Home-based business owners are a distinct type of insurance consumer.

The industrial revolution moved society away from cottage industries, the "home-based businesses" of the era, into the factories. Today millions of Americans are leaving the traditional workplace and returning home. As expressed by Shakespeare in King Lear, "The wheel is come full circle."

What does this have to do with insuring a home business? The personal lines insurance products in use today, designed in the 1950s, haven't stayed in step with "the wheel." Today's homeowners policy is a product of an era when industrialization was at its peak in this country. The small businesses of that era were the corner drugstore and the neighborhood barbershop. Home businesses were not even taken into consideration.

There are two areas of exposure connected with a home-based business: property and general liability. Each has to be viewed from the perspective of how these exposures are addressed by the traditional personal insurance products.

Property
Property loss has two components, loss to the structure and loss to the contents.

Structure coverage is provided under coverage A (dwelling) of a traditional homeowners policy. Under coverage A, incidental business use is permitted as long as the primary use of the structure is as the residence of the named insured. An extra bedroom or an attached garage converted into an office would fall into this definition.

If the garage office is in a detached garage, however, there is no coverage under a homeowners policy for that structure. Structures that are not physically attached to the dwelling are covered under coverage B (other structures) of the homeowners policy. The homeowners policy excludes coverage under coverage B for structures "used in whole or in part for business." Connection by fences, electrical lines and plumbing does not constitute physical attachment. Some companies, under certain circumstances, will allow the homeowner to buy this coverage back. If that is not an option, a separate fire policy can be purchased to cover the appurtenant structure used in business.

Contents coverage is provided under coverage C (contents) of the homeowners policy. Coverage C is limited to "$2,500 on property, on the residence premises, used at any time or in any manner for any business purpose," and "$250 on property, away from the residence premises, used at any time or in any manner for any business purpose." Some companies will allow the homeowner to buy additional coverage for business property.

The homeowners policy has a $1,000 sub limit under coverage C (personal property) for electronic apparatus that "is used at any time or in any manner in business." This would include computers, fax machines, copy machines and any electronic media or accessories used with them.

The homeowners policy specifically excludes coverage for business data, which as defined can be books of account, drawings or other paper records, as well as electronic data processing tapes, wires, records, discs or other software media.

General Liability
A homeowners policy provides personal liability coverage. Personal liability and general liability are not the same thing! Coverage E (liability coverage) of the homeowners policy is designed to cover the liability arising out of the use and maintenance of the insured's residence as well as the personal liability of the named insured and his or her family members.

The homeowners policy excludes liability "arising out of or in connection with a business engaged in by an insured" as well as that "arising out of the rendering of or failure to render professional services." Liability for damage to property of others "arising out of a business engaged in by an insured" is also excluded.

Under coverage F (medical payments to others) of the homeowners policy, liability "arising out of or in connection with a business engaged in by an insured" is excluded. If Aunt Sue falls down the front steps while visiting you, your homeowners policy would provide medical payments; if your best customer falls down the front steps during a business call, it won't.

Personal umbrella policies provide coverage above the homeowners policy. Most personal umbrella policies define business as it is defined in the homeowners policy and therefore exclude business activities. Check the contract language to see how business exposures are addressed.

As an insurance consumer, you must read your insurance policies and discuss coverage needs and options with your agent. This is even more necessary if you're a home-based business owner—your coverage needs may change from month to month. When your business is in a growth mode, it could easily outgrow your coverage. The time to determine how much or what kind of coverage you need is before you have a loss. Don't let an insurable loss, which is not insured, put you out of business.

Authored by: Michael D. Engel, CPCU. He is the personal lines underwriting manager for the Mid-Continent Group and has more than 25 years of personal lines underwriting experience.
Source: Home-Based Business