Homeowners and renters insurance provides some coverage for your home-based business, but gaps in protection and inadequate coverage limits leave your business exposed to a heap of costly risks and threats.
Home-based businesses are surging in popularity as fallout from the COVID-19 pandemic impacts the economy. Four million Americans quit their jobs in April alone. Of those Americans that have quit their jobs in pursuit of other employment, 32 percent have decided to start their own business.
The Small Business Administration reported that, as of 2018, almost 50 percent of small businesses were home businesses. Given the low startup cost of launching a home-based business, there’s little in the way of stopping someone from setting out on the path of entrepreneurship and self-employment.
However, home-based businesses are still at risk from the same threats faced by other small businesses. Worse, homeowners insurance, renters insurance, and personal Auto insurance don’t provide adequate coverage for a home-based business.
Does Homeowners Insurance Cover Home-Based Businesses?
If you’re working from home, your homeowners or renters insurance provides some degree of protection. Unfortunately, that coverage is woefully inadequate for most home-based businesses.
Typical homeowners insurance policies limit coverage to:
- $2,500 for business equipment located on your property
- $250 for business equipment off-premises
Additionally, Homeowners insurance often excludes any coverage for business operations you conduct at the home It also doesn’t cover lost revenue from interruptions to your business from a Property loss.
Without sufficient insurance coverage, you’re entirely responsible for the cost of any claims made against you or your business. You’re also on the hook for your own legal defense and the cost of any potential settlements or judgments made against you. This could jeopardize the existence of your entire company.
What About Auto Insurance?
Your personal car insurance policy may provide some coverage for business use of your vehicle, but there are exceptions, such as:
- Transporting goods or people
- Vehicles (other than cars covered by your policy) being sold, maintained, repaired, stored, or parked as part of your business
- Other certain activities (depending on your insurer), such as delivering food, newspapers, or other items in exchange for compensation
In general, personal car insurance covers you if you’re driving between clients or picking up supplies. However, if your business is based around your vehicle, you likely need a Commercial Auto insurance policy.
Why Your Home-Based Business Needs Business Insurance
Without adequate insurance coverage for your home-based business, you’re on the hook for potentially millions of dollars. Whether you’re a freelancer, gig worker, contractor, or other home-based entrepreneur, you need dedicated business insurance to protect your livelihood.
Here are some examples as to why.
A client sues a hairdresser over an allergic reaction
Clients rely on hairdressers before some of the most important, once-in-a-lifetime events. Unfortunately, sometimes clients have unexpected reactions to the products used during service — whether or not there’s any merit to their complaints.
Such claims may be costly for a home-based hairstylist.
In 2019, a customer filed a $1 million suit against a stylist and two corporations, alleging that a hair-lightening product caused third-degree burns to her scalp.
Even if the hairdresser took all proper precautions before applying the product to the client’s hair, he or she would still have to bear the cost of putting up a legal defense — including any potential settlement or damages.
Business insurance protects home-based hairdressers from claims of negligence and malpractice. Home-based business insurance also protects against product liability claims, in which a product used or sold by a professional harms or damages a customer.
Cottage food exposes home-based food providers to risk
The cottage food industry is growing, propelled even further by COVID-19 lockdowns. But the industry — in which entrepreneurs sell food items made in their own home kitchens — exposes business owners to costly risks.
Cottage food businesses are regulated on a state-by-state basis, so business owners must abide by their state’s laws. Even then, a home-based food business may be sued for claims of:
- Food poisoning or food-related illness
- Allergic reactions
- Injury (such as accidentally leaving a bone in with the food, leading to a customer choking)
Your Homeowners insurance policy won’t protect you from the liabilities of running a cottage food business. Not only is your home business at risk from fire, theft, and equipment malfunctions, but you may also be found liable for the quality and effects of your products and any injury or death resulting from their consumption.
An accountant is accused of malpractice
Bookkeepers, accountants, and CPAs have long had the luxury of being able to operate virtually or from home offices. Unfortunately, the profession isn’t without risk.
Accountants are responsible for maintaining accurate records and using that information to provide advice, guidance, and suggestions. For example, a small business may ask an accountant for guidance before applying for a business loan, purchasing real estate, or hiring more help.
But what happens when an accountant makes a mistake? Bad advice, overlooking information, or improper record-keeping may lead to costly litigation — in this case, a judgment of $1.35 million.
Even if the lawsuit is eventually deemed frivolous or found to lack standing, accountants must still put up the money for their legal defense if they lack sufficient protection from a Business Insurance policy for their home-based business.
Hackers steal customer data from home-based businesses
According to the 2020 Year End Data Breach QuickView Report by Risk Based Security, “the total number of records compromised in 2020 exceeded 37 billion.” This was a 141 percent increase over 2019.
In other words, hackers want your data. To make matters worse, the average cost of a data breach involving remote working exceeds five million dollars.
