Introduction to Home-Based Business Insurance
Home-based businesses – those exclusively run from a home and no other location – comprise roughly half of all U.S. businesses and generate a huge amount of economic activity, according to the Small Business Administration (SBA). Some of the top types of home-based businesses are the following:

  • Professional, scientific and technical services
  • Consultants and freelancers
  • Construction
  • Retail
  • Specialized services (e.g. music instructors, day-care)

While some home-based businesses grow into full-fledged companies that employ substantial numbers of people, most remain quite small. According to the SBA:

  • 90 percent are sole proprietorships
  • 7.2 percent have fewer than 5 employees
  • Just over 1 percent have 5-19 employees
  • About 0.2 percent have 20 or more employees

Regardless of their exact size or type, home-based businesses – like all businesses – should be properly insured to protect their assets and their owners against certain risks. Often, home-based businesses are underinsured – a fact their owners discover after an incident occurs when they realize the insurance they have is inadequate to address the magnitude of the problem.

Types of Insurance to Consider
If you have a home-based business or are thinking about starting one, it’s a good idea to learn about the range of insurance products available. While your specific business may not require all types of insurance described below, it’s important to understand your potential risks and your insurance options.

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Introduction to Workers’ Compensation Insurance  
If your home-based business has employees, most states will require you to purchase workers’ compensation insurance. It protects a business owner from claims by employees who experience a work-related injury or illness – either sustained on business premises or due to business operations. You will need a separate workers’ compensation policy for this type of coverage. Check with your state insurance department to see what is required for your small business.

Typically, workers’ compensation covers the employee’s medical expenses, rehabilitation costs and lost wages. If you do not have workers’ compensation and one of your employees is injured on the job, your business may be liable for any medical expenses that individual incurs.

According to the Small Business Administration, business owners, independent contractors, domestic employees in private homes, farm workers and unpaid volunteers are usually exempt from workers’ compensation eligibility.

If this is the first time you’re purchasing workers’ compensation insurance, the rate will depend on your payroll and your industry. After a few years, your premiums may be based on the actual experience of your company.

Tips & Considerations Concerning Workers’ Compensation Insurance
Take steps to minimize risk in the workplace, thereby lowering the chances of a worker getting injured.

  • If you own machinery, and it is operated by your employees, you are exposed to the risk of serious injuries. Always provide goggles, gloves and other recommended safety gear to help prevent accidents.
  • Keep home office space in good physical condition. Maintain carpeting and railing on stairs. Make sure telephone and computer wiring is in good working condition and does not create any hazards.
  • The U.S. Department of Labor’s Occupational Safety & Health Administration (OSHA) offers specific information by industry type and provides other helpful resources to small businesses on how to comply with safety requirements that can limit work injuries. To learn more about OSHA’s guidance to small businesses, visit the OSHA Web site at http://www.osha.gov/dcsp/smallbusiness/index.html.

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Introduction to Property and Liability Insurance
Property and liability insurance is important to home-based businesses to protect against loss or damage to your business property and equipment (such as computers), as well as protect against claims due to accidents or injuries to customers, clients or others who may visit your home in order to conduct business.

Many home-based business owners believe that their homeowners or renters insurance policy will adequately cover their home-based business. However, that coverage is rarely enough. For example, most homeowners insurance policies limit coverage due to damage or loss of business property to $2,500 in the home and $250 away from their home. These limits might be far too low if a fire destroyed your home office and all of its contents.

Furthermore, your regular homeowners policy might totally exclude business-related liability claims, thereby exposing your business to serious risks if a customer, client or supplier were seriously injured during an appointment on your premises. Therefore, you should consider a comprehensive home-based business property and liability insurance policy.

There are several home-based business property and liability insurance options:

  • Homeowners Policy Endorsements – In some cases, you may be able to add a simple endorsement to your existing homeowners insurance policy that can increase the standard coverage for business equipment. For example, for a nominal amount, you may be able to raise your coverage to $5,000. In other cases, you can choose to increase your coverage to $10,000 in increments of $2,500. If you use expensive equipment, such as computers or construction tools, this option may be worth considering. However, it’s important to note the following:
    In many cases, endorsements of this type may only be available to companies with revenues of $5,000 or less. Check your homeowners/renters policy and call your insurance company or insurance agent to discuss the availability of this option and to see if your business qualifies.
  • Similarly, some types of home-based businesses may be able to purchase a homeowners 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 – Choosing this option provides greater coverage for business property as well as for liability than the homeowners policy endorsement. Depending on the terms of the policy you select, in-home business policies 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 of a temporary location
    In-home business policies can also provide broader liability insurance coverage. For example, they can offer some liability protection for injuries suffered by other people in the course of doing business in your home or against accidents caused by the products or services you offer, again depending on the specific terms of the policy you select.
  • Business Owner’s Policy (BOP) – ABOP” is an all-in-one 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 may be a good option for larger home-based businesses.
    BOPs do not cover workers’ 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 the three insurance options outlined above. However, home-based businesses with heightened concerns regarding interruption choose to purchase a special policy that expressly covers this risk.

