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Ask About Insuring Your Home-Based Business

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By | May 25, 2012

Dear Toolkit,

I recently set up an office in my home for a sideline business I've started. Eventually, I hope to quit my "day job" and work full time at my own business. In the meantime, I'm concerned about insurance risks. I know my homeowner's policy covers some aspects of my home office, but do you think I need more coverage now or is my HO policy sufficient until my business grows a bit?

Worry Wart

Dear Worry,

You are wise to worry before a problem arises so you won't have to weep after you get the bill for some uninsured peril not covered in your particular homeowner's policy contract form.

Homeowner's policies come in three flavors: HO1, HO2 and HO3. (Additionally there is an HO4 form for renters and an HO6 form for condo owners.) The HO1 form is very basic coverage, and the HO2 is only somewhat broader--meaning it covers a few more perils than an HO1. The HO3 is the broadest of all. It's called an "all-risk" form. The first two forms only cover "named perils," while the HO3 covers all risks not specifically excluded.

The higher the form number, the higher the premium cost, of course, but I feel that HO3 coverage is the minimum anyone needs regardless of how much more you must pay for it, even if you don't have a home-based business. All-risk coverage is well worth the price!

Before you embark on the hunt for business coverage, refresh your memory about homeowner insurance basics. That done, you'll be ready to move on to the finer points of riders and BOPs!

Adding coverage for a business in your home may simply mean buying an endorsement (sometimes called a rider) to plug the holes in your HO3 contract. For example, form HO 24 71 is a Business Pursuits rider that will allow you to conduct business from your home by extending the liability portion of your HO3 form to cover risks engendered by this activity. But this endorsement is meant primarily for salespersons who DO NOT OWN the business in question.

Suppose you give trombone lessons in your home. You'd want form HO 04 42 (Permitted Incidental Occupancies) which is a rider that eliminates the exclusion of business pursuits in your home. It also allows extended liability coverage in case one of your itinerant trombonist pupils falls down your front stairs and bends his slide--or worse.

Or, if you're thinking of running a day care center in your rec room you'll need, at a minimum, a form HO 0497 (In-Home Day Care) endorsement. But are there enough rider forms for all the exposures you may have? For example, what about insuring your equipment?

But the majority of folks these days believe that endorsements are not the way to go. The current wisdom is that the only way to truly protect yourself, your home and your business is to go with a Business Owner's Policy (BOP) or perhaps even a full-blown commercial policy form to protect you on all fronts. You'll need to understand the basics of business insurance. I don't want to give you a lot of gray hair, but it's important for you to be aware of business risks you might not have even thought of yet.

The good news is that many carriers are beginning to offer "In-Home-Business" policies to fill the gap between inadequate endorsements and sometimes over-adequate BOP coverage. This new class of policy may save you big bucks if you qualify.

Different insurance companies have their own rules for what types of businesses will qualify for their business owner's policies. Most major carriers offer BOPs--CNA, Traveler's, the Hartford, Fireman's Fund and many of the captives as well. (Different insurance carriers sometimes use different form numbers, too. The ones we've used are simply common examples.)

Most importantly, remember that a good agent is your best defense against insurance gaps and catastrophic consequences. Interview a few agents and choose the one you feel best understands your business needs. Don't necessarily go for the cheapest bid. Professional guidance is well worth a few extra bucks.

Insure.com is a good site for getting detailed insurance info about your home state. Bookmark it for future use in looking up complaints on carriers you're considering or for how to contact your state commissioner for info on agents or brokers. Remember that insurance is regulated at the state level, and there are differences among the states. If you do business in more than one state, you'd do well to check the individual state sites so you'll be an informed consumer regardless of what jurisdiction you're dealing with.

Do your homework and you'll be able to avoid a lot of sleepless nights.

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