What data does your home-based business collect? You may have records of customers’:
- Phone numbers
- Date of births
- Financial records
- Banking information
- Medical history
This personally identifiable information, or PII, is incredibly valuable to unscrupulous hackers and data thieves. With it, criminals may steal identities, blackmail individuals, or empty bank accounts.
Homeowners insurance doesn’t protect against data theft from your home-based business. As cybersecurity threats increase, so, too, does your risk exposure, necessitating the importance of small business insurance and protection against cyber theft and data breaches.
Employees of a home-based plumbing company sustain injuries
Home-based businesses aren’t necessarily small or solo operations. An owner of a local plumbing company may use their home office for administrative work. At the same time, the owner may employ additional plumbers to handle the company’s workload.
This setup works well for some. Without the need to rent an office, the owner may keep overhead to a minimum. After all, there’s little need for the staff to congregate and wait for calls.
But what happens if one of the company’s employees sustains an injury on the job?
Normally, workplace injuries are covered by an employer’s Workers Compensation insurance, which pays out for injuries or illnesses sustained by an employee during the course of work.
For example, if a plumber falls from a ladder and breaks a leg, his employer’s Workers Compensation insurance would cover his treatment, rehabilitation, and a portion of his lost wages.
However, homeowners insurance doesn’t provide any degree of Workers Compensation coverage. Though Workers Compensation policies are mandated by each state, home-based businesses must purchase coverage through a qualified insurer — homeowners insurance will not provide any protection for injured or ill employees.
Damage to your home leaves you unable to work
As its name implies, the place of work for a home-based business is the owner’s home. In some cases, a portion of your home may be a dedicated workspace, such as an art studio or workshop. In others, the entire business may be run from the kitchen table.
But what happens to your home business if your home is damaged or destroyed? Fire, flooding, and other unexpected events may leave your home unlivable, never mind unfit to run a business from.
Without access to your workspace, your income screeches to a sudden halt.
Though your homeowners insurance would pay to repair damage from a covered peril, it would not cover your loss of income. It also wouldn’t cover damage to “other structures,” such as a shed, used for your business.
For example, let’s say you’re operating a home-based Etsy shop producing and selling handmade clothing. If a fire rips through your home and damages or destroys it, your homeowners insurance would pay to repair or rebuild your home, replace personal items (up to your policy’s limits), and cover the cost of additional living expenses until you can return (hotel, food, and travel).
It would not replace lost income as a result of no longer being able to run your Etsy shop. Overnight, your income would drop to zero — unless you’re covered by a business insurance policy that provides coverage for business interruption.
Equipment on a customer’s property is lost or stolen
Oftentimes — and especially for some contractors — lugging equipment back and forth to a worksite is time-consuming and burdensome to your body. It may be simpler and easier to leave your equipment on a customer’s property until the job is finished.
Unless, of course, that equipment is lost or stolen in the meantime.
Professional equipment can be expensive. According to the National Equipment Register, the total value of equipment stolen in 2016 was close to $300 million, with an annual average estimate between $300 million and $1 billion.
Consider the cost of power tools, machinery, or even forklifts and loaders. Because homeowners insurance typically limits coverage for business equipment stored off-premises to $250, you may potentially be out thousands of dollars to repair or replace lost, stolen, or damaged equipment if you’re not covered by small business insurance.
How to Protect Your Home-Based Business
Home-based businesses may face different types of risk compared to other businesses, but the ramifications are just as threatening to your livelihood.
Homeowners insurance is an effective and necessary solution for protecting your home and personal belongings. However, it’s ineffective — or downright unusable — for protecting your home-based business.
Some insurers may offer the option to purchase a policy rider or endorsement for your home-based business. Such endorsements increase the coverage limits for your business equipment, and may even add additional liability protection. However, home-based business endorsements are typically limited to certain types of businesses under a nominal revenue threshold.
Of course, not all home-based businesses are alike. The insurance product that’s right for you depends entirely on the nature of your business and what it is you do.
- General Liability insurance protects your business from claims alleging you caused injury, property damage, or reputational harm to a third party (such as a client or customer). GL coverage is useful if you frequently provide services away from your home .
- Business Owners Policies combine GL insurance with coverage for your own Business Personal Property and assets, as well as lost income stemming from a covered event. It’s a versatile policy that’s highly customizable depending on your specific needs and preferences.
- Professional Liability insurance protects your business from claims alleging negligence, malpractice, incomplete work, and other breaches of contract.
With the right small business insurance, you may protect your home-based business from the unique risks it faces and ensure its continued success, no matter what life throws at it.
How to Buy Insurance for Your Home-Based Business
Purchasing small business insurance for your home-based business is quick and easy through Coterie and your insurance agent. Enter some information about your business to find, select, and purchase the policy and coverage.
Policies are issued within minutes, allowing you to protect your home-based business with an insurance policy designed to cover what homeowners insurance does not.