Do you operate a home-based business from your home?
According to some calculations, there are 38 million home based businesses in the United States. From a cosmetics distributor, to a contractor with several employees, to tax preparation services, the options are almost unlimited. Many successful businesses who are Main Street storefronts today started out as a home business in their garage.
It is my experience that people often overlook important insurance considerations when they have a home based business. If you currently operate your business out of your home, there are a few important options and potential coverage gaps you should be aware of. Let’s take a look at them!
How do you define a business?
First let’s define what a business is according to insurance language. A business is something you do for a profit or for which you charge a fee. It does not have to be a large profit and you can even show a loss and still be a business. There is often a fine line between a business and a hobby. You love to play piano and decide to buy a nice Steinway. To help offset the cost you decide to give lessons at home. While you might consider this a hobby, for insurance purposes this is a business.
Coverage Gaps for Business in the Homeowners Policy.
Why is that important? Your homeowner’s policy has an exclusion for business use. This means there would be no liability coverage under your home policy if you were sued as a result of your business activities. In addition most homeowner’s policies limit coverage for business personal property to $2,500. The $15,000 piano may not be covered if it is being used for a business.
Another common home business coverage gap we see involves detached structures such as a barn or outbuilding. People often think that since the home itself is not being used they are ok to use an outbuilding for their business. Again there is the exclusion for liability that applies and the limitation for business personal property. There is also an exclusion on most homeowner’s policies that takes away any property coverage for a detached structure being used for business purposes. If it burns down, it would not be covered if being used for business purposes.
Let me share an example with you that actually happened. This homeowner owned a nice home with some acreage. He had a couple of horses for a hobby and mowed hay from his acreage to feed the horses. He stored the hay in a barn on his property and would sell some of the hay to a local farmer as he had more than he needed for his horses. He did not think of this as a business and the income from selling the hay was not a large amount. His barn where the hay was stored was struck by lightning and burned to the ground. The barn was not covered due to the business use exclusion.
What are the Options for a Home Business?
First of all, check with your trusted advisor. Depending on the nature of the business it may be as simple as endorsing the home policy to cover the business liability and adding additional coverage for business personal property if needed. The outbuilding may be able to be covered as well. If your business involves a lot of customers or even employees coming and going on your property this will present a more difficult approach. In some cases an insurance company will cancel a homeowner’s policy if the business exposure is too severe for them to offer coverage. Some situations require insuring the home and business with the same insurance company.
Home based businesses are on the rise. It makes a lot of sense and they can be very profitable. Just be aware that there are gaps in coverage for a home based business. If you work at home and have any questions as to whether or not you have gaps in your policy and/or are at risk, don’t hesitate to reach out to us so we can review your coverages with you.