Insurance for the Home Based Business

  • Small business owners are often very good at what they do. As entrepreneurs, they run their businesses like the great offensive coaches in professional sports. A great offense is a good thing, but offense alone will not win the big games. A truly great team or business must develop a great defense as well.

    An effective defense comes into play as a company puts the right components into place to manage risk. Managing risk helps to protect a business from a major financial setback that could cause it injury or a premature death.

    Using insurance to transfer risk

    Insurance is one of the three components of risk management. It provides a way for a company to transfer a large part of its risk to an insurer (which has deeper pockets). This protects the company from the full impact of an insured loss, which could threaten its viability and its owners’ financial well-being.

    As business revenues increase, it becomes necessary to ensure that you and your company are adequately protected with the right kinds of coverage to manage the risks common to your industry and any other areas of vulnerability.

    Home-based businesses

    If you operate your business from home, don’t expect your homeowner’s policy to cover you in case of a mishap without an endorsement or rider added to the policy. On the contrary, most homeowner’s policies deny coverage for home-based businesses. If you file a claim for an undisclosed home-based business, your claim may be denied AND your homeowner’s policy cancelled.

    Home-based businesses can be insured using one of three options:

    1. An endorsement or rider can be added to a homeowner’s policy to cover up to $2,500 for the loss of business equipment.
    2. An in-home business policy will generally cover up to $10,000 in losses for equipment, customer injury, critical documents, and theft of funds.
    3. A business owner’s policy (BOP) provides the most comprehensive coverage for home-based businesses. BOPs provide higher limits for liability (including injury to customers or delivery persons), property damage, and loss of equipment. BOPs can be expanded to cover loss of critical records, the costs of malpractice claims, loss of income, and losses due to business interruption.

    Business owner’s policy (BOP)

    BOPs combine protection for all major property and liability risks in one package and can be expanded to cover loss of income and business interruption.

    • Bodily injury and property damage liability is one of the most important components of a BOP (especially if you deal with customers). Bodily injury lawsuits often involve big dollars. If coverage is too low, you could become personally liable for any judgment that exceeds the coverage.
    • Equipment.  When insuring business equipment, it’s usually a better value to purchase all-risks coverage as opposed to named-perils, due to the comprehensive coverage. If the loss of the equipment would be a devastating blow to your business, you may want to add replacement value coverage to your all-risks policy. Replacement value coverage pays the cost of replacing the equipment rather than paying your original cost, which in most cases is lower than the current replacement cost.
    • Product liability should be considered if you manufacture or sell products. If a product defect caused injury to someone, you could be sued for selling the item even if you had nothing to do with its design or manufacture.
    • Business interruption or loss of income coverage can help replace income or lost business profits when your business is interrupted by events, such as a power outage, a fire, or natural disaster.

    For businesses with commercial locations see our article: “Transferring Risk Using Insurance for Commercial Businesses” for more information.

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