Insuring a Home Business

If you have a home-based business or are thinking about starting one, it is a good idea to learn about the different insurance products available. There are several basic types of insurance you may want to consider buying: property and liability, worker's compensation, auto, health, disability and life insurance/key person.

Property and Liability Insurance
Worker's Compensation
Auto Insurance
Disability Insurance
Life Insurance/Key Person Insurance

Property and Liability Insurance

If you operate a home business full-or part-time you might be uninsured and not realize it. Many home business owners believe that their homeowner's insurance policy covers all their home business needs. You should not assume that your homeowner's policy would cover your home business. Your homeowner's insurance policy may provide coverage but probably only to a maximum of $2,500 for business equipment in the home and $250 away from the premises. These limits might be far too low if a fire destroyed your home office and all of its contents.

Your homeowner's policy usually does not cover business-related liability, for example, if a customer or supplier is injured on your property. A homeowner's policy also does not insure your inability to collect your accounts receivable if your business records are damaged, and your policy will not replace lost income if you cannot operate your business due to damage to your home.

There are several ways you can buy home-based business property and liability insurance:

Homeowner's policy endorsements. Depending on your home business, you may be able to add an endorsement to your existing homeowner's insurance policy. For example, some insurers offer a home day care endorsement for people who operate a home day care service for pay in their home. For a nominal amount, you may be able to raise your coverage.

You may also be able to add an endorsement to your existing homeowner's insurance policy that can increase the standard coverage for business equipment. For example, you may be able to raise your coverage to $5,000. In many cases, this type of endorsement may only be available to a home-based business with revenues of $5,000 or less.

Some types of home-based businesses may be able to purchase a homeowner's liability endorsement to protect you in case someone gets hurt in your home in the course of conducting business. For example, a client or delivery person may fall while walking up your steps and sue you for not keeping your home in a safe condition. A liability endorsement would protect you from such a claim. Typically, this type of endorsement is only available to those businesses that have few visitors.

In-home business policy. This option provides greater coverage for business property as well as for liability than the homeowner's policy endorsement. Depending on the terms of the policy, an in-house business policy can provide coverage for: loss or damage to business property; loss of important records and papers; lost income associated with business interruption (e.g., from a fire); expenses of operating out a temporary location.

Business owner's policy (BOP). A BOP is a package insurance policy specifically created for small to midsize businesses that provides coverage for business property, general liability and business income lost due to a fire or other covered event. BOPs do not cover worker's compensation, health, disability or auto insurance, each of which requires separate insurance.

Business interruption/continuation insurance. Business interruption/continuation insurance replaces income and pays for expenses that continue to accumulate as a result of a covered loss. Some level of business interruption/continuation coverage may be included in one of three insurance options outlined above.

Worker's Compensation Insurance

Worker's compensation insurance covers employees who suffer a work-related injury or illness. In Wisconsin, most companies are required to carry worker's compensation for their employees.

For more information on worker's compensation insurance, see the section of this site dedicated to worker's compensation insurance. (http://oci.wi.gov/sm_emp/workcomp.htm)

Auto Insurance

In most cases, home-based business owners can be covered by their personal auto insurance policy. However, depending on your particular use of your car, you may need to purchase higher coverage limits to protect yourself and your business.

In other cases, particularly if you are transporting people for any reason in the conduct of your business, you should consider a home-based business auto policy.

A home-based business auto policy is priced no differently than your regular auto policy. Insurance companies look at the number of miles you drive, who will be driving the vehicle, your driving record, and your claims history in order to set your premium.

The liability limits you choose and your comprehensive and collision deductibles are also major factors in how much you are going to pay. The higher your limits, the higher your premium. Lower deductibles are going to cost you more, too.

As a home-based business owner you need to pay attention to liability limits in order to protect both personal and business assets. If you cause an accident, the injured parties can go after you as an individual and as a business owner. In order to minimize financial risk, you might consider higher liability limits.

Many home-based businesses move equipment from job to job, like power washers and ladders for house painters, lawn mowers and other gardening equipment for landscapers. If you have a homeowner's or renter's insurance policy, the equipment you haul from job site to job site is minimally covered. Your insurer will typically cover damages from $250 to $1,000, minus your deductible.

If you permanently affix a piece of equipment, like a generator, to your vehicle, the generator will not be covered unless you increase your insurance on your vehicle in order to cover items that are permanently attached.

Disability Insurance

Disability insurance replaces income if you are unable to work for an extended period of time because of a physical or mental illness, disease or bodily injury. Long-term disability coverage typically begins after the policyholder is disabled and unable to work for at least six months. It can extend for a specified number of years or until the insured retires or reaches the age of 65, depending on the policy selected.

Home-based business owners who are interested in disability insurance may want to negotiate for a shorter waiting period after the onset of disability if their only source of revenue is from their business. Be aware that a shorter waiting period will result in a higher premium.

Home-based business owners may also want to consider an added rider to a personal disability policy for business overhead insurance. This type of coverage insures that a business can continue to function while the owner is recovering from a disability and that standard business expenses, such as payroll, utilities, rent, etc., continue to be paid.

If you get turned down for disability insurance or find the cost prohibitive, reapply next year. The longer you're self-employed (three years is a marker) and the more consistent your business, the better risk you are to an insurer.

Life insurance

Life insurance is crucial, especially if you have a business partner who relies on you, or if your home business is the main source of income for your family. Life insurance will help ensure that your family has the money it needs should you meet an untimely death. Some lenders require that you have life insurance before they will issue a loan; this guarantees that the loan will be repaid if you meet with an untimely end.

Key person insurance is a form of life insurance that might be suitable for some home-based businesses. Key person insurance pays out when the owner of the business or a crucial employee dies. As the policy owner, the company is the beneficiary and receives the proceeds when the insured key employee dies. The payout can help the company by providing:

• cash to weather the loss and continue operations until a new employee can be hired and trained to carry out the functions.
• the funding to buy out the key person's heirs, if ownership rights of the business are involved.