses and look for someone to blame. Clear contracts and good communication reduce the risk, but they don’t remove it.

Product liability if you sell physical goods

If you sell or supply products—especially items people consume, use on their skin, give to children, or rely on for safety—product liability can be important. It covers claims that a product you sold caused injury or property damage. For sole traders selling handmade goods, reselling items, or running an e-commerce store, product liability can be a key piece of the puzzle.

In some cases, product liability is bundled with public liability. In others, it’s separate. The details matter: selling a candle is different from selling an electrical appliance or a cosmetic product.

Tools, equipment, and stock cover

Many sole traders invest heavily in tools, cameras, laptops, instruments, or specialist equipment. If it’s stolen from a van, damaged at a job, or lost in a fire, replacing it can be expensive. Standard home insurance often won’t cover business equipment outside the home, or it may have low limits and exclusions.

Equipment cover can protect:

• Tools and trade equipment

• Computers and electronics

• Stock and materials

• Equipment hired in or borrowed

If your income depends on that equipment, insuring it is really insuring your ability to keep working.

Business interruption insurance

Business interruption insurance is designed to replace lost income (and sometimes cover ongoing expenses) if your business can’t operate due to an insured event—like a fire at your workspace or major damage that forces closure. Sole traders often overlook this because it can feel abstract. But for businesses tied to a physical location—salons, studios, workshops, cafés, small retail—interruption can be financially devastating even if your equipment is insured.

Some interruption cover is linked to property insurance. If you don’t have premises, interruption cover might be less relevant, but there are still scenarios—like supply chain disruption or a key piece of equipment failing—where other forms of cover may be more suitable.

Cyber insurance for digital risks

Even a one-person business can suffer cyber incidents: phishing scams, ransomware, data breaches, hacked accounts, fraudulent invoices, or website outages. If you store client data, process payments, or rely on online systems for sales, cyber cover can help with recovery costs, specialist support, and liability if client data is compromised.

Cyber insurance is not usually legally required, but data protection rules can create legal consequences after a breach. In that sense, cyber cover can be part of a broader compliance and risk management approach, even if it isn’t mandated.

Personal accident, income protection, and health-related cover

This is where sole traders face a unique reality: if you can’t work, you may not earn. Employees often have sick pay, workplace benefits, or employer support. Sole traders frequently have none of that unless they create it themselves through savings or insurance.

Personal accident insurance can provide a payout if you’re injured. Income protection can replace a portion of your earnings if illness or injury prevents you from working, often after a waiting period. These policies aren’t typically required by law, but they may be among the most important covers for anyone whose business depends primarily on their own time and ability to work.

Why “not legally required” is a risky comfort

It’s tempting to treat insurance like a checklist: if it’s not compulsory, skip it. But business risk doesn’t care about checklists. The reason many sole traders buy insurance without being forced is that the downside of being uninsured can be enormous compared with the relatively predictable cost of premiums.

Here are some common scenarios where “optional” insurance becomes painfully important:

• A client alleges your work caused them a financial loss. Even if the claim is exaggerated, legal costs can be significant.

• Someone trips over your cable at a client site. Small accidents can turn into large claims, especially if there’s injury and time off work.

• Your laptop with client data is stolen. You may face costs for notifying clients, securing systems, and recovering information.

• Your van is broken into and your tools are taken. Replacement costs and lost work time can be a double hit.

• A product you sold causes damage. You may face refunds, replacements, and liability claims.

The important point is not to scare you into buying everything. It’s to show that “not required by law” doesn’t mean “unlikely to happen.” It only means the government won’t force the purchase upfront. The financial consequences still exist.

How legal requirements can sneak up on sole traders

Many sole traders start small and simple, then gradually expand. Legal insurance requirements often appear at growth points—when you hire help, rent space, sign larger contracts, or work with bigger clients. The tricky part is that you can cross a threshold without realising it.

Common growth moments that change your insurance position include:

• Hiring an assistant for a few hours a week. That can be enough to trigger compulsory employee-related cover.

• Taking on a subcontractor who works under your control. Depending on definitions, you might take on responsibilities like an employer.

• Moving from home-working to a studio or workshop. Lease terms may require insurance, and you might need property-related cover.

• Working at public events or markets. Organisers often require public liability certificates.

• Winning a commercial contract. The contract may specify minimum insurance limits and specific policy types.

Because of this, it’s helpful to think of insurance as something you review when your business changes, not a one-time decision.

