How to insure your home-based business

Insurance for your home business is fairly limited under your homeowners policy. For adequate coverage, you may need to buy a separate home business policy.

Pat Howard 1600

Pat Howard

Published April 14, 2020

KEY TAKEAWAYS

  • A standard homeowners insurance policy covers business property up to a limited amount, typically $2,500

  • If you run a business out of your residence or work from home as a freelancer, you’ll want to consider additional coverage

  • If you own expensive business equipment or run a business out of your home, you may want to consider either a business property endorsement for your home insurance, a standalone in-home business policy, or a business owners policy (BOP)

Homeowners insurance is financial protection for your home and personal property if it’s damaged or burglarized, and it may cover your liability expenses if you’re sued because of an accident. However, your insurance company assumes a relatively low limit of liability for business equipment, meaning the maximum amount it will reimburse you for business-related losses is fairly limited.

If you operate a business out of your residence or work from home for your job, you’ll want to make sure your livelihood is adequately covered against calamity. In a standard homeowners insurance policy, the maximum claim payout for business property is typically $2,500 — if you’re self-employed and have several laptops or cameras that you use for work are damaged in a house fire, that $2,500 won’t be nearly enough to reimburse you for all of that equipment. Furthermore, the liability protection in your homeowners insurance policy doesn’t extend to business activities, so unless you have additional coverage, you’re out of luck if a client or employee is injured on your property.

If you’re an owner of a home-based business or work-from-home freelancer, you have a few additional coverage options to fill in those gaps in coverage:

  • A homeowners policy endorsement, which is a simple add-on to your homeowners insurance that increases business property coverage limits and may provide a limited amount of liability coverage as well
  • An in-home business insurance policy, which is a standalone policy that typically provides higher payouts for business equipment, business interruption insurance if your in-home business is interrupted due to property damage, and business liability protection of up to $1 million
  • A business owners policy (generally referred to as BOP) which combines several types of business insurance protections like general liability coverage, business interruption insurance, and higher property coverage limits than in-home business insurance

IN THIS ARTICLE

Why you need home-based business coverage

If you run a business out of your home, there’s a good chance you need more coverage than what is provided in a standard homeowners insurance policy. But very few in-home business owners or freelancers realize that relying on homeowners insurance to cover work equipment can leave them with a sizable coverage gap.

According to a survey conducted by the Independent Insurance Agents & Brokers of America, 87% of home business owners don’t realize the need for separate business insurance. Here’s what it found:

  • 39% thought that business insurance was unnecessary since they had a homeowners policy
  • 29% thought their business was too small or posed zero risk
  • 19% were underinsured for no reason at all

The study further concluded that most business owners without adequate coverage assumed that business insurance was too expensive and were willing to live with a potential loss.

One thing the survey respondents might not realize is it’s not simply your computers, camera equipment, or fax machine that need protection. You also need to think about your personal liability if a client falls down the steps of your home and decides to sue, workers compensation for employees who get hurt on the job, protection for your business property away from your home, and lost income protection if your house burns to the ground and you’re not able to work for an extended period.

In addition to property and liability limitations, you should also keep in mind that your standard home insurance may have “business property” restrictions; if a bunch of sensitive work-related documents are stolen from your home, that wouldn’t be covered under a standard home insurance policy.

Three types of home business insurance coverage

Home business insurance is intended for a variety of businesses with different coverage needs. Insurers understand this, and will generally be able to write you a policy that fits your business or direct you to the correct additional coverage options. If you’re an instructor who gives swim lessons from your residence, you’ll have different home business insurance needs than a freelance web developer.

As we touched on earlier, most carriers will let you increase your business property limit of liability up to a certain amount with a home business policy endorsement. If you need higher reimbursement limits or you have additional coverage needs, you may want to look into getting an in-home business policy or buying a more robust business owners policy.

Homeowners policy endorsement

Your home insurance policy’s personal property coverage will typically cover up to $2,500 in business property for on-premises business-related losses, and $250 to $500 for off-premises losses. Most standard homeowners insurance companies offer a policy endorsement to increase the limit of liability on property used for business purposes. This policy add-on will increase your business property coverage limits to $5,000 for on-premises losses and $1,000 for off-premises losses.

However, it typically doesn’t include liability protection related to business activities, and if the loss occurred in a detached structure on your property, your insurance claim would most likely be denied.

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In-home business policy

An in-home business policy, is more comprehensive coverage for your home business than a simple business property endorsement. These policies are intended for businesses with up to three employees and less than $250,000 in revenue, and while it varies by insurer, coverage perks typically look like this:

  • Up to $10,000 in business property coverage
  • Liability protection for business-related injury
  • Income replacement
  • Data breach coverage
  • Losses that occur in other structures on your property

While insurers may package business property and liability coverage under one policy, some speciality insurers may offer the two coverages and endorsements — like income replacement and data recovery — separately. Be sure to read the fine print of your policy and make sure all your business coverage needs are being properly met.

Business owners policy

If you run a larger home business operation — more than three employees and over $250,000 in annual revenue — and you want to group a number of different coverages under one policy and you have property coverage needs that exceed $10,000, you may want to look into a business owners policy.

Many insurance companies offer BOP coverage for home-based businesses, but it's traditionally designed for commercial businesses that feature multiple locations. A BOP typically doesn’t offer business automobile coverage, workers compensation, health, or disability insurance.

Additional home-based business coverage to consider

Depending on the size and scope of your home business, you may also want to consider coverages that aren’t featured in a standard business endorsement or businessowners policy.

Commercial automobile coverage

If you operate a florist business out of your garage and own multiple delivery vans, you’re going to need to insure the vehicles with commercial auto insurance.

Workers compensation

Should one of your employees become injured while on the job, your business insurance won’t compensate them for lost income. You’ll need to add workers compensation coverage to your business to protect your employees. In some states, workers comp is required if you have three or more employees.

Umbrella insurance

An umbrella policy increases your liability limits beyond the amount in your underlying policy. One caveat to keep in mind — your umbrella coverage won’t supplement business losses that aren’t covered by your homeowners insurance. In order for your umbrella insurance to take effect for your business, you need to make sure the business-related loss is covered under an existing home business endorsement or policy.

About the author

Insurance Expert

Pat Howard

Insurance Expert

Pat Howard is an Insurance Editor at Policygenius in New York City, specializing in homeowners insurance. He has been featured on Property Casualty 360, MSN, and more. Pat has a B.A. in journalism from Michigan State University.

Policygenius’ editorial content is not written by an insurance agent. It’s intended for informational purposes and should not be considered legal or financial advice. Consult a professional to learn what financial products are right for you.

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