Insurance for Home-Based Businesses

With advanced technology at our fingertips, more business owners base their operations at home. A home-based business faces unique challenges, including insurance needs and financial protection.

Let’s explore the special considerations for home-based businesses, including coverage options, risk management, and factors influencing what insurance is necessary.

Understanding Home-Based Business Insurance

Home-based business insurance is specifically tailored to suit the needs of a home-based business. Home-based entrepreneurs are highly recommended to obtain insurance coverage for liability, property damage, legal fees, lost business income, and data breaches.

In case of an incident, your home-based business can file a claim with the insurance company. If the claim is covered under the policy, your business can receive substantial financial assistance that covers expenses such as legal fees, medical bills, settlements, and lost income.

Special Considerations for Home-Based Businesses

Liability risks

A liability claim can be filed against your home-based business if another party believes you are responsible for injuries and damages. Liability claims are incredibly commonplace, with lawsuits of general liability averaging around $75,000. This can overwhelm a home-based business, interrupting normal business operations.

Some home-based businesses have higher liability risks because of their business operations. Examples include if:

• Customers visit your home/business premises
• Customers use your products
• Your home-based business provides consulting and other services

Property coverage

A home-based business has property-related risks to consider, such as damages due to fire, theft, vandalism, and natural disasters. The issue is that personal property insurance typically offers very little coverage for business-related needs, going up to $5,000 which is not enough for a home-based business.

Home businesses need commercial property coverage, which will cover the property used for the home business operations, as well as:

• Business supplies kept at home
• Inventory and assets
• Business equipment
• Theft and vandalism
• Covered perils (e.g. a fire)

Business interruption

A home-based business may encounter threats to its operational continuity due to property damage and other unforeseen events. If your home business is not prepared to deal with the financial challenges of a liability claim, fire damage, or other risks, it may suffer severely. Due to the high risks of business interruptions, it is advisable for entrepreneurs to consider paying for the necessary business insurance coverage.

Coverage Options for Home-Based Businesses

Business owners' policy

A business owners’ policy (BOP) bundles together several commercial insurance types together. A BOP makes it easier for home-based entrepreneurs and small business owners to obtain suitable coverage. Most BOPs cover:

• General liability
• Business property damage
• Business interruption
• Perils like fires, theft, and vandalism

While BOPs offer amazing coverage for their affordability and convenience, home-based business owners should consider additional insurance policies to ensure adequate coverage.

Professional liability insurance (E&O insurance)

If your business performs professional services for clients or customers, professional liability insurance (AKA errors and omissions insurance) is highly recommended. Professional liability insurance covers losses related to claims of negligence, bodily injury, copyright infringement, and property damage.

For a home business, errors and omissions insurance is typically most helpful for mistakes made by the business that result in financial loss for a client. Examples include when an accountant makes a calculation error that hurts a client’s finances, or when an architect’s errors in design cause bodily injuries or property damage.

Some home-based businesses need professional liability insurance more than others. If your home business operates in the following fields, it is highly recommended to obtain E&O insurance for risk management and financial protection.

• Accounting
• Architecture
• Engineering
• Consulting
• Health care
• Law

Product liability insurance

If your home-based business manufactures, distributes, or sells products, consider product liability insurance. This type of commercial liability insurance will cover claims such as if your product causes property damage, illness, bodily injuries, or wrongful death. Claims that are typically covered by product liability insurance include defective design, defective marketing, improper warning, and strict liability.

Cyber liability insurance

Running a home-based business typically means connecting with the world and storing data using the internet. This opens up a business to a wide range of digital vulnerabilities. Cyber liability insurance can cover costs related to cyber attacks, such as:

• Data breaches
• DDoS attacks
• Malware
• Phishing
• Ransomware

A data breach incident or cyberattack can cost your home-based thousands if not hundreds of thousands of dollars in expenses. All businesses that store or use data digitally should consider cyber liability insurance.

Business interruption insurance

If an unexpected event interrupts your home business continuity, forcing operations to halt, your business can face an overwhelming amount of bills and expenses. Business interruption insurance typically covers claims such as:

• Lost revenue: Any lost income due to the business operations stopping
• Fixed business expenses: rent and lease payments
• Payroll: employee wages
• Relocation: Expenses for if your home business needs to rebuild or move.

Note that business interruption insurance does come with coverage limitations and exclusions. For example, a basic business interruption insurance policy tends to exclude damages caused by flooding, earthquakes, pandemics, and mudslides.

Other insurance policies

Plenty of other business insurance types exist that could bridge your insurance coverage gaps. Options include:

• Workers’ compensation: Legally required by most states. Covers medical expenses and lost income for workers who are injured while on the job.
• Commercial auto insurance: Covers expenses and claims related to business vehicles. If your home-based business uses a vehicle for commercial purposes, it is important to look into commercial auto insurance.

In-home business endorsements

If you want more comprehensive coverage to secure your home-based business, it is a good idea to look into customizing your business interruption insurance policy with add-ons. As home-based businesses expand in scope and revenue, they can find more use for tailored insurance policies with suitable add-ons.