Contracts can make insurance feel mandatory even when the law doesn’t

It’s worth separating two ideas: legal requirements (what the government mandates) and contractual requirements (what a client or partner demands). Contractual requirements can be just as firm in practice, because without the insurance you simply won’t get the job.

Examples include:

• A corporate client requiring professional indemnity of a certain limit.

• A landlord requiring public liability for a leased unit.

• A recruitment agency requiring both public liability and professional indemnity to place you.

• An event venue requiring public liability before you can operate onsite.

These requirements can also specify details like:

• Minimum coverage amounts

• Specific policy wording (for example, “claims-made” policies for PI)

• Named insured details matching your trading name

• Coverage for subcontractors or temporary workers

If you regularly work with organisations, it’s smart to view insurance not only as risk protection but also as a business development tool. Having the right cover can remove friction when bidding for work.

How to decide what insurance you need as a sole trader

A practical way to decide is to map your risks in plain language, then match them to insurance types. Here’s a structured approach you can use even if you’re not an insurance expert.

Step 1: Identify who could be harmed by your business

Consider:

• Members of the public (clients, visitors, passers-by)

• Your clients’ finances (if your advice or service affects outcomes)

• Your employees or helpers (if anyone works for you)

• You (your health, ability to work, personal assets)

If your work could injure someone physically or damage property, public liability becomes more relevant. If your work could cause financial loss through advice, errors, or failure to deliver, professional indemnity becomes more relevant. If someone works for you, employee-related cover may become compulsory.

Step 2: Identify what you could lose

List your valuable business assets and dependencies:

• Tools and equipment

• Stock

• Data and devices

• Access to a vehicle

• A physical premises

• Your ability to work and earn

Insurance choices become clearer when you see what would be hardest to replace quickly and what would stop you working if it disappeared.

Step 3: Check your work environment and client expectations

Ask yourself:

• Do I visit client sites or host clients?

• Do I work at events or in public places?

• Do my clients ask for proof of insurance?

• Do I sign contracts with insurance clauses?

If you’re often on other people’s premises, liability cover becomes more important. If you’re contract-driven, you may need specific cover limits to compete.

Step 4: Consider the worst plausible claim, not the average mishap

Insurance is for the big, painful outcomes. A small mishap you can pay for yourself is not the main reason to insure. The main reason is the rare but costly incident: a significant injury, a major financial loss claim, or a scenario that triggers legal costs.

Think in “worst plausible” terms:

• What is the most expensive thing that could realistically go wrong in my line of work?

That answer helps you decide both whether you need cover and how much.

Understanding common policy limits and what they mean

When people talk about insurance, they often focus on whether a policy exists rather than what it covers and up to what amount. But limits matter. A cheap policy with a very low limit might not meaningfully protect you if a claim exceeds that amount.

At the same time, buying the highest possible limit isn’t always necessary. The “right” limit depends on your industry risk, client requirements, and exposure. For example, a consultant working with large budgets may face higher potential claims than a hobby-based seller making small handmade items—though both could still face serious issues in the wrong scenario.

It’s also important to understand that some policies are “claims-made” (often professional indemnity), meaning the policy must be active when the claim is made, not just when the work was done. That can influence whether you keep cover even after you stop trading or finish a project.

Myths that lead sole traders to underinsure

Many sole traders avoid insurance due to common myths. Clearing these up can help you make a more confident decision.

“I’m too small to be sued.”

Small businesses are sued and receive claims because the trigger is usually an incident, not your size. In fact, smaller businesses may be targeted precisely because they might settle quickly to avoid legal costs. The best defence is prevention and adequate insurance that includes legal support.

“Clients sign waivers, so I’m covered.”

Waivers and contracts can help manage expectations and reduce disputes, but they don’t always remove liability. Some liabilities can’t be waived in certain jurisdictions, especially where injury is involved. Insurance isn’t replaced by paperwork; it complements it.

“My home insurance covers my business equipment.”

Sometimes it does, often it doesn’t, and frequently the limits and conditions are not sufficient for business use. Even if your home insurance covers equipment at home, it may not cover it while you travel to jobs or leave it in a vehicle.

“Nothing bad has happened so far, so I don’t need it.”

This is like saying you don’t need a seatbelt because you haven’t crashed yet. Insurance is for the unpredictable. The absence of past problems doesn’t reduce future risk to zero.

“Insurance is pointless because they never pay out.”

