Everybody knows the stories about Silicon Valley bazillionaires who started out working in their garage. Nice stories but setting up a business in your home isn't as easy as shoving a desk into the guest room and hoping for the best.
There's insurance for one thing. Businesses face risks that individuals don't and relying on a homeowners policy to cover your online zirconium sales venture may not be wise.
While this may be a potential headache for budding entrepreneurs, it's an opportunity for insurers. There are, after all, about 30 million small businesses in the United States and it's estimated that about half of them are home-based, many of them still relying on their homeowners policy to cover them – essentially putting their personal assets at risk.
Homeowners policies are limited
Relying on homeowners policies for business coverage is risky. A standard homeowners policy typically offers only $2,500 worth of coverage for business property. This might cover your laptop but not clothes, nostrums or widgets that you're selling out of your house.
There are also limits, typically $500, on business equipment used away from home. So if your $3,000 video camera is stolen while you're shooting a commercial, you're out $2,500.
Also, Forbes Advisor notes, most homeowners policies don't cover "other structures" used for business purposes. So if your detached garage burns down, taking with it the client's car you were detailing, you're on the hook for a car.
The simplest way to get more coverage is to pay for an "endorsement" on your homeowners policy. A standard home-based business endorsement will typically double your standard policy limits for business property from $2,500 to $5,000, often for as little as $20, according to the Insurance Information Institute.
That might be enough for a very small business but anything doing more than $5,000 or so per year probably needs more robust coverage.
Who should have more business coverage?
Just about anyone who operates a business should be certain they are adequately covered, including:
- Accountants and tax preparers
- Web design firms
- Online publishers, bloggers, podcasters
- Online goods sales
- Caterers and food sales
By the way, it's become very popular these days to hold nothing back when picking a bone with business or political rivals. A blog may be a good thing for your business to have but if you regularly use it to run down competitors or people you just don't like, it could expose you to a big juicy libel suit.
You may win but as those of us who have fought libel suits over the years can testify, it may well cost you hundreds of thousands of dollars. That's if you win. If you lose, well ...
Photographers should also take note of the laws regarding publication of private citizens' images. You may need a signed release. It's best to look into this now, before the issue comes up. Professionals are expected to know the laws affecting their line of work.
Insurers offering more home-based coverage
Fortunately, insurance companies are beginning to respond to the home-business boom, with most major insurers already offering or planning to offer coverage.
AXIS Insurance is one. It recently commissioned a survey of 1,000 home-business owners and found that 91% of the respondents know they need insurance coverage but 44% either do not have coverage or do not know what liabilities are covered by the insurance they have.
The survey found that about a quarter of the respondents were in e-commerce and home crafts while about 16% were in professional services and consulting.
But, notes AXIS, a typical homeowners policy may not cover risks from giving advice or for product liability issues. Without coverage, the entrepreneur could be personally liable for claims.
Hoping to capitalize on the growth of homespun enterprises, AXIS has developed "a completely new product" to meet the needs of home-based business.
“These [business] owners need unique coverage because what they do is different, and we can align coverage for a tailored insurance product,” said Jill Bryant, head of small specialty commercial policies at AXIS Insurance, in an Insurance Journal report.
Bryant said home-based business owners often do not understand the difference between general liability and professional liability. In its new plans, AXIS combines the two products if necessary to cover a client's risk factors.
“We wanted to create an environment of simplicity and transparency,” Bryant said. “They don’t have to be insurance experts."
A BOP might be the answer
As Bryant noted, insurance can be confusing for non-experts. For most small businesses, a BOP may be the answer, at least initially.
What's a BOP? According to the National Association of Insurance Commissioners, a business owner’s policy (BOP) is a "package" product that typically includes property, business interruption/continuation and liability insurance.
A BOP can be less costly than buying individual policies and many insurers customize BOPs for specific types of businesses.
A home-based business or a company with only a few employees may start out with a BOP and then expand coverage as the company grows, NAIC said. However, a BOP typically does not include commercial auto insurance, workers’ compensation, health or disability insurance or liability insurance for claims of wrongful professional practices.
What's the best solution? It varies with each business. While you can look online for business coverage, a local independent agent may be better able to steer you in the right direction and tailor the coverage to suit your business.
As your business grows and you gain expertise in risk management, you can upgrade your coverage and tailor it more specifically to your needs.
Don't go naked
Many entrepreneurs go boldly into the competitive jungle thinking they don't need business insurance. They might be right but being wrong can be ruinous.
MoneyMiniBlog lists five reasons a small business, home-based or otherwise, needs insurance:
- A client may sue you. You may accidentally damage the client's property or deliver a defective product.
- Certain types of insurance are required by law. Every state except Texas requires workers comp and unemployment insurance.
- Damage to your property. If your office (ok, guest room) floods or your delivery van is damaged, your business policy should cover it.
- An employee gets hurt. Workers comp and disability insurance protect both you and your workers.
- Your business' credibility. Many potential clients won't deal with a company that isn't properly insured. Landlords may refuse to rent to you if you're not properly covered.
Let's face it. Insurance is not the most interesting topic and reviewing various policies is not how an aspiring entrepreneur wants to spend an afternoon. But while starting a business can be exciting, it's not as easy as it looks and there are as many Boulevards of Broken Dreams in Anytown USA as in Hollywood.
Going into the fray is fun but you want to armor up first.