With millions of Americans losing work this year, it’s not surprising that home-based business startups are gaining popularity. About one in five homeowners reported they had launched a home-based business in the last six months, according to a recent online poll conducted by The Harris Poll on behalf of The Hanover Insurance Group.
While starting a home-based business is an exciting endeavor, new entrepreneurs may be unaware of the risks involved. The right home-based business insurance can safeguard your interests.
To decide if a home-based business insurance policy is worth considering, here are a few things to know.
What is Home-Based Business Insurance?
When you run a company out of your residence or on the property, home-based business insurance can pay out for property damage, injuries related to the business (like a client who takes a fall in your office), employee injuries and lawsuits.
While some entrepreneurs rely on their homeowners insurance policies, these policies may not be sufficient at all:
- A standard home insurance policy covers only up to $2,500 of business property. So if you lose more than that in a house fire, for example, your reimbursement is limited to $2,500. For example, if you’re selling clothes in a home-based business and your inventory is destroyed in a fire, you may not have enough coverage under your home insurance policy.
- A home insurance policy usually excludes coverage for “other structures” that are used for business purposes, such as a detached garage where you run the business.
- Standard home insurance has a $500 limit on business property that’s away from the residence premises. So if you’re using an expensive video camera away from home, coverage is limited.
You can get better home-based business insurance from either an endorsement to your homeowners insurance policy or as a separate business insurance policy. State Farm, for example, offers both types.
Types of Home-Based Businesses That May Need Insurance
While you may assume insurance isn’t necessary for your particular business, here are a few examples of businesses that may need home-based business insurance.
- Accountants and tax preparers
- Web design firms
- Online goods sales
- Caterers and food sales
How to Buy Home-Based Business Insurance
An endorsement to your home insurance policy will add extra coverage for a small operation out of a home. But larger businesses or professions that need specialized coverage may need a stand-alone business insurance policy.
Add an Endorsement to Your Homeowners Insurance Policy
Home insurance companies typically offer endorsements that you can add to a homeowners policy to get more business coverage.
With a standard home-based business endorsement, it’s possible to double your standard policy limits for business property from $2,500 to $5,000 for less than $20 annually, according to the Insurance Information Institute. This would be good for a very small business with annual sales around $5,000 or under.
You may be able to purchase an endorsement specific to your business needs, such as The Hanover’s Permitted Incidental Occupancies. This coverage can protect the inventory of a home-based business.
Purchase a Standalone Business Insurance Policy
Stand-alone business insurance policies can offer more robust coverage and with higher coverage limits. This type of policy can provide better coverage limits for business equipment and liability over a typical home insurance policy endorsement.
For example, a business owners policy (BOP) combines coverage for business property and liability.
Stand-alone business insurance policies are good for a business that has visitors coming and going. They are also better than a homeowners endorsement if you have a lot of business property to insure.
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Types of Home-Based Businesses Coverage
Insurance for a home business generally falls into two categories: liability and property coverage.
With this in mind, some options may include:
- Business liability coverage: If your business is sued, this provides coverage for your legal defense and legal settlements and judgments. Depending on your profession, you may need specialized liability insurance—such as errors and omissions insurance for a tax preparer.
- Business property coverage: This protects the business property and equipment, such as cameras or cooking equipment.
- Electronic data processing equipment coverage: This covers data processing equipment such as computers, laptops, phones or servers.
- Loss of income coverage: This replaces lost business income after a problem covered by the policy. It can provide the money you need for payroll, for example.
- Accounts receivable coverage. If your accounts receivable records are lost due to a problem covered by the policy, this coverage reimburses you for the amounts you can’t collect from customers.
Workers Compensation Insurance
If one of your employees gets injured or sick due to a work occurrence, workers compensation insurance pays medical bills. Sole proprietors are often exempt from workers comp requirements, but if you have employees make sure you understand your state’s workers comp laws.
The National Federation of Independent Business has a state-by-state comparison of workers comp laws.
Other Home-Based Business Insurance Options
Depending on your business type, you may need specialized coverage such as:
- Data compromise coverage. This covers security breaches at your business that exposed confidential client information.
- Employment practices coverage. This covers claims brought against you by employees.
- Business vehicle coverage. You likely need commercial auto insurance if you use your vehicle for work, such as making deliveries. A personal auto insurance policy won’t cover business use of a vehicle.
Do You Need Home-Based Business Insurance?
If you’re deciding whether to buy home-based insurance, the Insurance Information Institute recommends asking yourself these questions:
- What is my home-based business?
- What are the unique risks my business may face?
- How many employees do I have?
- Do clients visit my property to conduct business?
- Does my business require a vehicle?
- Does my company have technology that stores the personal or financial information of clients?
Dick Lavey, president of Agency Markets at The Hanover, says he recommends home-based business insurance even for the simplest business pursuits.
A business insurance agent can help you work through these questions to determine where your business may be vulnerable, and where home-based insurance business can help.
Article By: Ashley Kilroy and Jason Metz
Source: Forbes Advisor