Factors Influencing Coverage Decisions

1. Nature of the home business

The main factor that affects what business insurance you need is the type of products or services offered. Evaluate what risks are associated with your business. Some businesses have lower risk levels and will require less insurance coverage.

For low-risk home businesses, general liability insurance may cost only $11 a month. On the other hand, high-risk businesses find themselves needing more insurance to mitigate risks. They may need to pay up to $70 monthly for the same type of coverage.

2. Business assets

Evaluate the value of your home-based business’ equipment, inventory, and intellectual property to determine appropriate coverage limits. Do you have business assets with high valuations? If so, your home business may need an insurance policy to cover these assets.

3. Client interactions

How much and what kind of interaction does your business have with clients and customers? What are the liability exposures related to client visits, deliveries, and off-site work? Your interactions with customers and third parties will greatly influence how much coverage is necessary.

4. Insurance terms

Deductible: This is how much your business needs to pay out-of-pocket before insurance kicks in. The minimum deductible can vary greatly depending on what type of coverage you have. General liability insurance policies usually have a deductible of $500 to $1000.

Premium: The premium refers to how much your home-based business needs to pay for insurance every month. Business insurance premiums can add up to cost several thousands of dollars a year. Choose a premium that aligns with your home business budget.

Exclusions: Most commercial insurance policies come with exclusions. For example, pandemics are usually excluded from business insurance coverage.

Coverage limit: This is the maximum amount of coverage provided by a policy in a year or per occurrence. Most small businesses choose a coverage limit of $1 million per occurrence. A higher coverage limit will result in more expensive premiums.

Risk Management Strategies for Home-Based Businesses

Commercial insurance is a great way to manage risk for home-based businesses. Entrepreneurs can also leverage other strategies to protect their business from various risks and prepare for any potential insurance claims.

Whether you’re just starting your home business or you’re already far ahead of competitors, risk management is essential for business continuity and success. Here are key risk management strategies for a home-based business.

1. Implementing safety measures for a home business

Safety and security measures can help your home-based business minimize the risks of property damage, theft, and cyber incidents. Good options include:

• Security cameras
• Secure locks
• Alarm systems
• Store spare keys safely
• Virtual Private Network (VPN)
• Multifactor Authentication (MFA)
• Backups of sensitive data
• Running the business on business-specific devices and networks

In addition, having solid safety measures in place can also help your home business obtain lower insurance premiums.

2. Creating and maintaining thorough documentation

Business operations of all sorts should have official records, even if you run a business in your home. Keep records of payroll, taxes, business insurance policies, client agreements, employment agreements, rental and mortgage, advertising, and professional fees.

Transactions of in-person and digital purchases should be kept safe. If you need to file an insurance claim or defend against a legal claim, you can benefit from having all the receipts and transaction details.

Client communications come in handy if you ever enter a legal dispute with a client. Evidence of communications can help you support your case. For example, records of contracts and messages exchanged with a client can help a home business defend against a liability claim.

3. Developing a contingency plan for business continuity

In the event of unexpected disruptions, your home business might still need to cover rent, payroll, crisis management, and other expenses. If a fire, theft, or other incident affects a home, this typically also causes serious personal devastation that can hinder business operations at the same time. Planning for what to do and who to contact in case of an emergency can help with business continuity for a home-based business.

4. Selecting comprehensive coverage

It’s critical for home-based business owners to review what commercial insurance policies are beneficial. Not all home businesses require every sort of insurance policy. Evaluate your home-based business to see what types of insurance will cover your risks. Here are some of the most common insurance policies for home-based businesses.

• General Liability Insurance: Protects against claims of bodily injury or property damage by other parties.
• Professional Liability Insurance: Covers claims related to professional errors and negligence.
• Commercial Property Insurance: Protects the business’ assets, including inventory and equipment.
• Product Liability Insurance: Protects the home business against damages caused by its products.
• Cyber Liability Insurance: Covers expenses related to data breaches and cyberattacks.
• Business Interruption Insurance: Protects against lost income and operation expenses if your business continuity is disrupted.

5. Choosing a suitable coverage limit

Home-based businesses may hesitate to obtain higher coverage limits due to less frequent exposure to traditional business threats. At the same time, some coverage is more essential than ever, such as cyber and commercial property insurance.

For risks with greater expenses like property damage and liability lawsuits, it is a good idea to consider a coverage limit of at least $1,000,000 per occurrence and $2 million in aggregate. The per-occurrence maximum limit means this is how much the policy will pay you on a single claim. The aggregate limit refers to the limit imposed on all claims.

Summary

Home-based insurance businesses should consider key insurance policies, such as:

• General liability insurance
• Professional liability insurance
• Product liability insurance
• Commercial property insurance
• Cyber liability insurance
• Business interruption insurance

These policies can prevent the home business from breaking apart in case of a lawsuit against it. Home-based entrepreneurs should carefully evaluate their operations and business assets. Prioritizing risk management and comprehensive insurance can protect the home-based business in the event of an incident.

Choosing a reputable, stable business insurer can go a long way in protecting your business against claims. Good business insurance providers to consider include:

• Hiscox
• Tivly
• Simply Business
• The Hartford