A business is a business regardless of where it’s located. That includes home-based businesses, which is why decisions about insurance should be based on need and not location.
Each of the almost 40 million home-based businesses in the United States is unique. From the smallest part-time venture to multimillion-dollar international enterprises, they all need insurance to protect them and their owners from the perils that affect any other business.
Operating a home-based business can be rewarding and challenging. The latter is especially true when it comes to navigating the world of insurance.
One area of particular confusion for those who worked from home for an employer before striking out on their own is what is covered by homeowners or renter’s insurance. The source of uncertainty is that business equipment and materials associated with a home office are covered by homeowners insurance. This leads many entrepreneurs to believe that a home business is also covered.
Adding to the confusion is the fact that a home office is covered by homeowners insurance even if you work for yourself, so long as your primary place of business is not your home.
For example, my wife is a CPA and has an office about a mile from home as well as a home office. Her home office is covered under our homeowners policy, even though she owns the business, because she has an office elsewhere.
You should read your policy carefully and check with your agent to make sure you understand the limitations of your coverage.
What’s the Risk?
When you fail to notify your insurance company of a home business, you place your business as well as your home and personal property at risk. An undisclosed home business can result in a claim being denied — whether it’s for the business or not.
For example, if your home is burglarized and the thieves make off with $20,000 in covered personal property and $100 in property from the home business, the insurance company may be able to deny the entire claim by saying the thieves were lured by the uninsured and undisclosed home business. Your policy may even be canceled because you did not tell them about the business.
Other risks that may not be covered include injuries someone sustains while on your property if their presence was related to your business. You would be personally responsible for the cost of medical care and damages.
This risk includes not only injuries to your customers or employees, but others who visit your home for business. For example, if a FedEx driver delivers personal as well as business items to your home and falls, your insurance won’t cover the injury because the driver was there to service your business.
Questions to Ask Yourself
If you have or are planning to start a home business, answer these questions to assess your insurance needs:
What are the limits of your homeowners or renter’s policy for business equipment? Since most policies limit coverage for business equipment, it is essential to know how much coverage you have and what the conditions are.
Will your home office be your primary place of business? Insurance companies make a clear distinction between a home office (covered) and a home business (not covered). You may be covered if you have a place of business away from home and have a home office for occasional use.
Will customers, employees, and other visitors be coming to your home office? In most cases, your homeowners or renter’s insurance won’t cover injuries to visitors to your home who are there because of a home-based business.
Will you be keeping business data at home? Whether it’s personally identifiable client information such as customer names and addresses or proprietary business information such as supplier names and confidential pricing related to your home-based business, chances are your homeowners insurance won’t cover its loss.
The least expensive and most limited way to insure a home business is the addition of a policy rider or endorsement. This option is not available for all policies from all insurers, so the first step is to ask your agent or insurance company representative if it is available. This rider will add a modest amount of coverage for office equipment and limited liability protection for injuries to business-related visitors.
This type of coverage may be a good choice for a sole proprietor with no employees and very limited liability exposure. These riders almost never offer any coverage for merchandise inventory, so if you are in the business of selling a product of any kind, your goods will not be insured against damage or loss.
The cost of adding a home business rider to an existing policy is usually about $100 per year, with a maximum added insurance of between $2,000 and $3,000.
One Step Up
The next step up the insurance ladder for home business coverage is an in-home business policy. Insurance companies that offer this often make coverage available only to homeowners or renter’s policyholders. The coverage may be provided as either a separate stand-alone policy or an endorsement to existing home insurance protection.
Availability, coverage requirements, policy limits and covered industries will vary widely from one insurer to another, and state regulations may also differ. As a result of these variables, you should not make business decisions based on what you have heard from other home-business owners. This variability makes it imperative that you compare actual benefits along with premium costs when shopping for in-home business coverage.
While these policies and endorsements offer far more protection than a homeowners or renter’s policy rider, they are still limited in scope. This type of coverage is more comprehensive than a homeowners or renter’s policy alone or with a rider.
In-home business policyholders are protected against loss or damage to equipment such as computers and other electronic devices, documents, and business property. However, the policy may offer only limited coverage for merchandise that you keep in inventory for resale purposes, whether it is stored in your home or at another location.
Other limitations that should be carefully reviewed are liability limits to make sure they are adequate for your needs. Liability coverage may be limited to businesses with three or fewer employees.
The cost for this coverage is usually between $250 and $500 per year, with typical policy limits up to $10,000 in on-site property losses and $5,000 in off-site losses. Since state and local regulations play a significant role in determining what types of home businesses are permissible, the availability of coverage may not be a valid indicator that you are able to operate your business from your home.
These policies are best suited to low-income, low-risk, and part-time businesses because of their low cost and limited coverage.
Business Owner’s Policy
Business owner’s policies, or BOPs, are a type of all-in-one coverage. These policies were created specifically to meet the needs of small businesses.
Their inclusive component-based design is such that they can be customized with a wide array of configurations with different limits to meet the exact needs of different businesses. The cost of BOP coverage starts at about $500 per year for a bare-bones plan that includes business income, liability, and property protection.
Premium costs for business-owner policies are lower because insurers benefit from the bundling of different products in a single package. Streamlined administration allows insurers to offer lower limits, and hence lower-cost coverage, to small business customers.
Policyholders also benefit from simplified administration by only having to deal with a single policy for multiple forms of insurance protection. Other policy components, such as commercial auto insurance and umbrella coverage, can also be added to a BOP.
Business Auto Insurance
As with homeowners policies, insurers may deny claims for damage or injuries that result when your private vehicle is used for business.
When you operate a home business, it is sometimes difficult to recognize when you cross certain lines, such as when your business activities cross into your personal life. This is most often the case with cars.
State laws and insurance company standards vary, but if any of these situations sound familiar, you should consult with your insurance agent about adding business auto coverage to your BOP or in place of your existing auto insurance.
If you use your vehicle to move people or merchandise for a fee, you may want to discuss commercial auto insurance with your agent or insurer.
If your employees are regularly using your vehicle for business, it might be a good idea to think about business auto insurance.
If your vehicle is registered in the name of your business, commercial auto insurance may be required.
If your vehicle is regularly used to transport tools or equipment to job sites or pull a trailer with equipment or merchandise, you may benefit from the added protection of a commercial auto insurance policy.
Commercial auto insurance often comes with higher limits and adds an additional layer of protection between your personal assets and your business. For vehicles that are purchased or leased by your business, you should ask that the business be listed as the principal or primary insured instead of you personally.
Beyond the Basics
Operating a business of any kind from your home has many advantages, from lower costs to convenience. But what it does not do is eliminate your exposure to risk.
Home businesses face the same threats as those that operate from a commercial location such as a storefront, warehouse, or office building and should be insured the same way. That means whether you are an accountant who needs errors and omissions coverage or contractor with 10 employees who needs worker’s compensation, all of your insurance decisions should be based on what makes the most business sense.