How Should You Insure Your Home-Based Business?

Three Basic Coverage Options Small Business Owners Should Know

Sorting out some admin for her home-based business
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Many businesses begin in the home. As of 2018, there were 30.2 million small businesses operating in the United States, and 50% of them were home-based. A home-based business offers many advantages, including low startup costs, flexibility, tax benefits, and freedom from commuting. Like any business, a home-based operation requires insurance. Several insurance options are available so business owners can choose the one that best meets their needs.

Why You Need Home-Based Business Insurance 

While home-based businesses may operate on a small scale, they face many of the same risks as their larger counterparts. These include third-party claims, auto accidents, and damage to company-owned property. To protect themselves from losses, business owners must purchase adequate insurance.

Some home-based business owners might assume their homeowners insurance will cover claims arising from their business activities. This is a faulty assumption because most homeowners policies contain business-related exclusions and limitations. For example, many policies exclude structures not attached to the dwelling (like a detached garage or shop building) if they're used for business purposes.

Types of Coverage

Small business owners have three basic options for insuring home-based operations. They can cover business exposures via endorsements to a homeowners policy, purchase an in-home business policy, or buy a business owners package policy. Which option is best depends on the size and nature of the business and the cost of insurance.

Homeowners Policy Endorsement

Many home-based businesses depend on equipment like computers and printers. Unfortunately, most homeowners policies provide a very low limit (typically $2,500) for equipment on the residence premises that's used for business purposes. Business owners may be able to double or triple that limit by purchasing an endorsement for a modest additional premium.

Business owners may also have the option to add a homeowners liability endorsement to their policy. The endorsement covers third-party claims by customers or delivery people for injuries sustained on their property. It's typically available only if policyholders have few business-related visitors.

In-Home Business Policy

An in-home home business policy affords broader coverage than a homeowners endorsement and may cost less than $300 per year. It's a middle ground between a homeowners policy and commercial insurance. Policies typically include business personal property and general liability coverages. Optional coverages like business income, valuable papers, and accounts receivable may also be available.

In-home business policies can vary widely from one insurer to the next. Before you buy a policy, be sure you understand what it does and doesn't cover.

Business Owners Policy

Business that need more coverage than an in-home policy provides can choose a business owners policy (BOP). A BOP is a commercial package policy designed for small businesses. It includes commercial property, business income, and general liability coverages.

The general liability section covers claims for bodily injury or property damage, including claims against the business that arise out of its products or completed work. It also covers Personal and Advertising Injury Liability and claims based on damage to rented premises. A wide variety of endorsements are available for broadening or restricting coverage. Small businesses pay an average annual premium of $1,191 for a BOP.

If your home-based business sells a product or does construction work, be sure your liability insurance includes coverage for products and completed work.

Other Coverages To Consider

Homeowners policies, in-home business policies, and BOPs provide general liability and property coverages only. Here are some other coverages home-based businesses should consider.

Commercial Auto Insurance

Many home-based businesses use vehicles in their day-to-day operations. Business owners should not rely on a personal auto policy to insure business-use autos unless they have verified with their insurer that those vehicles are covered. Personal auto insurers generally won't insure vehicles registered to a business (other than a sole proprietorship). Moreover, personal policies don't cover trucks larger than a pickup or vehicles used for delivery. 

A business auto policy includes commercial auto liability and physical damage coverages. It's a flexible policy that can be tailored to the needs of a business by the use of endorsements. It can cover vehicles the business owns or hires as well as autos it doesn't own (like employees' autos) that are used in its operations.

Errors and Omissions (Professional) Liability

Accountants, lawyers, engineers, consultants, and other businesses that provide a service or advice to clients may need errors and omissions (E&O) liability insurance. Also called professional liability coverage, E&O insurance covers third-party claims for financial losses that result from mistakes made by a business when serving clients. Most E&O policies are written on claims-made forms.

Small business owners typically pay between $500 and $1,000 per year for an E&O policy.

Workers' Compensation Insurance

Like all businesses, home-based companies must comply with state workers' compensation laws. The obligation to buy workers' compensation insurance is typically determined by the number of workers a business employs. Many states require businesses to purchase coverage if they employ one or more workers.

Most states don't require sole proprietors to purchase workers' compensation insurance if they don't employ any workers. Many states allow sole proprietors to purchase coverage for themselves