What's the Right Insurance for a Home-Based Business?
By Susan Schreter - Take Command

Q.   My husband and I have successfully converted a woodworking hobby into a profitable business that we operate from our home basement. Sales have been growing thanks to eBay and search engine advertising. Recently I was asked by our banker about our insurance coverage. Since we operate from our home, isn't homeowner's coverage enough? What kind of insurance do we need?

A.   Loyal readers of this column know that I encourage entrepreneurs to pay attention to the downside of their new business initiatives just as much as the upside. Most entrepreneurs have a good grasp of how much money they can make in their business. They like to think big. But they probably haven't put the same amount of energy into thinking through the equally big ways they can lose money.

Balancing risk and reward is a tricky job. Just as entrepreneurs work hard to light a fire in the marketplace they also have to know how to put out fires that can quickly overwhelm the most stable small businesses.

To determine your insurance needs, you really have to start by asking what types of claims or losses are most likely to scorch your business operations, your home and your business income. Given the type of products produced in your basement, I suspect that your homeowner's insurance is not enough coverage.

Here are some basic considerations:

  • Business equipment. Computers and general-purpose office equipment that are kept in a home can be covered by a homeowner's policy up to some relatively low limit for business-related personal property – usually about $2,500. However, unless you specifically buy extra coverage, your homeowner's policy may not be enough to pay for the "basement full of machinery" that you describe in your longer letter. Tech-oriented entrepreneurs who house expensive servers, cameras and other equipment in their homes may be underinsured too if this equipment is deemed more business property rather than personal property.
  • Loss of use. Most homeowner's policies offer some compensation for families who have to move to a temporary residence after a fire or other covered event. But you can't produce your toys, salad bowls and other wood products in a hotel room. If you want a fast disaster recovery fix you have to buy a small business insurance package that includes business- interruption insurance.
  • Liability. Businesses that serve customers in the home may need liability coverage offered under a business policy, not homeowner's policy to handle onsite "trips and falls." If you don't allow customer visits but have employees, you still might add insurance coverage to complement your state's workers'-compensation plan for employee injuries.
  • Product liability. Most large chain retailers require businesses to present proof of product liability insurance coverage before issuing purchase orders. They also know that toys are especially prone to costly consumer claims and litigation. If your business is not incorporated to help shield your family from business liabilities, you may want to purchase a business policy with product liability coverage.

John L. Ryan, personal lines product manager for The Hartford Financial Services Group, a leading small business insurance provider, says that home-based business owners get into trouble when their businesses outgrow their homeowner's insurance. Says Ryan, "Small business owners assume that business insurance is expensive. Today, a relatively low exposure small business can purchase business insurance for as little as $500."

The best advice I can give to all home-based business owners is to evaluate insurance needs at least once a year. This means taking time to learn about insurance products from qualified insurance agents. You can do it!

Do you want to find reliable investors for your business? Write to Susan at susan@takecommand.org for great funding references and tips especially designed for startup entrepreneurs, sole proprietors and fast growth companies.