From the August 1998 issue of Startups

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?

The Perfect Fit

Once you've determined what risks you face, and have eliminated or reduced as many as possible, it's time to shop for insurance. Fortunately, you have plenty of choices. The insurance industry has finally recognized the large and growing market of homebased business and is regularly introducing new products for that market. Not all these products are the same, however, and while insurance companies have tried to design them to fit the needs of a broad range of homebased operations, the policies need careful analysis. Some homebased business owners will find their homeowners coverage is, indeed, sufficient; others will find a homebased business policy is not enough and they need commercial coverage.

Toni Korby, owner of Antonia Korby Design Inc., an interior design firm in Centreville, Virginia, has considered and rejected an additional insurance policy for her business. She carries no inventory, uses sample books and catalogs provided by manufacturers, and owns just two pieces of equipment: a sewing machine and a computer. Although materials are occasionally delivered to her home, which she then takes to her clients' homes to install, she believes the overall risk of loss is so minimal that paying for commercial insurance wouldn't be cost-effective.

In contrast, John Farrell, owner of Farrell Painting and Waterproofing in Orlando, Florida, has a commercial insurance package that includes general liability and workers comp insurance, primarily because it's required by his customers. "Some customers ask for a certificate of insurance before they'll give you the contract," says Farrell, who views insurance as a "necessary evil."

Because most homebased business insurance products on the market are actually endorsements to a homeowners (or renters) policy, the companies that offer them require you to carry what they call "appropriate underlying coverage" (which is that basic policy) with them. This means you may need to switch carriers to get the best homebased business coverage for your company.

What's Your Type?

Part of the insurance application process involves explaining your business to insurance companies; they need to understand what you do so they can determine what level of risk they're assuming. But describing your business isn't always an easy thing to do.

Michael D. Smith, president and CEO of MIDO Sports Marketing & Management in Mt. Pleasant, South Carolina, conducts most of his business on the Internet. He says that when he applied for his first general liability policy, insurers were leery of an Internet-based business because they didn't understand it. "A lot of insurance companies are scared of it," Smith says. "It moves so fast, information gets so widespread, if you're sending the wrong message, who's going to share that risk?"

So exactly what kind of insurance does your homebased business need? Here are specific coverages to evaluate:

  • Health, or medical, insuranceis one of the biggest challenges for individuals and companies of all sizes, primarily due to rising costs. But availability is easing somewhat, and a number of major insurance companies are offering "group of one" policies at reasonable prices. Also, many trade and professional associations offer group insurance to their members; it may be worth joining one for that benefit alone.

If you're married and your spouse is an employee of a company that offers health insurance, family coverage under its group policy could be an affordable option for you. Keep in mind that the Health Insurance Portability and Accountability Act (HIPAA), which took effect last year, has made it easier to maintain coverage if you take this route and your spouse changes jobs.

  • Property insurance protects your business equipment, supplies and furnishings. In most cases, inventory isn't included under property insurance and requires a separate commercial policy.
  • Business property insurancecovers your equipment or inventory when you take it out of your home for any reason, whether it's to work at a client's location or to sell at a show.

However, Flannagan points out that if you work exclusively away from your home, such as an artisan/contractor who must perform his or her work at the customer's site, off-premises property coverage is not appropriate; you'll need a commercial policy.

  • General liability protects you against unintentional injuries to people who visit your home for business purposes.
  • Professional liability covers you against claims for damages resulting from the performance of your services. This type of coverage is appropriate for attorneys, accountants, consultants, and even hairdressers and day-care providers--essentially anyone who is at risk of being charged with malpractice. Think about what could happen if you fail to perform your services as promised, and then think about how to protect yourself in that event. You may even want to look for an alternative to insurance. For example, Smith addresses the issue of professional liability in his client agreements, which outline the consequences if his company doesn't meet its obligations. "We looked at what harm we could possibly do to other businesses," Smith says, "and decided we could protect ourselves [better] through our contracts."
  • Product liability protects you against financial loss stemming from a claim of injury or damage resulting from the use of an insured product.
  • Business interruption insuranceprotects you against losses if you're unable to operate your business due to an insured peril, such as a fire or a flood. You'll be reimbursed for lost net profits and expenses that continue whether or not you're making money. This insurance would kick in if anything happened--even a kitchen fire--that made it impossible for you to live and work in your home.
  • Disability insurance replaces your personal income if you are unable to work due to illness or an accident. Most homebased business owners are definitely lacking this type of coverage, says Flannagan.
  • Life insurance pays benefits to your survivors in the event of your death. In addition to life insurance to protect your family, you may want to consider "key man" insurance on yourself, your business partner if you have one, or another key person in your organization. This is life insurance that designates the company as the beneficiary and provides the cash necessary to replace the services of the key man and pay other expenses the business incurs from the death of the insured.
  • Workers compensation pays medical expenses and provides a degree of income replacement for employees injured on the job. Laws vary among states, but in general, you must have workers comp coverage if you have three or more employees. Flannagan suggests you consider purchasing this coverage even if it's not required, especially if you work in a high-risk business, such as any of the construction trades.
  • Unemployment compensation insurance replaces income for workers who lose their jobs through no fault of their own. As with workers compensation, laws vary among states, but generally, if you have employees, you must pay into the unemployment compensation fund.
  • Automobile/vehicle insurance covers the vehicle you use in the course of your business; rates will vary depending on the amount of business driving you do.
  • Umbrella policies provide extra liability coverage that kicks in when the limits of your underlying policies are reached. They typically offer a sizable amount of coverage and are very affordable.

