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Business insurance for sole proprietors

Sole proprietors face many of the same risks as larger tech companies, which makes business insurance just as important. Discover recommended policies for sole proprietors in IT.

Who is a sole proprietor?

A sole proprietor is someone who runs their own business without registering as a special business entity such as a limited liability company, partnership, or corporation. You don’t need to file any paperwork to become a sole proprietor.

Why do sole proprietors need insurance?

You may think a one-person business is inherently low risk, but sole proprietors face many of the same risks of larger tech companies. From lawsuits to data breaches and fires, unexpected events can devastate a small company.

If something goes wrong with a project you're working on, your clients could hold you responsible, even if the problem wasn't your fault. A client could, for example, pin blame for a data breach on your IT consulting company if you recommend faulty software. Your clients could also come after you for a mistake made by a subcontractor you hired.

Plus, sole proprietors are not separate entities from their business. That means you're directly liable for business mistakes – and your personal assets are at stake, too.

Business insurance is critical for sole proprietors, especially those without funds set aside for legal fees or other sudden costs. Whether you’re a software developer, IT consultant, or project manager, you’ll need to protect your clients and yourself with the right coverage.

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Recommended policies for tech sole proprietors

Without a formal business entity to separate your business assets from your personal assets, it's crucial for sole proprietors to protect themselves with adequate insurance. Here's where to start:

Errors and omissions insurance (E&O)

Errors and omissions insurance protects tech companies against professional mistakes or oversights that lead to legal defense costs, settlements, and court-ordered judgments. This policy is sometimes called professional liability insurance.

Cyber liability insurance

Cyber liability insurance is often bundled with errors and omissions in a package called tech E&O. It's essential for IT businesses that handle sensitive information such as bank account numbers, Social Security numbers, customers' contact information, and other sensitive data.

Cyber liability policies come in two forms:

First-party cyber liability insurance helps businesses recover from data breaches or other online attacks against your company. It typically covers immediate costs such as customer notification, credit monitoring services, crisis management, and cyberextortion.

Third-party cyber liability insurance protects companies from client lawsuits over failure to prevent data breaches. It covers defense attorney fees, settlement costs, and other court costs.

Business owner's policy

A business owner's policy (BOP) combines general liability insurance with commercial property insurance, which allows tech companies to safeguard against the most common risks of owning a business. That includes client injuries, business property damage, and copyright infringement lawsuits.

Though not all businesses are eligible, it’s ideal for a range of tech firms, including web design sole proprietors, IT consulting firms, or small computer repair shops. A BOP usually costs less than purchasing each policy separately. If your sole proprietorship is a home based business though, it makes more sense to purchase just general liability insurance.

Workers' compensation insurance

If your business expands and you hire employees, the next policy you need is workers’ compensation insurance. This policy covers work-related injuries and illnesses, including medical bills, lost wages, medications, physical therapy, and other ongoing care costs.

Your state likely doesn't require sole proprietors to carry workers’ compensation coverage until you hire employees. However, it's a good idea to carry this coverage even when it's not required. Health insurance providers can deny claims for work injuries, which could leave you paying expensive medical bills out of pocket.

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