From a technological standpoint, running a business from home has never been easier. SmartPhones, emails, fax machines, the Internet, skyping, have all led to a major surge in what has been termed “homepreneurs.” In fact, it’s believed more than half of all U.S. businesses are based out of an owner's home.
Unfortunately, many of these people have become entrepreneurs by necessity, having been laid off during the recent depression. "These are people that did not aspire to own a business, but circumstances dictated that they look at freelance opportunities and other business ventures,” says Ken Yancey, CEO of the non-profit entrepreneur mentoring group Score.
When Cynthia Jermin received a pink slip and lost her dream job at an investment bank, she left with a smile and a plan. "I had a smile on my face, because I was ready. I saw it as an opportunity to embark on this entrepreneurial journey," said Jermin. Instead of looking for a new position, the former assistant vice president at Credit Suisse, decided to start a business. With financial support of her husband, to avoid going into debt she turned her guest bedroom into an office and launched Fundamental Life Products from her house in Queens. "It was better to start small and grow, than to rent a space, rent a factory, hire people, and then, six months in, you've run out of capital and you have to let everybody go," she said.
When most people launch into a home-based business, they immediately turn their attention to the material means to launch their enterprise. They stock up on paper, ink, pens, dry-erase boards, push-pins, and all the technological bells and whistles (computer, printer, modem, etc.) so they can get up and running as soon as possible. But they rarely consider insurance. So before they know it, they have invested a lot of money and time into this venture but haven't protected it.
A popular misconception is that since the business is in your home, then it must be covered by home insurance. But before making this assumption, ask a simple question, “What kind of insurance should I buy to protect a business: Home insurance or business insurance?” When the question is phrased like this, the answer is nearly always business insurance.
Although there is some limited coverage for certain types of small business activities on a home policy, most policies have several exclusions for anything business. Since the home policy is designed to protect a home, with its normal risks and exposures, the home policy needs to limit or exclude areas not normally associated with a home. Don’t assume home insurance will protect small business activities.
According to an article in Entrepreneur magazine, 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. People don’t realize that if the UPS guy comes to their home-office with a business package in his hand and slips and hurts himself, there is no coverage for that injury in their homeowner's policy.
There lies the problem. The most costly exclusion on a home policy may be in the area of liability. Most home policies provide comprehensive liability protection of $300,000 for normal home activities, but the policy will specifically exclude most business activity. With today’s legal system, liability exclusion is a major financial gap in your protection.
Another limitation is business property or inventory. If your home business has any kind of inventory it could be inadequately protected. If your home business involves repairing computers for clients, and at any given time there could be a dozen laptops sitting on a shelf in your office, you will not be protected if there is a fire or a flood and that inventory is damaged or destroyed. Although there is some limited coverage on the home policy, the coverage is just that, limited, and with exclusions on where your inventory may be stored. For example, if business property is stored in an outbuilding or detached structure, the business use of the building voids any coverage for the outbuilding under the homeowner’s policy. The business property stored in the outbuilding is also not covered by most homeowner’s policies. Not all insurance policies are the same. Many changes will be coming for home-based businesses so be sure to review your specific situation with your risk advisor.
A business policy that is based on your type of exposure will cover your business liability, which is the most costly exclusion on the home. You can also choose the amount of liability protection to meet your needs. A business policy is designed to protect your business property and inventory with increased limits that you choose, and better coverage for where you choose to store them.
What can solve the problem for many home-based businesses is an in-home policy, which 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 is a plan against injury or theft covering as many as three employees. 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."
So if you have a home based business, ask yourself these important questions:
· Do clients come to my home?
· Do I have inventory?
· Do I depend on the income from this home business to support my family?
· Do I have business property or equipment?
If you answered yes to any of these questions you should request an insurance review of your home and home-based business exposures. It is also especially important for anyone starting a home-based business to do a complete Risk Analysis of your business exposures in order to ensure you have adequate business insurance, because even with optional business coverage most homeowner policies fall woefully short of covering the needs of most home-based businesses.
Starting a home-based business has many potential rewards. After all, Apple, Hershey’s, Mary Kay Cosmetics, and even the Ford Motor Company, all started out of somebody’s home. But whenever there are rewards, there are usually just as many challenges. Starting up a home business is stressful enough without worrying that your homeowner’s insurance will always protect your business.
It is especially important for anyone starting a home-based business to have adequate business insurance, because even with optional business coverage, most homeowner policies fall woefully short of covering the needs of most home-based businesses. Most home-based business owners are not aware of many risks associated with their businesses, and homeowner's policies don't cover many of the common risks, which can include putting your personal property in peril.
If you’re doing business at home, you’re smart to have insurance. Because at the end of the day, the amount of sales you generate doesn’t matter. The amount of loss you could face should something go wrong is what really counts.
Deb Bouchard, CISR, is a personal risk advisor with Ottawa Kent Insurance, Jenison, MI. She has close to 30 years experience in dealing with all aspects of personal lines insurance, including home-based businesses. She can be reached at dbouchard@ottawakent.com.
Current Issue - May 2024