Commercial Insurance for Home-Based Businesses

Commercial Insurance for Home-Based BusinessesWith the rise of the internet making telecommuting easier than ever, we’re currently in the midst of a home-based business boom. More and more entrepreneurs are choosing to start their new businesses in the comfort of their own homes, not only because it’s convenient, but also because it’s a way to save a tremendous amount of money in the startup phase, when every business is always pinching pennies.

Possibly because of this increasing popularity, we encounter more confusion among entrepreneurs than ever before when it comes to the issue of acquiring commercial insurance for a home-based business. While your typical homeowners or renters policy does have some protections for your home-based business assets, it seems that too many entrepreneurs severely overestimate the level of protection this provides.

In this article, we’ll address these common misconceptions about commercial insurance for home-based businesses and many more. Who really needs insurance for their home-based businesses? Which kinds of insurance do they need? And how much will it cost? Read on to discover the answers to these questions.

Fast Facts About Home-Based Businesses

Everything you need to know about the incredible rise of home-based businesses can be summarized with one quick fact. In 2004, there were about 11 million home-based businesses in the United States, but today there are nearly 40 million! While those figures do include very small businesses that only provide a fraction of the owner’s total income, a full 20% of all home-based businesses in America generate revenues between $100,000 and $500,000 per year.

It’s no big shock that home-based businesses are cheaper to open and operate than typical companies, which is the reason many people start them in the first place. The exact numbers may be even lower than you’d expect though, as nearly half of all home-based businesses in the country are launched with less than $5,000 in initial investment.

The most surprising aspect might be the success rate of home-based businesses. Impressively, about 70% of home-based businesses are profitable within their first three years of operation, which stands out even more when you consider that only around 30% of businesses based outside the home ever become successful.

When there are numbers like this backing up the success rate of home-based businesses—as well as the relative ease of starting one—you can see how they’ve become so appealing to entrepreneurs. However, there is one major misconception floating around the world of home-based businesses, and it’s related to the issue of business insurance.

Which Home-Based Businesses Need Insurance?

Far too many owners of home-based businesses make the crucial mistake of believing that their homeowners or renters insurance policy will protect their business. After all, it’s all under the same roof, right? Well unfortunately, that just isn’t how it works. While some homeowners and renters coverages will provide some limited benefits for a business located inside the home, most insurance providers would dump your coverage on the spot if they found out that you were running a business in your home without informing them first.

For the most part, your homeowners or renters insurance will not provide any protection at all for your business assets, whether they’re physically located in the same building as your home or not. There are many home-based entrepreneurs who think they don’t need any business insurance coverage, and a few of them are correct in thinking so. For example, a one-person business providing low-risk freelance services with no in-person clients could probably get away without acquiring insurance coverage.

However, any other home-based business likely has enough risk associated with it to justify the purchase of insurance coverage. For example, if a delivery person suffers an injury while delivering a business-related package to your home, you would need business insurance to be covered. Similarly, a customer picking up a product from your home who slips and falls on your floor could sue you, which would be an unprotected claim for your business if you don’t acquire insurance.

What Kinds of Insurance Apply to Home-Based Businesses?

While on the one hand we’ve established that most home-based businesses probably do need some form of insurance coverage, on the other hand you might be relieved to hear that insuring home-based businesses is relatively simple and usually quite affordable. But what types of insurance are available for your home-based business to begin with?

  • General liability insurance: This form of coverage applies to just about any business, whether it’s located in your home or not. With general liability insurance, your business is protected from third-party bodily injury, third-party property damage, reputation harm, and advertising liability. It’s a nice set of coverages for companies in any industry, and of any size.
  • Professional liability insurance: If you make your living by charging money in exchange for your expertise, it’s probably a good idea to look into professional liability insurance, also known as errors and omissions insurance. This form of insurance protects your company if you’re sued for negligence, libel or slander, copyright and trademark issues, and some other industry-specific perils.
  • Commercial property insurance: We’ve heard it a million times, and trust us, we get it: “Why would I get commercial property insurance to cover my house?” Well, if you’re operating a business in your home, you may require commercial property insurance to cover your equipment and furnishings that you use for business purposes.
  • Commercial auto insurance: In much the same way as you might need commercial property insurance and a homeowners policy on the same physical building, you may also require commercial auto insurance in addition to your personal policy, even if you only drive one car. If your personal auto insurance provider finds out that you’re using your vehicle for business purposes, they’ll almost certainly deny your coverage.
  • Business owner’s policy (BOP): Many home-based business owners enjoy the convenience of a BOP, which combines business liability insurance and commercial property insurance in one policy. Considering that most insurance providers will allow you to bundle professional liability coverage into your BOP as well, it can be a one-stop shop for many businesses’ insurance needs.
  • In-home business policy: For owners of small, home-based businesses, in-home business insurance might be the right choice for you. In-home business policies provide up to $10,000 in claims, which are typically limited to injuries and theft for companies with three or fewer employees.

How Much Does Insurance Cost Home-Based Businesses?

Clearly, the answer to this question depends on which types of coverage your home-based business requires and how much coverage you need. Still, it’s not too difficult to provide some rough estimates for what these insurance policies might cost to obtain.

Most commonly, home-based businesses choose an in-home business policy or a BOP, which provide a wide-ranging umbrella of coverage at one low price. The typical in-home business policy only provides up to $10,000 in coverage, but it also only costs $250-500 per year in premiums.

If your business needs more than $10,000 as a coverage limit, you can acquire a BOP, which costs about $1,200 per year on average but offers much broader coverage than an in-home policy does.

Adding Coverage to Your Homeowners Insurance

One other option that’s available from some homeowners insurance providers is to add home-based business coverage as a rider on your homeowners policy. This is usually the cheapest option of all, costing only about $100 per year. However, this only provides you with a very small amount of coverage, usually around $2,500. This level of coverage is so low that it’s almost worth asking if you can simply get by without any insurance at all.

Expanding Beyond the Home

If you have plans to someday expand your home-based business into a separate physical location, it might be easier to acquire insurance policies that can grow with your company. In other words, instead of adding coverage to your homeowners insurance or acquiring an in-home business policy, a business owner’s policy might be the better choice due to its flexibility and adaptability.

Final Thoughts

Even if your business is based in your home, this doesn’t necessarily mean that you don’t need to acquire insurance coverage. In fact, the reality is quite the opposite—most home-based businesses do require at least some level of insurance coverage. Unless you work alone in a low-risk industry, it really is strongly advisable to at least consider obtaining an in-home business policy.

We hope that this article helped you figure out how to approach the issue of insurance coverage for your home-based business. No matter which form of insurance you choose to acquire—or if you decide you don’t need business insurance after all—we wish you the best of luck with your home-based business!