Sole Proprietor Business Insurance: What you need and why it matters?

What is a sole proprietor?

A sole proprietorship is a type of business that is owned by an individual and is not registered as any other kind of business. For example, if you decide to mow lawns or babysit without registering as a business – such as a limited liability company, or LLC – then you would automatically be considered a sole proprietor.

But this also means there is no separation between your personal and business assets. 

Many businesses operate as sole proprietorships. In fact, 86.3% of nonemployer firms (businesses without employees, other than the owner) and 13% of small businesses (fewer than 500 employees) are classified as sole proprietors, according to a Small Business Administration report based on U.S. Census data.

Why do sole proprietors need insurance?

Because there is no separation between your personal and business assets, your finances can be targeted. This also can apply to creditors if your business assets aren’t sufficient to cover a debt. 

The legal fees associated with fighting a suit can add up quickly. Bentz notes that even filing a motion to dismiss could cost $50,000 or more in attorney fees.

What insurance does a sole proprietor need?

The type of commercial insurance you need will depend on your business. If you don’t drive for work purposes, you probably won’t need commercial auto coverage, but you may need general liability insurance if customers come to your workplace to conduct business.

Some examples of small business insurance for sole proprietors include:

• Business owner’s policy. A BOP is a package of insurance types. It generally includes coverage for liability, business property and business interruption. The coverages included may be customized to your business’s needs.
• Business interruption. If a covered peril forces you to suspend operations temporarily, this will help cover your lost net income (based on your financial records) and operating expenses like rent and payroll. This is sometimes called business income insurance.
• Commercial auto. Depending on the policy, commercial auto insurance will cover injuries and damage to others resulting from an accident with your business vehicle. It will also include collision, comprehensive, bodily injury and uninsured/underinsured driver coverage. Some insurers also offer optional coverage for using your personal vehicle for business purposes. You also can get coverage for any vehicles you rent or if you have employees using their own autos for work.
• Commercial property. Property insurance can cover your business’s equipment, building and inventory from perils like fire, lightning and wind damage. Commercial property damage is determined either as actual cash value or replacement cost.
• Cyber liability. This provides a financial safety net against data breaches, denial of service attacks, ransomware and malware. It can cover business interruptions that result from a breach, legal fees, hiring specialists to find the source of the attack and even credit- and identity-theft monitoring for your business and any clients possibly affected.
• General liability is broad coverage that includes bodily injury and property damage, personal and advertising injury, and medical payments. Medical payments coverage is only for non-employees. This is sometimes called commercial general liability. 
• Professional liability insurance. Also called Errors & Omissions insurance (E&O), these policies cover perils including negligence, inaccurate advice and misrepresentation. It can help cover the costs of legal fees such as hiring a lawyer, settlements and court judgments, and other court costs.  
• Workers’ compensation. Workers’ comp insurance covers you if an employee injures themselves. This includes medical payments and lost wages if an employee has a work-related injury or illness. It will also cover the cost of legal representation and provide some protection from lawsuits resulting from covered incidents. In almost all states, this will be required by law if you have any employees, even if they are part-time or family members.

Policies can differ from company to company. Discuss with your agent or broker the specifics of any policy you’re considering and what coverage makes the most sense for your business.

What are the pros and cons of sole proprietorship insurance?

Pros:

• Helps protect the long-term viability of your company
• Can create a financial buffer for your personal assets

Cons:

• Wide array of products can make shopping for coverage a time-consuming process
• Different policies will have different exclusions

One of the biggest pros of purchasing insurance for sole proprietorships is creating a financial safety cushion between your business and personal finances. This way, if your business is sued or otherwise runs into financial difficulties, your personal assets typically won’t be at risk. 

A big con is that navigating the wide variety of policies and their exclusions can be confusing. 

For instance, a business interruption policy can provide some protection if a severe storm interrupts your operations, but most policies won’t cover you if the interruption is caused by a non-listed peril, such as a cyber-attack. Coverage for that may require a different policy. 

Another example of an exclusion is that many commercial auto policies don’t automatically cover the use of personal vehicles for business without an endorsement. It’s important for you to fully understand what your policies do and don’t cover. 

You’ll also want to make sure there aren’t any coverage gaps and that you have sufficient coverage limits. If you work out of a building and have commercial property coverage, you may think you’re fully covered, but if you’re operating in a flood zone, you also may need to purchase a flood insurance policy.

