Home-Based Businesses Need to Be Properly Insured

By Beth Orenstein on January 17th, 2011

Homeowners Insurance

If you are one of the more than 22 million Americans who work from home, you need to think about your home insurance needs.

Many people mistakenly assume that their homeowners insurance covers their home-based business, says Michael Barry, vice president of media relations for the Insurance Information Institute (III).

Your homeowners insurance may provide some coverage, but it is likely limited. For example, a typical homeowners insurance policy provides no more than $2,500 to replace damaged or stolen business equipment, Barry says.

Also, says Gary Nace, a State Farm agent in Levittown, Pa., the equipment must be for both personal and business use to be covered under your home insurance policy. If you have equipment in your home that you use for your business only, it may not be covered.

Consider business interruption and business liability insurance

Standard homeowners insurance won't cover business liability or provide business interruption coverage for your home-based business either. What would happen if someone who was coming to see you on business fell on your front steps and was hurt? What if you had a house fire and you couldn't deliver your product or services to your clients on time because your equipment was destroyed?

You have several options if you need additional insurance for your home-based business. The least expensive is a simple endorsement or rider to your existing homeowners insurance policy.

The average cost for an endorsement is anywhere from $250 to $500, according to the III. The cost will depend on the type of business you operate from your home, what safety features you have in place, and the amount of coverage you need. For an additional premium, you can raise your policy limits for any equipment losses related to a home-based business to $5,000 to $10,000, Barry says.

You also can buy a homeowners liability endorsement that will protect you should your clients or a delivery person get hurt while coming to your home on business. This works well for home-based businesses where you have few visitors. Some insurers provide this kind of endorsement to piano teachers for example, but they won't sell it to you if you have people coming in and out of your home all day long, Barry says.

Business-owners insurance policy may be necessary

Another option is a business-owners policy (BOP). Whether your business is eligible for a BOP, depends on the size of your home business, the limits of liability you require, the type of operation you have and the extent of your off-premises servicing and processing activities.

A BOP covers business property and equipment, loss of income and liability, but it doesn't include worker's compensation, health or disability insurance. If you have employees, you will need separate policies for these coverages.

You also need to determine whether you need professional liability insurance. "For example, if you're an accountant, you probably need a separate policy for professional liability," Nace says.

You'd also want to have added coverage for your files and your computer system, which would be worth more than you'd collect from your homeowners insurance should you have a fire or other disaster and they were to be destroyed.

"There are some home-based businesses that we won't insure under homeowners insurance," Nace says. "If you paint cars in your garage or if you had a gun shop in your basement, things that tend to have more risk exposed to it, we won't insure. But if you're a writer or a piano teacher who gives lessons from her living room or a sales representative for Avon, they're acceptable and easy to endorse for not a lot of money."

The location of your home-business is a factor

Another consideration is whether your home-based business is part of your house or in a detached building on your property. "If you're running any kind of business out of that detached structure, the building is excluded from your home insurance policy," Nace says. "If it burns down, you're on your own."

Because of the different options and the different coverages you may need, check with your insurance agent before starting a home-based business and discuss what is and isn't covered under your homeowners policy and whether you need additional endorsements or separate policies.

Barry suggests checking with different carriers to compare home insurance policies and coverages because prices can vary.

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