You have a good homeowners insurance policy, so you're certain that whatever minor or major disaster happens in your home, you're covered, right? Wrong. If you run a homebased business, most of your business-related equipment and activities aren't covered by your homeowners policy.
"Under a traditional homeowners policy, there's very limited coverage, if any, for a homebased business," says Harry Spencer, a personal lines underwriting manager for The Hanover Insurance Co. in Worcester, Massachusetts.
According to the Independent Insurance Agents of America Inc., at least 60 percent of homebased businesses aren't properly insured. The most common reason given for insufficient business coverage is that owners mistakenly believed they were covered under another policy. In reality, typical homeowners policies limit coverage for items used for business to $2,500 while they're in your home and $250 when you take them off-site, and offer no business-related liability coverage.
The first step in determining whether your business is adequately insured is to understand the purpose of insurance. Essentially, it involves financial risk-shifting. You pay the insurance company a sum of money, or premium, to assume the financial consequences of designated events, such as theft, fire, illness and other disasters. The more risk they assume, the greater your premium, and vice versa.
With that concept in mind, you should analyze the specific risks you face in your business, then think about how you can eliminate or reduce them. The risks you can't eliminate are the ones you'll want to insure yourself against. For example, if you're conscientious about backing up your critical data and storing it at an off-site location, then you've eliminated the risk of losing that data in case of fire, flood or theft. And while you can't entirely eliminate the risk of theft, you can reduce it by installing good locks, exterior lighting and an alarm system. Considering these two scenarios, you would be more concerned about insuring against theft than against loss of data.
"Educate yourself on the type of coverage you need," says Spencer. "When we were developing our Home Entrepreneur product, we tried to [include] the coverage most small-business owners need." However, as each business has different insurance needs, don't approach this subject thinking you can accept a one-size-fits-all policy.
"You need to identify your exposure," says Madelyn Flannagan, consumer affairs advocate with the Independent Insurance Agents of America. "Understand what your risks are and how much, if any, would be covered under your homeowners policy. Then sit down with an agent who is well-versed in these particular areas, and go over it piece by piece."
Here are some questions to ask yourself as you consider your risks:
- What would it cost you to replace your business equipment and supplies, and to recover your records in the event of a disaster?
- Do you work with clients' materials on-site that you would be responsible for replacing if something happened to them?
- Do you maintain any sort of inventory? If so, what is its dollar value?
- If you were unable to operate your business for any length of time, what would it cost you in lost revenue?
- Do customers visit your homebased office?
- Do you take your business equipment or inventory to other locations, such as clients' offices or exhibits?
- Does the type of work you do leave you vulnerable to professional liability claims?
- Do your customers require you to carry certain levels of insurance?