Do I Need Insurance For My Home-Based Business?
As a home-based business owner, you may think that your homeowner’s insurance is enough to protect your business in the event of an accident or a disaster, but it might not provide the coverage you need. According to the National Bureau of Labor Statistics, nearly 30% of homeowners run a business out of their home and up to 44% of small business owners (sole-proprietors, freelancers, and home-based businesses included) are not protected with proper insurance. Some homeowners insurance plans only cover up to $2,500 of business equipment loss and some plans do not cover a home-based business at all.
Most home insurance policies are there to protect the house and the homeowners — not a business. If you run a small business out of your home, you should consider adding business insurance as an endorsement to your plan or invest in business insurance separately. Your small business is your baby and one disaster could shutter those dreams. Why roll the dice?
Read on to see how to prepare your home-based business from future risks.
What is Homeowners Insurance?
Homeowners insurance is there to protect your house and your assets from disaster and destruction. In homeowners insurance language, there are various “perils” your policy will protect you from. A basic HO-1 plan protects you from 10 perils; a more comprehensive plan will protect you from 18 listed perils (or perils you and an insurance agent itemize.) The basic perils are:
- Riots or civil commotion
- Damage from flying aircrafts
- Damage from vehicles (but not the insured’s vehicles; only other people’s)
- Smoke damage
- Volcanic eruptions
Notable exceptions to the most basic homeowners plans are earthquakes, flood protection, and sinkholes. These must be added as additional endorsements to any plan.
If you have a mortgage and are borrowing from a lender, it is usually a requirement of your loan to show you have a homeowners insurance policy. A basic homeowners insurance policy might protect up to $2,500 of business-related equipment stored inside a house at the time of a disaster, and that’s all. For businesses with more than $2,500 of equipment or which could be seriously affected by property damage, a homeowners policy is not enough coverage.
Does Homeowners Insurance Cover My Business?
A homeowners insurance policy will not specifically cover your business or your business assets in the case of an accident, disaster, or lawsuit. While your policy may cover up to $2,500 of business property stored inside your home, your policy will likely not cover more than that, and unless business items are listed specifically as covered in an expanded homeowners policy, you could see your business assets go up in smoke (or walk out in an act of theft, etc.). If you want to pay an additional $50 a month, you may be able to get an extended ceiling of protection on business-related items, but even that may not cover all the disasters or accidents your business might encounter.
True small business side-story: My mom, who taught childbirth and Lamaze classes as an independent contractor, kept all her teaching supplies in our garage. In 1996, Portland flooded, my house included. A box of my mother’s childbirth teaching tools washed away and, thankfully in an era before viral-videos, somehow our neighbor captured some pictures of plastic pelvises and laminated birth photos just floating down the street…
Why risk it? Right? Additional coverage will make sure that any business supplies (plastic pelvises included) are protected.
Most small business owners don’t think about insuring their businesses until an accident or disaster has already occurred. Don’t let insurance be an afterthought until it’s too late.
When To Buy Business Insurance Instead
If you are a home-based business owner and you are contemplating business insurance, it’s important to understand the benefits. Even minimal coverage could save thousands of dollars and grant you peace of mind. Homeowners insurance won’t protect your business from a potential lawsuit — or help if your business information is hacked online. Statistics from insurance giant Insureon show that 1 in 3 businesses go bankrupt because they are under-insured.
Do not rely on your homeowner’s insurance to cover you or your business assets in the case of an emergency, accident, or disaster. If you can say yes to any of the following, then you should consider looking into business insurance. Do you:
- Work with clients/customers?
- Keep work equipment at your house?
- Store customer data on your computer?
- Drive places to meet clients?
- Drive around with business supplies in your car?
- Give advice as part of your business?
- Have a home located in a high-risk-zone for natural disasters?
- Employ others?
- Have clients visit you at your house?
- Have inventory at your house or somewhere off-site?
5 Types Of Insurance For Home-Based Business
Once you’ve decided to take the step to insure your home-based business, you’ll have to choose which plan and policy will be the right fit. Allow your mind to temporarily wander to the dark list of worst-case-scenarios, and find the policies that will match with how best to protect yourself. Every business has risks and there are no risk-free guarantees, but you also don’t need to insure yourself for things that aren’t a risk for your particular business.
Here are the top five most common home-based business insurance policies worth looking into:
1. Home-Based Business Insurance
Many insurance providers have a home-based business insurance plan that bundles several of the most common types of insurance freelancers, sole-proprietors, and home-based business owners might need. Each insurer’s plan and policy is different, so check with providers to get a list of what their current home-based business insurance covers. Most home-based business plans include general liability and commercial property coverage, and also have business interruption service and business data-protection.
2. General Liability Insurance
General liability insurance protects you in the event of a lawsuit or an accident. Claims against a business can arrive in the form of bodily injury, property damage, personal injury to a customer (including slander or libel), or false advertisement. General liability insurance guards a business against financial ruin if a client slips and falls or if someone is offended by a social media post and decides to sue you.
3. Commercial Property Insurance
This type of insurance protects all of the property needed to run your business. Even if you run a home-based business, this coverage would be a way to protect the cost of your home office and the equipment stored at your house. A commercial property policy covers business products inside your house — and other people’s property while it’s in your care. Property damage due to theft also falls into this policy. Property insurance is the policy that will cover your home and your business property when it’s away from your home.
4. Business Interruption Service
If a business needs to close its doors due to a disaster — natural or otherwise — business interruption service will repay the costs of lost revenue and business expenses accrued during the interruption. For example, if your house catches fire, your property insurance will get you back up and running in terms of damage, but if you had to close your business for a few weeks, business interruption service will help offset the financial loss.
5. Professional Liability (E&O)
Professional liability insurance (commonly referred to as errors and omissions or E&O) covers the cost of defending your company in a lawsuit where the claim is that your business caused a financial loss for a client (error) or did not perform a service as required (omission). This type of insurance may be required for medical and legal businesses, but it is generally an add-on to liability insurance and can be an important addition for home-based businesses. If you give advice as part of your business plan, you’ll want professional liability to protect you from lawsuits.
Some other options to consider: If you drive a lot as part of your business model, you might want to consider commercial auto insurance and make sure to check and see if extra endorsements are needed to add flood and earthquake protection.
A good rule is: If you use it for your business, insure it properly. No business is exactly the same and but your unique needs can be met.
Finding The Best Insurance For Your Home-Based Business
You’ve decided to insure your home-based business: Great! If anything happens to your home, to your supplies away from home, or to the things you need to run your business, you won’t have to be one of the 33% of businesses that has to close after a disaster or accident.
Whether you’ve decided on hunting for an insurance company that offers home-based business insurance specifically or you want to work with an insurance professional to piece together a plan that covers your unique needs, the hunt for business insurance doesn’t have to be arduous. You can buy business insurance in 4 easy steps:
- Choose the insurance you need
- Gather business documents (square footage of your office space, how much income you earn, equipment you’d like insured)
- Compare costs (some sites like Coverwallet, Coverhound, and Insureon compare multiple agencies at once for you)
- Make your purchase
How much does business insurance cost? The answer is simple: It depends. The size of your business and the endorsements you might add will determine the amount you pay. Basic coverage will run between $300-$1000 dollars a year on average. (Rates also depend on deductibles and whether or not you have other policies with the company.)
All businesses will have hiccups and accidents, but only some businesses will have coverage for those moments. Don’t put off thinking about protection until it’s too late. The question a business needs to ask itself is: Can I afford not to buy insurance?