Homeowners Policy Won’t Cover all Home-based Business

If you run a business out of your home, the risks can add up fast. Do you see customers? You could be sued if someone trips on the steps. Make crafts? Your glue gun could cause a fire. Use your garage as an office? Your inventory or equipment could be stolen.

But the biggest risk of all is assuming that your homeowners policy will cover these damages. Regular homeowners policies cover only a fraction of business-related claims — yet many entrepreneurs don’t buy additional coverage, leaving them potentially exposed to huge losses.

Madelyn Flannagan, vice president of education and research at the Independent Insurance Agents and Brokers of America, says a typical homeowners policy covers only about $2,500 of on-premises business equipment, and just $250 off premises. In addition, the policy is unlikely to contain any liability coverage for business-related accidents.

“You have to look at your policy, but most likely, since (the liability is) related to the business, it wouldn’t be covered,” says Robert Hunter, director of insurance at the Consumer Federation of America in Washington.

It’s not clear just how many home-based businesses are underinsured. But some evidence suggests that many entrepreneurs don’t know they aren’t covered.

For instance, a February 2004 survey conducted by International Communications Research for the Independent Insurance Agents and Brokers group found that nearly 60 percent of home-based businesses lacked insurance coverage beyond the homeowners policy. Most of the uninsured business owners said they thought that they didn’t need insurance, that they had other coverage or that the business was too small or didn’t carry any risk.

Given the risks, experts advise home-based entrepreneurs to beef up their coverage by buying business insurance. There are three general types of policies available; the best choice depends on the size and nature of the enterprise.

First, there are endorsements, also known as riders. These are provisions added to your existing homeowners policy that bolster the coverage to include your business. If you opt for this type of coverage, check whether it includes liability insurance for your business — if not, you may need to purchase a separate liability policy.

An endorsement usually doesn’t offer a great deal of coverage, so it’s probably best for businesses with a small amount of equipment and space that don’t get visitors or deliveries at the home. A typical endorsement might cover $5,000 of contents and $1 million of liability for about $200 to $250 a year. That’s on top of the homeowners policy, which on average costs about $675 to $800 a year.

An in-home business-owners policy combines coverage for the home and the business into a single contract, eliminating duplications and gaps in coverage.

This type of policy, which generally starts at around $100 to $150 on top of the regular homeowners-policy costs, usually covers you for liability and loss of income. It’s a good choice for businesses with limited risk exposure, such as crafts or accounting — but not if much of the business is conducted outside the home, because the policy covers only household activities and property.

A business-owners package policy is the most comprehensive type, and is more like a regular commercial policy than the other two options. It’s completely separate from the homeowners policy, and coverage usually includes liability on and off premises, business property, loss of income and injury.

Larger businesses, those with high liability risk and those that stock merchandise on the premises will probably be best off with this package policy. That includes home-based day care, bakeries and any venture that involves a large amount of off-site work. This option could run about $250 to $500 a year, but may cost more depending on how risky your business is. Ventures such as day care and doctors’ offices, for example, have large amounts of liability risk.

Ms. Flannagan of the insurance agents association says the agent who provides coverage for your home is the best person to ask about additional coverage. Your agent will be familiar with your current level of coverage and is therefore in the best position to determine what else you may need.

Ideally, though, “you really want to check with your (insurance) agent in advance of starting your business,” she says.

Full disclosure and planning ahead will help the agent determine exactly what your business’s needs are. “You need to tell the agent everything” about what the business will be doing, says Andy Thompson, an agent with Thompson Group in Parker City, Ind.

For instance, the agent will need to know how much property will be dedicated to the business, and whether it will be in your home or in a separate structure, which can affect what type of policy you need. If your business is located in a separate building such as a detached garage, a homeowners policy may exclude coverage entirely.

Mr. Thompson also suggests that you bring your agent a copy of your business plan. This will help identify, among other things, your exposure to liability. A baker could be sued if someone fell ill after eating a cookie; a consultant could be sued if a piece of advice landed a client in hot water with regulators. A day-care operation could be targeted if a child had a medical emergency.

And there are incidental liability risks as well. Someone who wants to offer piano lessons in the home could be held liable if a student were bitten by a family pet, or if a delivery person slipped on the sidewalk coming up to the house.

Product-liability coverage for products, and workmanship-liability coverage for services, will insure you against those risks. The costs vary widely, depending on the type of business and your level of risk.

“The liability exposure is always the greatest exposure somebody has,” says Noel Edsall, director of product development for MetLife Auto & Home, a unit of MetLife Inc. “When in doubt, buy the extra coverage.”

Another often-overlooked insurance item: Your personal auto policy is unlikely to cover claims from such mishaps as car accidents or break-ins if you’re using the vehicle for business purposes. A commercial auto policy will close that gap in coverage. The cost varies widely depending on how heavily you use the car: If all you do is occasionally drive to see clients, you probably won’t pay much more than you would for a personal policy. On the other hand, if you have a taxi business and ferry around customers, you’ll probably pay considerably more than a personal policy.

Moreover, if you have employees, most states require you to carry workers’ compensation insurance. Scott Hauge of CAL Insurance & Associates in San Francisco says many business owners think that by submitting the Internal Revenue Service’s 1099 form for their employees — usually reserved for independent contractors — they can avoid having to pay workers’ comp. But, he says, if you pay someone a regular salary and they’re working “at your direction,” you’ll probably need the insurance.

Costs vary widely, depending on the number of employees, the nature of the work and your state regulations. Indeed, workers’ comp rules vary by state, more so than many other types of property or casualty insurance. So make sure the policy you choose fulfills the proper requirements.

Joanna L. Ossinger, The Wall Street Journal

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