The terms home business and home insurance sound as though they could go together. Unfortunately, they not only aren't a couple but can be active enemies. With a little planning and communication, though, you can help them coexist.
According to the U.S. Census Bureau, about 52% of small businesses – generally defined by the Small Business Administration as those with fewer than 500 employees – are home-based ventures. Of course, not all home businesses are created equal in the eyes of an insurance provider. It all depends on the amount of risk the carrier sees in your venture.
Why these common questions get asked
'Do you operate a daycare out of your home?' It's one of the first questions you'll be asked when you seek a home insurance quote. Answer 'no' to that and you likely will get hit with the follow-up: 'Do you operate any business out of your home?'
The agent isn't being nosy. She or he is using your answer to assess your risk. Obviously, a home daycare opens a policyholder up to all kinds of potential liability issues: Children fall down and bang into tables and slip out of chairs and have all kinds of accidents that can leave them needing medical care – and you open to a lawsuit from angry parents.
Why does that matter to your home insurance provider? Standard homeowners policies typically include liability coverage that offers protection in case someone is injured at your home (or suffers property damage that's your fault). Because the risk of a lawsuit increases so greatly for a home with a daycare, many providers won't insure the home unless you purchase surplus lines policy to bolster your liability coverage.
Admitting that you operate any business out of the home will give providers pause about insuring you. If clients or customers visit the home, there's always the chance of a slip-and-fall or other accident. So why not lie? Because if there is a claim related to your business, it won't be covered. That means you'll pay the full cost of the claim with no help from the provider.
Other home business insurance issues
Daycares and slip-and-falls aren't the only problems, however. You'll have to consider each business separately. Here are some common problems:
You may have no interest in a daycare. Say your passion is web design or photography, and you don't intend to allow clients in your home. You still could have some home insurance gaps.
Another feature of standard homeowners policies is personal possessions coverage – protection in case the contents of your home are stolen or if they are destroyed by a covered peril such as fire. This coverage allows for replacing your stuff, up to the limit of your policy. That limit is usually set at between 50% and 70% of the total cost of rebuilding your home.
Only there's a catch when it comes to business equipment. Home insurance policies typically limit payouts for business equipment to $2,500 – sometimes less. Photo and computer equipment can easily exceed that amount.
And then there's your car
You don't have any of the above risks. You operate a small bakery out of your home. On a good day, you make and deliver a wedding cake or two dozen cupcakes to a client. So you don't have any problems, right?
Wait, did you say 'deliver'? In your automobile? That means you're using your personal vehicle for business purposes. That also means your auto insurance likely won't cover you if you run a red light and cause a multi-car wreck.
OK, you don't do any of the stuff above. You run a consulting business. No one comes to the house for business. You don't have expensive equipment. You don't deliver anything. So does that mean you're in the clear?
Unfortunately, no. Suppose your advice is wrong, and a client suffers severe financial losses because he or she followed it. Suppose that client sues you for malpractice?
Depending on the nature of your business, you can schedule endorsements to your home insurance policy to cover more liability or extend your contents coverage to $5,000 in equipment. This option, while relatively inexpensive at $20 or less a year, usually applies to home businesses with $5,000 or less in annual receipts, according to the Insurance Information Institute.
Another option is an in-home business insurance policy, which will bump the contents coverage up to $10,000 and offer from $300,000 to $1 million in general liability coverage. These policies typically include business interruption coverage, which can help make up for lost income if your business can't operate because of a covered peril. The cost? Usually less than $300 a year, according to the III.
But a better solution might be a business owners policy. A BOP packages several types of coverage, usually for a lower price than purchasing coverages individually. Such policies typically include more liability coverage – including malpractice protection. It likely will be more expensive than an in-home business policy but could offer much more coverage, including protection for malpractice.
You may think your home business is simple. But the effects on your insurance can be complicated. Check with your agent to make sure your business is fully protected.
Arthur Murray writes for HomeInsurance.com, an online resource for homeowners and drivers across the country. Offering comparative automobile and home insurance quotes, consumers rely on HomeInsurance.com for the most competitive rates from the top-rated insurance carriers in the country. The HomeInsurance.com blog provides fresh tips and advice on a range of financial topics to help homeowners and homebuyers make educated decisions about their insurance purchases.