How to properly insure your home-based business

In 2011, home-based businesses across the nation were estimated to be 19.3 million. A market research outfit, IDC, predicts that this number will grow to 20 million by the year 2013. But, it is estimated that around sixty percent of these do not have sufficient business insurance coverage.

The importance of home-based business insurance

Many of those who manage a home-based business think that their standard homeowner's insurance will be enough to take of their business' insurance needs. This is not true and the business owner may be making a costly mistake.

Here is an example why home-based business insurance is important: assuming you are into the graphic arts business and you work from the comforts of your own home. You have invested a significant sum on state of the art computer graphics equipment, which occupies space in your living room - the area you are using for your business.

Since you receive potential customers in your home, your equipment is at risk of theft. Also, a visiting customer might trip around your equipment which can cause him injury.

In another situation, you made a press release about your business where you claim that a competitor's services are sub-standard. That competitor decides to take legal action and you will be forced to hire a lawyer to defend the business. In all these situations, a standard homeowner's policy will not provide cover. This is why a separate coverage is important.

Types of insurance available to home-based businesses

The types available are:

  • homeowner's insurance rider,
  • home office policy, and
  • business owner's policy.

Homeowner's insurance rider

This is an additional coverage or rider added to the standard homeowner's policy.

Usually, this is the cheapest option available to small business owners and, understandably, the coverage offered is limited and can leave the business susceptible to a lot of risk.

Typically, a rider of this type can cost as low as $25 a year and there is an option to increase the limits from the standard $2,500 to $5,000. In certain instances, the limit can be raised higher, to $10,000.

  • What it covers - computers and equipment, liability coverage increased for business and medical claims, coverage for personal properties owned by the business, electronic data that gets damaged or lost.

  • What it does not cover - A homeowner's insurance rider, in most cases, will not provide coverage for workers compensation, loss of income or over other commercial insurance needs.

  • Who needs this rider - Insurance experts tend to advise getting this rider to small business which have minimal equipment and which do not receive clients or receive deliveries at home. For instance, if your home business involves mainly you working from your computer (as off-site programmer or developer, for instance) or fax machine, then this option might be for you.

  • How much it costs - This depends on the type of home-based business. It is, however, common to see this type of rider offered for as low as $14 per annum. In return, the consumer gets to double his standard homeowner's policy coverage for business equipment to $5,000 from $2,500. This rider, however, is only available for home-based business that make $5,000 a year or less.

Home office or home business policy

This policy provides better coverage than a homeowner's insurance rider. Essentially, this is a homeowner's and business insurance combination designed especially for the home-based business.

  • What it covers - This plan features coverage for lost income and business liability, as well as coverage against theft, personal liability and fire. The lost income coverage may cover up to a year for lost income and also ongoing expenses like payroll. Records, valuable documents, off-site properties, accounts receivable, use of equipment may also be covered. A home office policy typically offers higher limits when it comes to properties that are found off-premises, protection against equipment breakdowns, and also an added coverage against theft. Also, liability coverage for use of products sold or for services rendered may be included.

  • What it does not cover - Generally does not cover inventory stored in the home, and employees who work in the home as well. Also does not include damage arising from earthquakes and floods.

  • Who needs this policy - home-based businesses that require a higher level of coverage that a homeowner's policy rider cannot offer and those who cannot avail of a BOP may want to consider this plan.

  • How much it costs - estimated to be at around $200 per annum for $10,000 coverage.

BOP or business owners policy

BOP is the plan that offers the most comprehensive insurance available for small, home-based businesses.  The protection offered by a BOP is comparable to policies available to larger sized businesses but with budget-friendly prices that a home-based business owner can afford.

  • What it covers - This plan covers structures such as garages turned to offices, barns, carriage house, outbuildings, etc. Coverage also extends to office equipment and furniture, software and documents, loss of income because of a named event such as fire, loss arising from theft or crime, liabilities that arise from accidents that take place in the property's premises, advertising and personal injuries like slander or libel that arise from what the business produced or wrote as part of its marketing campaign.

  • What it does not cover - Workers compensation, professional liability claims, disability or health insurance, and business auto coverage. Separate insurance will have to be bought for these.

  • Who needs this coverage - Home-based businesses that have operations in several locations and those that are into manufacturing of products may well consider a BOP plan.

  • How much does it cost - On the average, a BOP's premium payments may start at $500 per annum. Additional coverage for business auto insurance may require an additional $1,000. Workers' compensation will cost an extra $500. An umbrella, commercial add-on may cost $350 or more.

How to know which option is for your home-based business

Asking the following questions will help you choose a fitting policy:

  • Which property is business owned and which is not?
  • Which part of the home will the business operate from?
  • Will there be vehicles used as part of operations?
  • Will workers be employed?
  • Is there a risk of someone making a claim for committing a mistake or supplying incorrect information?
  • Will the occurrence of fire force the business to shut down?
  • Is the business into product manufacturing?
  • Will your home-based business receive clients at your home?
  • Will there be work done away from the home?
  • How much will I be investing on equipment?

Federal and state regulations regarding home-based business insurance

One important type of insurance that is required of your home-based business is workers compensation. State laws differ on the requirements for home-based businesses. In some states, a certain number of employed workers has to be met before the business is required to get coverage. Our guide, "Workers compensation - learn the ropes in a single guide" provides detailed discussion on the matter.

Also, as of this writing, home-based business are not required to get health insurance. However, under the Health Care Reform law, all businesses are required to get health coverage by 2014. For a more detailed discussion, go to our article "Health insurance for small businesses."

Tax-related concerns

Premiums paid on many business insurance policies such as property loss and liabilities, are deductible according to the U.S. Internal Revenue Service. However, losses that a business incurs because of flooding and business interruptions are not.

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