Does Your Home Business Need Insurance?
Here's a look at the most common types of coverage for home-based companies and what make sense for your business.
Driving to clients' homes always made Brandi Greygor nervous. As the owner of Sassy Mama Boutique, Greygor often drove as much as $10,000 in women-and-kids' clothing and accessories to home parties and exhibition halls. She would set up merchandise, which then sat overnight unattended before an event took place.
Greygor wasn't so worried about a dismal sale. She had no business insurance, and if a child were injured using one of her toys or a shopper was hurt, she could be sued for health-care costs. Also, if anything went wrong – if, say, merchandise were damaged, lost or stolen -- Sassy Mama would face a big loss.
"That $10,000 of wholesale merchandise is $20,000 to $30,000 of income, if I were to lose that," says Greygor, who is based in Union, Ky. Her 1-year-old home-based business was uninsured for more than nine months until April, when her worries about her risks led her to purchase insurance coverage.
Sassy Mama's story is a common one. Sixty percent of home-based businesses lack adequate business insurance, according to the Independent Insurance Agents & Brokers of America, based in Alexandria, Va.
One reason owners forgo insurance is confusion over what may be already covered by a homeowner's or a renter's policy. But most home-business owners have little or no coverage from their homeowner's policy. What's more, if you file a homeowner's (or renter's) claim for losses sustained by a previously undisclosed home-based business, your insurer may refuse to cover it or cancel your policy, says Ryan Hanley, an insurance agent at Murray Group Insurance Services in Albany, N.Y. At best, you might receive a small reimbursement.
"People do not realize that if the UPS guy comes to your door with a business package in his hand and slips and hurts himself, there is no coverage for that injury in their homeowner's policy," Hanley says.
If you’re doing business at home, you’re smart to have insurance. The amount of your sales doesn’t matter. The amount of loss you could face should something go wrong is what counts.
So how can an entrepreneur protect a home-based business? Start by insuring your business right away. You can choose from one or more of these three basic types of insurance, depending on your business's complexity and type.
1. Rider to a homeowner's or renter's insurance policy
The most inexpensive home-based business insurance is an add-on or rider that expands a homeowner's or renter's policy to cover the company. The cost of such a rider is minimal -- perhaps $100 a year -- but it generally provides about $2,500 of additional coverage, says Loretta Worters, vice president of the Insurance Information Institute in New York City, an industry trade group and information clearinghouse.
This type of insurance may be appropriate for a one-person business without a lot of valuable equipment or many business-related visitors, and unlikely to suffer a major loss if unable to operate for a while as a result of fire or another disaster. Such coverage may work, for example, for an accountant who works at home preparing customers' taxes and delivers the returns via email, Hanley says. But it could leave a home-based business owner on the hook for costs such as a large medical bill for that injured UPS man.
2. In-home business policy
An in-home policy covers a broader spectrum of contingencies, including loss of critical documents or theft of funds being taken to the bank for deposit. An in-home policy, issued by a home insurer or a specialty firm, usually is a plan against injury or theft covering as many as three employees, Worters says. Rates typically run from $250 to $500 and the plans can cover as much as $10,000 in losses.
Most serious home-based business owners may want to consider picking up at least an in-home policy, says Rebekah Marshall, multiproduct insurance manager at the National Federation of Independent Business. "This covers business equipment and liability [for injury]," she says. "That's important if people are coming in and out."
If you're interested in an in-home policy, you’ll need to find one that will cover your business type in your state. Each state sets its own rules about the insurance coverage that can be offered to home-based businesses. In general, given the low coverage amount, purchasers of in-home policies often operate low-revenue or part-time businesses.
3. Business owner's policy
Entrepreneurs who need more than $10,000 of coverage should pay for a business owner's policy. This comprehensive policy is what brick-and-mortar retailers, among other businesses, use, Marshall says.
Circumstances usually covered by this type of plan include damage to or loss of business equipment and other assets, liability for customer injuries, loss of critical records, malpractice or professional liability claims, and loss of income or a business interruption in the case of a power outage or a natural disaster. Such a policy might also protect you when driving a personal vehicle for business purposes.
This insurance protects against a higher amount of loss than a homeowner’s policy rider or an in-home business policy. Videographer Logan Hale, owner of 2-year-old Your Little Film in Los Angeles, paid about $500 for a $2 million business owner’s policy to cover his $25,000 of equipment against breakdown, theft or damage. His plan also covers loss or damage to home movies sent to him by customers, as well as injury or property damage inside a client's home or public venues. He shopped around a bit before Los Angeles-based Farmers Insurance agent Rodney Pyle found a specialized policy for videographers, he says.
"As I started increasingly going into people’s homes to shoot, it really pushed me to say ‘2011 is about getting covered,' " he says. “Now I feel so much safer, knowing I'm not putting my family at risk for a possible lawsuit."
As your company grows, it may require additional coverage not covered by a business owner's policy, Marshall says, such as life insurance, workers' compensation, and business-vehicle insurance. But for most small businesses, the business owner's policy can provide a suitable basic safety net.
Business owner's policy "is an investment in the business you should make if you're serious about what you're doing," Marshall says.
Greygor is relieved that Sassy Mama is now covered by the business owner's policy she purchased in April, especially the protections in case a customer is harmed by a product, she says. Like Hale's, her policy has $2 million worth of coverage.
"I'm a mom," she says, "and I wouldn't ever want to be looking at another mom and saying I don't have enough coverage for [her] injured child to be taken care of."