Getting the Right Insurance When You're Going Solo
A fair number of home-based business owners confided -- off the record -- that they didn't have any additional insurance coverage, because they either were strapped for funds or just assumed that their homeowner's insurance policy would cover any problems that might arise.
"That's the biggest mistake a business owner can make," says Dan Peterson, manager of risk management for Larson, Allen, Weishair & Co. LLP, an accounting and business-consulting firm in St. Cloud, Minn. "Most homeowner's policies exclude business pursuits from their coverage, so insurers can easily terminate coverage or refuse to pay claims if a customer has not disclosed the operation of a business in his or her home." It's easy to imagine the tip-offs: a fire, theft, or other catastrophe might necessitate the filing of a hefty insurance claim for losses tied to suspiciously large investments in computer equipment or customized business software products, commercial inventories, or machinery and equipment that seem excessive for home use.
Historically, it's been tough for home-based business owners to find property-casualty, health, or disability coverage because they've had two strikes against them. For one thing, they face the same difficulties that small- or start-up company owners do: insurers often balk unless a business has been around for three years and has at least a handful of employees. To make matters worse, many insurers have basically shunned home-based operations, fearing that they might not be stable, long-term ventures or that they might lack adequate safety and other precautions.
Jon Feld started Navigator Systems Inc., an information-technology consulting firm, in his 800-square-foot apartment in Dallas eight years ago. He recalls getting nixed by several insurers because, as he puts it now, "I didn't have a business address separate from my home address." Although his internal-management goals were right on target -- to obtain commercial and medical insurance as quickly as possible -- it took Feld and his two employees some time to achieve them. "We had a lot of misfires even though we were working with an insurance agent, which we thought would help us reach the right insurer quickly." Finally, thanks to that agent's advice and some tips from another home-based business owner who had confronted similar hassles, Navigator, now an $8-million company, was able to purchase both medical and commercial coverage.
Fortunately, there have been recent improvements on the insurance front. Some insurers have loosened policy restrictions, and some have even started to aggressively promote their products to the growing home-business market. The best place for founders to start is with the company that already provides their homeowner's policy. Some insurers are willing to issue an endorsement that will extend home coverage to the home business. Typically, there's an additional fee, but it is usually under $600.
However, as insurance expert Peterson warns, "Most insurance companies are pretty selective about what type of home-based business they'd be willing to cover, if they're willing to do so at all." If your ventures involve lots of visits from customers or suppliers, production operations that can be viewed as risky, or highly specialized professional skills or equipment, your insurance company will probably reject your application for an endorsement. Such decisions can best be described as quirky. What one company may deny, another may approve. It's a good idea to put together as big a list of insurers that sell in your state as possible. Also, if you're tempted to downplay or disguise certain facts in order to qualify for an endorsement, understand that the insurance company could deny your claim or even drop your homeowner's coverage.
If you don't qualify for an endorsement, apply for a commercial policy, which provides the same coverage as any basic business policy. In order to find the most cost-effective coverage from among those insurers willing to cover home-based businesses in your state, your best bet is either to work with an agent who deals with multiple insurers or to get coverage that is available through membership in a business organization.
For example, the Central Rhode Island Chamber of Commerce sponsors a "Homebased Business Association," which enables its members to purchase workers' compensation and health insurance at a group rate. "Groups like ours stay on top of state regulatory trends that might affect small-business owners," explains executive director Renée Fullerton. For example, she says, "When we learned about a new law that was going to require small-business owners in our state to have workers' compensation coverage if they employed even one person, we went out and negotiated a group rate with one of the big local carriers so that our members could get coverage at a 15% discount." Unfortunately, there's no national roster of insurance-buying pools open to home-based businesses. To find one in your region, check with your chamber of commerce, the Small Business Administration, the Service Corps of Retired Executives, or trade associations.
Other kinds of coverage, some quite new, are also worth investigating. Peterson recommends business interruption coverage, which indemnifies for the loss of profits and continuing fixed expenses when a disaster prevents business from being carried on. The coverage is a good idea for any business owner. The twist for home-based business owners is to shop for policies that include an extra expense clause. "In the event of a catastrophic event, that clause would cover extra expenses incurred as the business owner attempts to continue to operate his business," says Peterson. For instance, a home-based business owner might need a short-term lease for office space and equipment at a temporary location outside the home, adding new costs that could create a cash-flow crunch and perhaps even jeopardize the company.
Another sort of coverage to consider for certain types of businesses -- say, high-end consulting firms -- is intellectual-property protection. The policies come in two forms, both pricey: defense protection covers you and your employees from accusations by outsiders of infringement; pursuit protection covers you when outsiders improperly use your company's ideas. Breach-of-security coverage, also expensive, protects against losses from unauthorized electronic access, most commonly by hackers.