Home Office Insurance: Myths and Realities

There's a lot of misinformation out there about what kind of insurance a home business really needs. Find out what the truth of the matter is.

Adequate insurance coverage is as vital to your home-basedbusiness as your computer or fax machine. Unfortunately, many homebusiness owners neglect insurance -- either because they can'tfind the right coverage, it's too expensive, or they justdon't know what's available. This can be a costly mistake,since a lack of insurance can permanently shut down your homebusiness and even cripple your personal finances, should you be thevictim of a lawsuit, fire, injury, or any other unforeseencalamity.

There's a lot of misinformation out there about what kind ofinsurance a home business really needs. We've assembled some ofthe most common myths below. Click on them to learn about homeoffice insurance realities.

Myth 1: Your homeowner'sinsurance policy will cover most losses to your homebusiness.

Don't count on your current homeowner's policy toprotect your business. Most homeowner's policies don'tcover extra buildings (such as carriage houses or convertedgarages) frequently used for business, nor do they cover the lossof business data or injuries to clients or colleagues that occur onyour premises. In addition, even if your policy does includebusiness property in your home, it may only cover up to a fewthousand dollars -- hardly enough to replace a valuable computersystem should disaster strike.

Many insurance companies offer a specially designed rider foryour homeowner's policy that will extend it to includeproperty, equipment and general liability coverage for yourhome-based business. Expect the premiums to be up to $200 or more ayear.
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Myth 2: An expensive businessowner's policy is your only option for complete coverage foryour home-based business.

There are many cases where your homeowner's policy -- evenwith a rider -- can not cover your home-based business. Ifyou're incorporated, if you have employees working from yourhome, or if your business assets are too great for yourhomeowner's policy, you will need to look at buying abusiness owner's policy (BOP). BOPs are designed to meet theneeds of small businesses, and typically include coverage forproperty, equipment and general liability.

Another option is home business insurance. These policies areless expensive than BOPs, because they are often only available tohome businesses that have minimal product liability, professionalliability and off-premises exposure. If you have a lot of expensiveequipment, have a good chance of being sued, or have employeesworking from your home, chances are you'll be excluded. Homebusiness insurance also does not cover things like inventory keptat your home office. If your current insurance broker does notcarry home business insurance, you can find one who does bycontacting the Independent Insurance Agents of America, 127 S.Peyton, Alexandria, VA 22314; phone: 703-683-4422.
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Myth 3: You'rehome-based, so you won't be able to get disability-incomeinsurance.

It's true that many insurers are hesitant to offerdisability-income insurance to home-based businesses, especiallyone-person businesses. They are often put off by the first fewyears of unstable earnings, and the difficulty adjusters will havein verifying claims.

Still, it's not impossible to find DI coverage for a homebusiness. Show insurers that you have a record of growth andstability. If you didn't qualify for DI insurance during yourfirst few years of business, re-apply after your business has beenestablished for 3 or 4 years. Longevity will work in yourfavor.

Some other methods for convincing insurers include:

  • obtaining long-term contracts or agreements from clientswhenever possible, to show that you'll be around for the longhaul.

  • preparing a financial forecast statement (with anaccountant's independent audit) which accurately shows yourfirm's financial strength and staying power.

  • hiring support staff, which demonstrates you're committedto permanence.

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Myth 4: A home-based businessdoesn't need workers' compensation coverage.

Workers' comp requirements vary from state to state, butthe general rule is you need to carry workers' comp if yourbusiness has employees. This is true whether you're locatedin a traditional office or home-based.

Several states don't require workers' comp insurancefor very small companies - those with fewer than 3-5employees. Sole proprietors and partners in a partnership are alsousually exempt. Think twice before you exercise this option.Without coverage, you may be sued by an injured worker for medicaland disability costs, plus damages. In fact, if you'reunincorporated you might want to consider workers' comp evenif you don't have any employees; it can cover you as theowner if you're injured at work.

Call your state's insurance commissioner's office tofind out more about your state's workers' comprequirements. Your insurance agent or broker should also be able toprovide details of your state's requirements.
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Myth 5: Your existing autoinsurance covers business use of your car.

If you occasionally use your personal car for business purposes,or you sometimes have clients in your car, you will probably needto extend your personal car insurance to cover business use.It's a good idea to check your current policy to see whatkind of business use is covered. If you keep valuable products inyour trunk, remember that most auto insurance does not cover thecontents of your car, so you will need to make sure that yourproduct policy covers loss outside your home.

If employees or others use your family car for businesspurposes, put their names on your policy. If your employees usetheir car while working for you, you may need to get separatenon-owned car insurance. Any vehicle that is used primarily forbusiness will likely require a separate business auto policy.
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Myth 6: You're properlycovered, so you don't have to give any more thought toinsurance coverage for your business.

As your home-based business expands, so will your insuranceneeds. What was adequate coverage in your start-up phase couldprove insufficient as the value of your business (and yourequipment) increases. It's quite possible that you willoutgrow the coverage your homeowner's policy rider or homebusiness insurance provides.

Make it a habit to check with your broker about your insuranceneeds as your business grows. In fact, you should review yourpolicy with your broker at least once a year. Does your policycurrently meet your needs? Is all your equipment covered? Is thereanything you can do to reduce your premiums?
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The viewsand opinions contained herein are not necessarily those of AmericanExpress and are intended as a reference and for informationalpurposes only. Please contact your attorney, accountant or otherbusiness professional for advice specific to yourbusiness.

Copyright © 2002 American Express Company. All RightsReserved.

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