There are about 18 million homebased businesses in the United States. But some 60 percent of them are gambling with the future of their businesses--and most don't even know it. These homebased entrepreneurs don't have enough business insurance coverage, according to the Independent Insurance Agents of America Inc. (IIAA), an Alexandria, Virginia-based trade group.
Many entrepreneurs mistakenly believe they're covered by their homeowners insurance, but most homeowners policies limit loss of business property to $2,500, don't cover losses away from the home, and exclude liability coverage for business-related activity. Consider these risks:
- A graphic artist can easily have $20,000 in computer equipment and software in the home.
- Sales representatives often take a laptop and cell phone on the road to meet with customers.
- A client could slip and fall during an appointment at a homebased bookkeeping service.
- A homebased manufacturer could be held liable if his or her product injured someone.
Assess Your Needs
Ask a lot of questions to determine the amount and type of insurance your business needs, says Amy Gergely of the IIAA. Start with these:
- What inventory do you have at home? How much equipment? How much would it cost to replace them?
- How many customers come to your home?
- What would happen to your business if a disaster forced you out of your home temporarily?
Read the fine print on your homeowners policy to find out the restrictions on business property and activity in the home. "Get quotes from a number of companies," says Gergely. "The average independent insurance agent represents eight companies."
Types of Insurance
As a homebased business owner, two types of insurance cry out for your checkbook: liability and property damage. Liability protects you against someone getting injured on your premises or by one of your products. Property damage protects against damage to a host of things, from computers to carpets.
Let's start with the most inclusive type of insurance and work our way down:
- A business owner's policy (BOP) includes both liability and property damage coverage. Typical hazards covered include loss of data, software or income; theft; and general business liability. The structure housing your business is also covered, so this might duplicate your homeowners' coverage. A BOP also provides some off-premises coverage, including liability coverage for products you sell or parts you install. Things like flood protection or insurance for outdoor signs may be optional.
- A home office policy is a step down from a BOP. This policy combines homeowners and business insurance, eliminating duplicate coverage or gaps. This is a good choice for a company with no more than a handful of business visitors each week and quality computer equipment. It covers general business liability, lost income and ongoing expenses like payroll for up to one year if the business can't operate because of damage to your home. Also covered are loss of records, accounts receivable, some off-site business property, fire, theft and personal liability. Many policies don't cover "options" such as floods or earthquakes.
- A "business pursuits" endorsement to your homeowner's policy provides the least protection, and isn't recommended for most homebased businesses that have customers on site or costly equipment.
Examine your business and your assets to determine your net worth, likelihood of business interruption, and liability "red flags." When you've found a policy that's within your budget and covers possible losses, review it yearly to make sure it's still adequate.
One final note: If your business has employees, you need workers' compensation insurance, which covers employees' injuries on the job. Requirements vary from state to state--check with your state's employment office to see what's required.
Cover Your Assets
Just because you have insurance doesn't mean you want to use it. Take steps to protect yourself from losses. "We ask our clients to do common-sense things like installing surge protectors and uninterruptable power supplies for their computers,'" says Brian Haase of Safeware, The Insurance Agency Inc., in Columbus, Ohio. Here are some other steps you can take:
Crime and disaster prevention:
- Install smoke detectors, fire extinguishers and deadbolt locks.
- Install motion-sensitive outside lights.
- Keep your office equipment out of view from the street.
- Keep money and important documents in a fireproof safe.
- Develop a disaster recovery plan to minimize losses and return to normal operations quickly.
- Make sure electrical circuits aren't overloaded.
- Keep stairs and walkways free of ice and debris.
- Set and enforce safety rules.
- Practice preventive maintenance on all equipment.
- Make clearly labeled backups of important documents and store them at another location.
- Don't accept work assignments you aren't qualified to perform or make promises you can't keep.
- Read the fine print in contracts to avoid assuming someone else's liability. Have an attorney review contracts.
Source: Start Your Own Business, Entrepreneur magazine and Biz Start Ups.
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