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Tips & Considerations Concerning Property and Liability Insurance

  • Don’t assume your existing homeowners or renters insurance policy will cover your home-based business.
    • Since coverage for business property is limited and liability insurance is not provided by homeowners insurance for home-based businesses, it is important to check your homeowner’s policy to determine exactly what it covers.
  • Check with your state insurance department or insurance company to see if your business qualifies for a homeowners policy endorsement.
    • Not all home-based businesses are eligible for homeowners policy endorsements. Typically, such endorsements are only available to those businesses with few visitors.
  • In-Home Business Policies vary significantly depending on the insurer and may not be available to all types of home-based businesses.
    It is important to check with your state insurance department to see if this applies to your business.
  • Always keep a clean and safe business environment to avoid injury or damaged equipment.
    • Make sure stairs are free of clutter to avoid accidents.
    • Make sure all electrical cords are wrapped tightly.
    • Wipe spills immediately to reduce the potential that someone could slip and fall.
    • Make sure you have fire alarms in your home-based business area.
  • Keep a record of all business documents and receipts for all business equipment, and store them in a safe place away from your home.
    • Start by making a complete inventory of all your business property and its value. Be sure to update this inventory annually (or more often if you buy a lot of new equipment). That will help you determine how much coverage you need.
    • Documentation will be critical if you ever need to file an insurance claim.
    • It’s also a good idea to take photos of your premises and equipment for the same reason.
  • Back up computer files and store them remotely.
    • Your intellectual property (e.g. financial records, customer lists, proposals, work product) is extremely important, but difficult to value and fully recover through insurance. Better to safeguard it from loss or damage.

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Introduction to Commercial Auto Insurance
In some cases, home-based business owners who only use their vehicle occasionally to deliver goods or transport equipment 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 commercial auto insurance. Typically, commercial auto insurance policies have higher liability limits, for example $1 million. They also may have provisions that cover rented and other non-owned vehicles, including employees’ cars driven for company business.

Several factors related to ownership and use of vehicles determine whether a personal or commercial policy is appropriate. These include:

  • Who owns or leases the vehicle – you individually or the business as an entity
  • Who drives the vehicle – you or your employees
  • How the vehicle is principally used – for example, transporting people, delivering packages or carrying hazardous materials

It’s important to remember that you could be held liable for injuries or damages caused by an employee of yours who is driving a vehicle to conduct your business – regardless of who owns the vehicle.

Most importantly, if you are relying on either a personal auto insurance or personal umbrella liability policy to provide you with protection for your company’s use of vehicles, look closely at the provisions, as business-related liability may be excluded.  

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Tips & Considerations Concerning Commercial Auto Insurance  

  • If your business owns or leases a vehicle, make sure its name is listed on the policy as the principal insured.
  • If you are relying on either a personal auto insurance or personal umbrella liability policy to provide you with protection for your company’s use of vehicles, look closely at the provisions, as business-related liability may be excluded.
  • If your employees operate a company car, make sure they have good driving records and are trained properly.
  • Consider increasing insurance on your business vehicle to cover permanently attached items, such as a generator or storage unit.  

The following factors can affect the cost of your insurance premiums:

  • Premiums are linked to the type of vehicle driven. So if you’re buying or leasing a new car or truck, check the insurance rates before you make your final choice.
  • Safety devices can help reduce your premiums. If you’re buying or leasing a new vehicle, consider getting one with anti-lock brakes, side air bags, automatic seat belts and daytime running lights.
  • Anti-theft devices, such as an alarm system and global positioning system – so that your vehicle can be located if stolen – can help reduce your premiums.
  • Where you park your vehicle can impact premiums. If you have access to an indoor garage or locked parking lot – places that decrease the likelihood of theft – you may qualify for lower premiums.
  • The geographic region in which your business operates impacts your premiums. For example, areas prone to extreme weather – hail, wind storms, hurricanes, etc. – higher traffic patterns or higher risk of theft may have higher insurance rates.
  • The number of claims you have previously filed can impact your insurance costs.
  • The coverage limits you choose affect the premium – the higher the coverage amount, the higher the premium. If you’re using your vehicle to conduct business, you may want to consider a higher liability limit so that coverage protects both your business and personal assets if you are sued due to an accident.
  • The cost of your insurance is directly linked to your policy’s deductible amount. The deductible is the amount of money that you agree to pay as part of a claim, before your insurer pays the remaining amount toward that claim. For example, if your vehicle incurred $1,000 of damage in an accident and your deductible was $250, you would pay the first $250 and your insurer would pay the remaining $750. The higher the deductible, the lower the premium.  

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Introduction to Health Insurance
Obtaining health insurance is a critically important issue for the proprietor of a home-based business. It is also one of the most difficult challenges.

Home-based business owners may qualify for two health options – group health insurance (typically, if they have at least two or more employees) or individual health insurance. Group health insurance can be expensive, particularly for very small groups, and may not be available to you. Individual plans may be very expensive as well. It is up to you to decide which option works best for your business and employees, based on cost and availability.