You may not need all these types of insurance--in fact, you probably won't. Remember, while under-insuring can cost you when you have a loss, over-insuring costs you in the form of premiums for insurance you don't really need. The key is to strike a comfortable balance of affordable coverage that gives you peace of mind so you can sleep at night--and concentrate on your business during the day.

Tip Offs

$ Shop around. Rates vary among insurance companies, and many will throw in extra coverage for free.

$ Combine policies with carriers whenever possible. Flannagan says most carriers will offer discounts when they handle two or more of your policies.

$ Review the amount of coverage you can get and the cost. You can often drastically increase your liability coverage for a nominal fee, which may be a wise choice.

$ Increase your deductible. Being willing to absorb a larger risk by having a higher deductible will reduce your rates and, especially if you don't have any losses for a period of years, can save you money.

$ Review your insurance annually. Insurance isn't a do-it-once-and-forget-it proposition. Make sure your coverage needs haven't changed and that you're not under- or over-insured. If your circumstances are different, adjust your coverage accordingly. Also, ask your agent about new products that may be more appropriate for you.

Damage Control

When a natural disaster, accident or criminal act causes property damage to your home, your homebased business will probably be affected. Doing the right things can control the damage; doing the wrong things can exacerbate the situation and even increase your losses.

If property damage occurs, Tim Toburen, national director of Signature Professional Cleaning, a property damage restoration company based in Jacksonville, Florida, says, "Remember the damage being done doesn't necessarily stop once the fire is put out, the water's turned off, and the actual disaster is under control. You need to take immediate steps to protect your undamaged property and salvage whatever damaged items you can." His advice:

  • Verify the safety of your home before entering it. "If there's water damage, there's the potential of getting electrocuted," Toburen says. "If there's structural damage, walls or ceilings could collapse. You could be hurt by debris, glass, nails or other items. Be sure the emergency services personnel have deemed it safe for you to enter the structure before you do so."
  • Make the necessary notifications, including contacting your insurance carrier, employees, customers and suppliers.
  • If the damage is such that you can't get into or work from your office, keep all receipts for temporary office space and related costs; if you have a homebased business insurance policy, these expenses are typically covered.
  • Call the telephone company, and arrange for calls to be routed to a location where they can be answered.
  • Prevent further damage. While waiting for the insurance adjuster, take whatever immediate steps are necessary to prevent further property damage, such as shutting off water and electricity, boarding up broken windows, covering damaged roofs with tarps and doing preliminary emergency cleanup.
  • Take photographs of the damage. This will assist in your claims process.
  • Contact a professional restoration contractor and tell him or her what sorts of things, such as paper and electronic files or business equipment you're attempting to salvage. Disaster restoration takes special skills and knowledge; get bids from several professionals before selecting one. Having someone come to your home probably won't take very long. "Because immediate response is critical," says Toburen, "restoration companies usually have someone on site within two hours and are prepared to start work right away."

Resource File

  • Independent Insurance Agents of America, 127 South Peyton St., Alexandria, VA 22314-2803, (800) 261-4422, http://www.iiaa.org
  • Call for a free brochure, "Protecting Your In-Home Business" from the Insurance Information Institute, 110 William St.
    New York, NY 10038, (212) 669-9200, http://www.iii.org
  • National Insurance Consumer Helpline,(800) 942-4242

Contact Sources

  • Antonia Korby Design Inc., (703) 502-9483
  • Farrell Painting and Waterproofing, 3953 Orange Lake Dr., Orlando, FL 32817, (407) 657-1776

Jacquelyn Lynn is a business writer in Winter Park, Florida.