Starting a Home-Based Business? Make Sure You’re Properly Insured


National Study Finds Nearly 60% of Home-Based Businesses Have No Coverage

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NEW YORK, March 25, 2010— With the national unemployment rate lingering around 10 percent, millions of Americans may be tempted to start a home-based businesses. But studies show that less than half of them have any type of insurance coverage for their new endeavor, and others wrongly believe a homeowners insurance policy is sufficient, according to the Insurance Information Institute (I.I.I.).
The Bureau of Labor Statistics notes that 22 million Americans did some work at home on an average day in 2008, up from 18 million in 2003, possibly reflecting increased telecommuting as well as job losses in the private sector. It is unclear how many people who are working from home have established home-based businesses; however the number of self-employed increased from 8.5 million in January 2009 to 9.0 million by the end of the year.
A common misconception is that homeowners insurance policies offer broad coverage for a home-based business, but in fact they usually provide no more than $2,500 to replace damaged or stolen business equipment.
“Just because a business is located in your home doesn't mean your homeowners insurance policy will cover you,” said Michael Barry, vice president, Media Relations, for the I.I.I.
In addition, standard homeowners insurance policies provide neither business liability nor business income (also known as business interruption) coverage for home-based businesses. These are essential forms of protection in the event an employee or customer is injured on the premises, or a loss prompts the extended closure of a home-based business. 
Depending upon the type of home-based business, separate professional liability coverage may also be necessary. Professional liability policies protect policyholders against financial losses derived from lawsuits filed against them by their clients. If liability is limited to acts of negligence, the professional liability insurance policy is known as an errors and omissions policy.
“No matter how industrious you are, one uninsured event relating specifically to your home-based business can deal a significant financial blow to the company. The key to protecting your home-based business is securing the appropriate coverage,” noted Barry.
The Independent Insurance Agents & Brokers of America (IIABA) commissioned a study in 2004 which found nearly 40 percent of home-based business owners had not purchased insurance because they thought they were protected by some other type of coverage; 30 percent said their businesses were too small to insure; and nearly 20 percent could not give a reason for not having the coverage.
Insurance companies differ considerably in the types of business coverages they offer. Some may meet the specific needs of your business, while others may not. So it is wise to shop around for coverage options as well as competitive pricing.
When insuring your home-based business, there are three basic choices, depending on the nature of your business and the insurance company you buy it from. They are as follows:
  1. Homeowners Policy Endorsement
    You may be able to add a simple endorsement or rider to your existing homeowners policy that doubles the $2,500 standard coverage for business equipment such as computers. For an additional premium charge, you can raise the policy limits for losses related to a home business to $5,000 or $10,000.

    Adding an endorsement to your homeowners policy is the least expensive option, but it might not be sufficient if you have a lot of expensive business equipment. It also does not provide business liability or business income coverage.

    You can buy a homeowners liability endorsement that will protect you in case clients or delivery people get hurt on your premises and sue. The homeowners liability endorsement is typically available only to businesses that have few business-related visitors, such as writers. But some insurers will provide this kind of endorsement to piano teachers, for example, depending on the number of students. These endorsements are available in most states.

  2. In-Home Business Policy
    An in-home business policy provides more comprehensive coverage for business equipment and liability than a homeowners policy endorsement. Many insurance companies offer insurance policies specifically tailored to small business. The average home-business insurance policy can cost anywhere from $250-$500. The cost depends on the type of business you operate, the kinds of safety features that are in place and the amount of coverage you decide upon.

    In addition to protection for your business property, most policies reimburse you for the loss of important papers and records, accounts receivable and off-site business property. Some will pay for the income you lose (business, or income, interruption coverage) in the event your home is so badly damaged by a fire or other disaster that it cannot be used for a certain period of time. Others will also pay for the extra expense of operating out of a temporary location.

    Some in-home business policies cover a certain number of full-time employees, generally up to three. 

    In-home business policies generally include broader liability insurance for higher amounts of coverage. They may offer protection against lawsuits for injuries caused by the products or services you offer, for example.

    In-home business policies are available from homeowners insurance companies, which offer business insurance bundled with a standard homeowners policy. Stand-alone in-home business policies are also sold by some specialty insurers; in this case you do not also have to purchase your homeowners insurance from the company.

  3. Businessowners Policy (BOP)
    The Businessowners Policy, known in the insurance industry as a BOP for short, is one of a number of package policies designed to meet the insurance needs of various kinds of businesses. The key to whether a business owner is eligible for a BOP is the size of the premises, the limits of liability required, the type of commercial operation it is and the extent of its off-premises servicing and processing activities.

    A BOP, like an in-home business policy, covers business property and equipment, loss of income, extra expense and liability; however, the BOP provides these coverages on a much broader scale.

    A BOP doesn't include workers compensation, health or disability insurance. If you have employees, you will need separate policies for these coverages. If you are using your car for business activities—transporting supplies or products or visiting customers—you need to make certain that your automobile insurance will protect you from accidents that may occur while you are on business.

As is the case with any insurance policy, a safe work environment can help lower property premiums. Make sure you have fire detectors and a security alarm system. Also have a computer-data backup procedure, and store the data backup away from your home. If you have an effective system, it may not be necessary to pay an additional premium for loss of business data.

The I.I.I. is a nonprofit, communications organization supported by the insurance industry.

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