A worst-case scenario for business insurance is if something happens and you discover you don’t have the coverage you thought you did. This could be due to not thoroughly understanding what your policy covers, not having high enough coverage limits, or not updating your policies over time. Bentz recommends reviewing your policy annually. 

How much does sole proprietor business insurance cost?

A general liability policy will, on average, run about $42 per month, according to small business insurance broker Insureon.  Meanwhile, E&O and workers’ compensation will average $61 and 45 per month, respectively.

An insurance bundle – a business owner’s policy – for a small business is $57 per month, according to Insureon. 

Source: Insureon

Remember, these are just averages, and the cost of small business insurance for a sole proprietor can vary wildly depending on several factors, including the size of your business, the type of business you’re operating and the amount of coverage you’re purchasing.

You may also get a discount by purchasing multiple policies from the same company, just like if you purchased homeowners and car insurance from one insurer.

What insurance companies offer sole proprietor business insurance?

Most commercial insurance companies offer policies that cover sole proprietorships, including:

• Allianz. One of the world’s largest insurance companies, Allianz offers an extensive selection of small business insurance policies. 
• Ergo. Ergo’s parent company, global reinsurance giant Munich Re, recently purchased small business insurance specialist Next. 
• The Hartford. The Hartford has been operating for more than 200 years. In addition to offering numerous policies for small businesses, The Hartford’s website has articles explaining the different types of policies, including those for sole proprietors.
• Hiscox. Hiscox focuses exclusively on insurance policies for small businesses. Like The Hartford, it has a number of online resources to help small business owners learn about business insurance and what policies they may need.
• Progressive. Progressive’s business insurance offerings differ from other companies in that Progressive sells the policies it issues and policies issued by other insurers. This means it can sell you a Progressive insurance policy as well as a policy from another insurance company.
• State Farm. A major player in the U.S. insurance industry, State Farm can provide various small business solutions. However, State Farm stopped selling commercial property insurance in California in 2023 and doesn’t sell business insurance in Massachusetts or Rhode Island. 

How to get sole proprietor business insurance.

One way to get sole proprietorship insurance is to work with a licensed agent or broker. They can help you understand what coverages your business may need and what companies can offer the best bang for your buck.

• Insurance agent. Insurance agents represent the insurance company. They can be captive agents, where they represent just one company, or independent agents representing several. A captive agent may have a more in-depth knowledge of an insurance company’s offerings, while an independent agent can help you gather quotes from multiple companies.
• Insurance broker. A broker represents you as their client. In some states, they may have a fiduciary duty to look out for your best interests. In addition to getting quotes from multiple companies, they can complete and submit applications on your behalf.

Investigate how much things cost in your area, whether it is the cost of replacing equipment or the cost of hiring a lawyer. You don’t want to end up in a scenario where your insurance doesn’t have enough coverage to pay for the services you require, and you need to make up the difference.

When selecting an insurance company, don’t just look at price. “There may be no difference in price from one carrier to another, but there may be a huge difference in coverage,” Bentz says.

Once you’ve settled on the insurance company and the policies you want, you must apply. Both an agent and a broker can help you understand what information you’ll need to complete the application process.

The insurance company will then initiate the underwriting process. This is when the company reviews your application and determines the level of risk involved with insuring you and what rates it should charge you. The insurer’s underwriters may request more information from you as part of this process. The length of time this can take will depend on the complexity of your application and whether the underwriters will require more information. 

Once this process is complete, you’ll need to review the policy documents and make sure you understand them: what is covered and excluded, deductibles, waiting periods, and premiums. It is important to thoroughly understand your policy before signing. 

After that, you’ll sign the document and begin making payments. Your insurer may then provide you with a certificate of insurance. 

Bottom line: How much protection from liability does a sole proprietorship offer?

Because a sole proprietorship doesn’t separate your business assets from your personal ones, it can leave you vulnerable to lawsuits and creditors. 

Many types of commercial insurance can help provide you with some protection. Some include general liability, BOP (which includes general liability), E&O, workers’ compensation, commercial auto and cyber liability. Which ones are necessary will depend on your business. For example, if you’re an accountant working from home, you may not need commercial auto, but a professional liability policy could prove useful. 

Depending on the state where you operate, if you work in a trade such as plumbing, you may be required to have a workers’ compensation policy even if you don’t have any employees. 

Working with a licensed agent or broker can help you understand your liability exposure.