Insurance can fail you if the policy is unsuitable, the risk isn’t disclosed, or exclusions apply. But many claims are paid when policies are correct and information is accurate. The practical takeaway is to choose the right cover and be honest about your activities, not to avoid insurance entirely.

Practical examples: when different sole traders might need insurance

Sometimes it helps to see how insurance plays out in real-world business types. Here are illustrative examples of common sole trader setups and the cover they often consider.

Freelance designer or developer working remotely

A remote freelancer may have low public liability exposure but meaningful professional indemnity exposure, because their work can affect client revenue, brand reputation, conversions, or system performance. They may also benefit from cyber cover (if handling client data) and equipment cover for laptops and devices. Legal requirements may be minimal, but contracts may demand PI.

Plumber, electrician, or general tradesperson

A tradesperson has significant public liability exposure due to working in homes and sites, potential property damage, and bodily injury risk. Tools and van cover can be crucial. If they hire an apprentice or labourer, employee-related compulsory cover may become mandatory. Some work might require proof of insurance to access sites or win contracts.

Personal trainer or fitness instructor

This type of work often includes public liability and professional indemnity elements because advice and supervision can lead to injury claims. Venues may require proof of cover. If teaching in public spaces, there may be permit-related requirements. Even if not legally required, having appropriate cover is often essential to operate.

Photographer or videographer

A photographer may need public liability when working at events, equipment cover for expensive gear, and sometimes professional indemnity for missed shots, data loss, or failure to deliver agreed work. Venues often require liability cover before allowing access.

Handmade goods seller

If selling physical products, product liability becomes relevant, especially for items that can cause harm (candles, skincare, toys, food). Public liability may apply at markets and fairs. Stock cover can be important if materials and finished goods are stored at home or in a workshop.

What to do if you’re unsure whether insurance is legally required

If you’re uncertain about legal requirements, focus on the triggers. Ask yourself these questions:

• Do I have anyone working for me, even casually?

• Do I drive for work or carry tools/stock for business?

• Am I in a regulated profession with licensing or membership rules?

• Do I need a permit, venue access, or contract that mentions insurance?

If you answer “yes” to any of those, the chance that insurance is required (by law or by practical necessity) rises significantly. The next step is to check the specific obligations in your jurisdiction and industry, and then choose policies that match your real activities.

Even when not legally required, you can treat insurance as part of responsible business planning. Many sole traders build insurance costs into pricing from the start, seeing it as part of delivering a professional service rather than an optional add-on.

How to keep insurance affordable as a sole trader

Cost is a genuine concern when you’re self-employed. The good news is that you often have control over the factors that influence premiums. Here are practical ways to keep cover sensible and cost-effective without taking reckless shortcuts.

Choose cover that matches your actual risk

Don’t buy everything just because it exists. If you never meet clients in person, a large public liability policy might be less relevant than professional indemnity. If you don’t sell products, product liability may be unnecessary. Start with the biggest exposures first.

Be accurate about your business activities

Understating what you do can backfire. If an insurer believes you misrepresented your activities, it may cause problems at claim time. It’s better to describe your work clearly and get the correct policy than to chase the cheapest quote with incomplete details.

Bundle policies when it makes sense

Some providers offer packages that combine common covers, which can be more cost-effective than buying separate policies. Just make sure the bundle actually includes what you need at adequate limits, rather than padding you with irrelevant add-ons.

Improve your risk management

Insurers may consider your claims history, your experience, your processes, and how you reduce risk. Using clear contracts, maintaining equipment, following safety procedures, and documenting work can reduce claim likelihood and sometimes improve insurability and pricing over time.

Review annually or when your business changes

Over-insurance and under-insurance both waste money—one through excess premiums, the other through uncovered losses. Reviewing your cover each year (or when you change services, hire help, or buy expensive equipment) helps keep your insurance aligned with reality.

Key takeaway: legal requirements are only the starting point

So, do sole traders need business insurance by law? In many cases, not automatically. But the moment you employ someone, drive for business purposes without the correct motor cover, operate in a regulated profession, or agree to contracts that require insurance, the “optional” conversation can quickly turn into a requirement.

Even when no law forces you to buy insurance, the practical risks of being uninsured can be far more expensive than the premiums. For sole traders, the business is personal, and a serious claim can affect not only your income but also your savings and financial stability. The smartest approach is to identify the real risks in your work, understand the legal triggers, and choose cover that protects you where it matters most.

If you treat insurance as part of building a resilient business—rather than a reluctant expense—you put yourself in a stronger position to take on better clients, work with confidence, and keep going even when something unexpected happens.