Alert to home-based business owners: check your insurance coverage now

Q. My husband and I operate a business out of our home basement. Do we need to buy a separate liability insurance policy for our business or are we covered by our homeowner's liability insurance policy?

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. But they probably haven't put the same amount of energy into thinking through the equally big ways they can lose money.

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, your home and your sideline 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 or video 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." The question is, can you operate your business from a hotel room? Many service-oriented entrepreneurs can't. If you want a fast disaster-recovery fix you have to buy a small business insurance package that includes business- interruption insurance.

General liability coverage: 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 extra business insurance to complement your state's workers'-compensation plan for employee injuries.

Product liability: Most chain retailers require businesses to present proof of product liability insurance coverage before issuing purchase orders. 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.

Here's some good news. Most business owners can obtain a relatively inexpensive small business liability insurance policy for about $400 to $750. It's worthwhile to compare costs and coverages because some policies that are offered through small business organizations are not any better than policies that can be purchased directly from leading insurance companies.

Susan Schreter is a 20-year veteran of the venture finance community and a university educator in entrepreneurship. Her work is dedicated to improving startup longevity in rural, urban and suburban America. She is the founder of www.takecommand.org, a community service organization that offers the largest centralized database of startup and small business funding sources in the U.S. Follow Susan on Twitter @TakeCommand.

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