Insurance Must-Knows for the Self-Employed

Insurance. Investing money to protect yourself (or your loved ones) in the event something horrible happens to you. It’s a concept that has been around since time immemorial. These days, insurance comes in many forms. Health insurance, life insurance, content insurance, and auto insurance.

Most households will have a combination (or all) of the above. Insurance is ironic in that we pay so much money for something that we hope to never use. But if we do have to use it, we’re always glad it’s there. I for one have made a few auto insurance claims myself and have never regretted having it!

When you’re self-employed, you will still likely use a lot of the insurance mentioned above. However, running a business comes with additional risk exposure. So let’s take a look at the types of insurance that you’ll need to think about as a self-employed individual.

General business insurance

I say ‘general’ because this covers a few different types of insurance. Depending on how you structure your self-employment (either as a sole trader or as a company), you need to insure your assets. You will need to consider the following:

Auto insurance

Does your company own a car or a fleet of cars? Then you’ll need to get each one insured. The policies for insuring company cars are slightly different from personal car coverage. You’ll want to ensure that your employees who will use the vehicle are covered. Depending on the type of vehicle, you may need to ensure that the insurance covers any situation you may be putting the car into. For example, making sure that your work truck is covered for off-road accidents or damage due to load-bearing issues.

Business premises insurance

Otherwise known as ‘contents insurance’. If you have a physical business premise (which is not your home office), you will want to take out premises insurance. This protects against theft, arson, structural damage, etc, that could affect your business. Be sure to ask your insurance agent/broker if income protection is included in this as well. If your premises got broken into and you had to close shop for two weeks, it is good to have insurance that will cover your lost income for those weeks.

As a self-employed individual, it’s also good to have income protection or trauma/health insurance. These types of insurance will typically cover your income if you’re unable to work due to various issues. These are typically taken out in the individual’s name, not the business.

Public Liability insurance

Now we’re looking at business-specific insurances!

Public Liability often gets confused with Professional Indemnity (which we’ll discuss later). They are very different! Public Liability looks at covering the liability that your business incurs if you cause damage to property as a result of carrying out your business activity.

In short, if you went out to see a client and your car ran over your neighbor’s mailbox, you can put in a Public Liability claim. Of course, the mailbox may cost less than your insurance’s excess fee, but you get the point.

Another example of Public Liability is damage caused to property as a result of incorrect equipment installation. If you installed a piece of electrical equipment wrongly and it caused your client’s building to burn down, you will be responsible for the damages. Public Liability insurance will allow you to claim for some of those damages.

Do I need public liability insurance?

It depends on how much interaction you have with the public when carrying out your work. If you are frequently going out to see clients/visit worksites, then yes, you should get Public Liability insurance. The same goes if your service requires you to service client property.

If you are a retailer/restaurant owner, you may be covered by Public Liability if a customer managed to get injured in your store as a result of your or your employee’s negligence. If you are a rideshare driver, Public Liability will cover you if you run your car into a road sign (or something similar).

Do you work from home? You may not get much value from Public Liability insurance. If your work does not require you to leave the office frequently and/or interact with clients physically, you don’t really need Public Liability insurance.

Professional Indemnity insurance

Do you provide professional advice and services to your clients? Do your clients rely on your professional advice to make their business decisions? If yes, Professional Indemnity insurance is for you!

Say, for example, you’re an accountant (like me!). Your clients rely on you to file their tax returns, ensure that they comply with tax legislation, and advise them on how to structure their tax affairs legally. If your client runs afoul of the tax authorities because they relied on your advice, they can sue you for providing bad and/or negligent advice.

Professional Indemnity insurance will come in to cover any settlements, legal fees, or fines that result from your professional negligence. Naturally, if your client messes up because they didn’t follow your advice — that’s on them. No sweat for you.

Professional Indemnity is different from Public Liability. Public Liability typically focuses on damage to property whereas Professional Indemnity focuses on losses arising from bad advice. So, a builder who installs a beam wrongly can claim Public Liability. An architect who draws up the wrong plans will be claiming Professional Indemnity.

Do you need professional indemnity insurance?

Much like public liability insurance, it depends on the nature of your business. If you are providing professional advice in any capacity (as an accountant, lawyer, IT adviser, management consultant, etc), then you are exposed to professional risk. If there is a chance that your clients could suffer losses as a result of your (bad) advice, you should get Professional Indemnity insurance.

Retailers and restaurateurs don’t have to worry about Professional Indemnity. No one’s ever lost a few thousand dollars because their barista recommended them a bad coffee (I mean, there might be a really specific situation where that could happen, but let’s be realistic here). Similarly, a bad dress recommendation in a retail shop usually won’t result in financial losses for your customer.

You will find that some larger organizations may require you to have Professional Indemnity insurance before you can do business with them. This is usually true for government contracts for consultants. In this case, you have to get Professional Indemnity if you want to unlock that revenue stream.

Pricing for business insurance

That depends on a few things.

For general business insurance, you are typically priced by the size of your premises, the value of your automobiles, and the value of your assets.

For Public Liability insurance, pricing is determined by the nature of your business (the more you need to be out and about, the higher the premiums will be).

Professional Indemnity insurance is tied to your yearly turnover from your advisory services. The higher your advisory income, the more your risk exposure and the higher your premiums.

Protect your future

Insurance is all about managing the risk of the unknown. Being self-employed often means embracing the unknown and taking big risks with your income. As a self-employed individual, you are exposed to greater risk than an employee. Understand what these new risks are. More importantly, understand what sort of insurance you can take out to protect yourself!

Stay positive!

Sam is the director of SH Advisory, an online accounting firm for small businesses and startups in NZ. He is also the creator of The Comic Accountant, an internationally-read finance comic blog. With 15 years experience in accounting and finance, he loves sharing quality financial advice with small business owners everywhere. In his spare time, he likes to nerd out over the latest board game launches and great PC gaming deals online. If you need help with your small business and startup, Sam is the person you want to talk to!