The different types of health insurance plans most commonly offered by small businesses are the following:

  • Indemnity plans are major medical plans that typically have a deductible amount the insured person pays before the insurance company begins paying benefits.
  • Under Health Maintenance Organization (HMO) plans, the insured person must receive care from a network provider in order to have the claim paid through the HMO.
  • With Preferred Provider Organization (PPO) plans, the insurance company enters into contracts with selected hospitals and doctors to furnish services at a discounted rate.
  • And Point of Service (POS) plans are a hybrid of the PPO and HMO models.

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Tips & Special Considerations Concerning Health Insurance

  • Check with your state insurance department to see if there are any programs in your state that offer health insurance for home-based businesses.
  • Consider COBRA insurance as an interim health insurance plan, if you are eligible.
    • If you have just left a job that provided health insurance, you might want to continue your coverage under your former employer’s plan. As mandated in the Federal Consolidated Omnibus Budget Reconciliation Act (COBRA), employers with 20 or more employees that have a group health plan are required to offer their employees (and their dependents) the option of continuing their membership in the group plan at their own expense after they leave their job.
    • You can continue your health insurance under COBRA for 18 months, during which you can search for the best option as a home-based business proprietor.
  • Consider individual health insurance.
    • Many insurance companies offer individual health insurance policies. You should compare several policies with comparable benefits to see which you prefer.
    • You may be able to get more affordable individual health coverage through a trade association or small business organization in your state.
    • Check with your state insurance department to see if there are any programs in your state that offer health insurance for home-based businesses.
  • Consider a Health Savings Accounts (HSA) and high deductible health plan (HDHP).
    • A Health Savings Account is not health insurance. Rather, it is a savings plan that offers an alternate way for consumers to pay for their healthcare. HSAs enable you to pay for current health expenses and save/invest for future qualified medical and retiree health expenses on a tax-free basis. Health Savings Accounts (HSAs) were created by the Medicare bill signed by President Bush on December 8, 2003.
    • In order to open an HSA, an individual must be covered by a High Deductible Health Plan (HDHP). Sometimes referred to as a “catastrophic” health insurance plan, an HDHP is an inexpensive health insurance plan that generally does not pay for the first several thousand dollars or more of healthcare expenses (i.e., the “deductible”) but will generally cover health expenses after that. 
    • For 2006, in order to qualify to open an HSA, your HDHP minimum deductible must be at least $1,050 (self-only coverage) or $2,100 (family coverage). The annual out-of-pocket expense (including deductibles and co-pays) for 2006 cannot exceed $5,250 (self-only coverage) or $10,500 (family coverage).
  • Be wary of health discount cards, which offer a reduced fee for doctor visits or other medical services.
    • Note, discount cards are NOT health insurance plans, and are therefore not regulated by the state insurance department.
    • Some discount cards have been the subject of numerous scams in recent years, so be sure to check these out carefully.

For more information on group health insurance options for small business, see the section of this site dedicated to this topic.

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Introduction to 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.

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Tip & Considerations Concerning Disability Insurance  

  • 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.  

For more information about disability insurance in general, see additional information from the NAIC on disability.

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Introduction to Life Insurance
Because home-based businesses often cease operating when the proprietor dies, your decisions about purchasing life insurance will likely be based on your personal/family considerations rather than circumstances related to sustaining your home-based business.

An exception is a situation where there is joint ownership of the business, for example by two partners. In this circumstance, purchasing "Key Person" insurance may be desirable. The business would purchase policies on each partner’s life. Each partner would be named as the beneficiary on the other partner’s policy. In the event that one partner died, the other partner could use the funds to:

  • Buy out the partner's heirs
  • Pay off outstanding loans or obligations
  • Weather the loss and continue operations until an employee could be hired and trained to carry out the functions of the deceased partner

For more information on “Key Person” life insurance, see the section of this site dedicated to this topic.

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Tips & Considerations Concerning Life Insurance
A number of factors can affect life insurance premiums. These include:

  • The age of the insured and his/her overall health. Life insurance companies typically ask about the insured’s medical history, request access to medical records and even obtain blood and urine samples for testing.
  • Pre-existing and/or chronic health problems, such as diabetes, heart disease or cancer. These conditions may prevent a person from getting life insurance or can place him/her in a high-risk pool and therefore subject to higher premiums.
  • Poor health habits, such as smoking and excessive drinking. These habits can trigger higher premiums. Be aware that insurance companies may look back and consider these behaviors for the past five years.
  • Engaging in dangerous hobbies, such as skydiving, skiing or rock climbing.
  • The insured’s driving record, in terms of accidents, DWI/DUI citations, claims and tickets. The better his/her driving record, the better rates he/she will receive for life insurance.
  • The insured’s geographic area. Life insurance companies have access to regional data that documents mortality rates and life expectancy, and they use that data to calculate the rates they offer. 
  • As with all insurance, shop around and compare rates for comparable coverage from a variety of insurers. 

For more information about life insurance in general, see the life insurance sections under each life stage in the Consumer InsureU Web site.

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