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Insuring Your Home Business

Insuring Your Home Business

By Michael D. Engel CPCU

"The wheel is come full circle" - William Shakespeare; King Lear

The industrial revolution moved society away from cottage industries, the home based busi-nesses of the era, into the factories. Today you, and millions of other Americans, are leaving the "traditional work" place and returning to the home as your work place. "The wheel is come full circle".

What does this have to do with insuring a home business? The personal lines insurance prod-ucts in use today were designed in the 1950's. The homeowners policy and family auto policy were products of an era when industrialization was reaching its peak in this country. These products were designed to package insurance coverages that met the needs of the expanding middle class that developed as a result of that industrial growth. The small businesses of that era were the corner drug store and the neighborhood barbershop. Home businesses were not even taken into consideration.

Whether you rely on traditional personal insurance products or purchase special home business policies or endorsements, your home business exposures are insured. Your losses are covered by either an insurance policy or by your business' checkbook.

There are three areas of loss exposure connected with a home based business: Property, General Liability, and Automobile Liability. Each has to be viewed from the perspective of how these exposures are addressed by the traditional personal insurance products. Generally per-sonal insurance is written using Insurance Services Office, Inc. contracts and forms. However there are multiple editions of these contracts and forms in use. In addition, an insurance com-pany may file its own contract and or forms for use. There are not universal contract languages for homeowners and personal auto insurance policies.

Property loss has two components, loss to the structure and loss to the contents. Under cover-age A (dwelling) of a homeowners policy incidental business use is permitted as long as the pri-mary use of the structure is as the residence of the named insured. An extra bedroom or an attached garage converted into an office would fall into this definition.

If the garage office is in a detached garage there is no coverage under a homeowners policy for that structure. Structures that are not physically attached to the dwelling are covered under coverage B (other structures) of the homeowners policy. The homeowners policy excludes cov-erage under coverage B for structures "used in whole or in part for business." Connection by fences, electrical lines, and plumbing does not constitute physical attachment. Some compa-nies, under certain circumstances, will allow the homeowner to buy this coverage back. If that is not an option, a separate fire policy can be purchased to cover the appurtenant structure used in business.

Contents coverage is provided under coverage C (contents) of the homeowners policy. Cover-age C of the homeowners policy is limited to "$2500 on property, on the residence premises, used at any time or in any manner for any business purpose." Coverage C of the homeowners policy is limited to $250 on property, away from the residence premises, used at any time or in any manner for any business purpose." Some companies will allow the homeowner to buy addi-tional coverage for business property.

The homeowners policy has a $1,000 sub limit under coverage C (contents) for electronic appa-ratus that "is used at any time or in any manner in business." Electronic apparatus would in-clude computers, fax machines, copy machines, and any electronic media or accessories used with them.

The homeowner's policy specifically excludes coverage for business data. Business data as de-fined, can be books of account, drawings or other paper records; electronic data processing tapes, wires, records, discs or other software media. However, blank recording or storage media and pre-recorded computer programs available on the retail market are covered.

The determination of what is and what isn't business property can vary. Generally all the fur-nishings in a room used as an office should be considered business property, regardless of what the individual pieces were originally purchased for. For example, an end table that was in your living room for years that is now used in your office as the work surface under your fax machine would, generally, be considered business property.

The credit card, fund transfer card, forgery, and counterfeit money coverage provided by the homeowners policy does not apply to loss "arising out of business use." If you accept counter-feit money as change at a local grocery store the homeowner's policy would cover your loss. If you accept counterfeit money as payment from one of your customers the homeowner's policy would not cover your loss.

If you are in a flood prone area and have flood insurance your business property is excluded from coverage under a standard flood insurance policy. The standard flood insurance policy ex-cludes "personal property used in a business and personal property used in connection with any incidental commercial occupancy or use of the building."

The second area of loss exposure connected to a home business is general liability. A home-owner's policy provides personal liability coverage. Personal liability and general liability are not the same thing! Coverage E (liability coverage) of the homeowner policy is designed to cover the liability arising out of the use and maintenance of the described premises as the insured's residence as well as the personal liability of the named insured and his family members.

The liability section of the homeowner's policy also covers the insured and his family members for non-employment related liability off premises. The homeowner's policy excludes liability "arising out of or in connection with a business engaged in by an insured." Liability "arising out of the rendering of or failure to render professional services" is also excluded. Liability for dam-age to property of others "arising out of a business engaged in by an insured" is also excluded.

Under coverage F (medical payments to others) of the homeowners policy liability "arising out of or in connection with a business engaged in by an insured" is excluded. If Aunt Sue falls down the front steps, while visiting you, the homeowner's policy would provide medical payments. If your best customer falls down the front steps, during a business call, the homeowner's policy would not provide medical payments.

Historically homeowners policies have had one form to address liability from home based busi-ness activities, the Permitted Incidental Occupancies - Residence Premises endorsement. This endorsement has limited applications and provides limited on premises liability coverage. It adds coverage for "activities which are usual to non-business pursuits or the necessary or incidental use of the premises to conduct the business."

Recently some companies, as well as ISO (Insurance Services Office, Inc.), have developed home business endorsements that can be added to homeowner's policies. The availability and application of these forms is subject to individual company rules. The types and sizes of busi-nesses that can be covered will vary from company to company. These endorsements may not be as broad as a stand-alone home business policy.

The third area of loss exposure associated with a home business is automobile liability. The family auto policy was replaced with the personal auto policy in the 1970's. The personal auto policy was designed to insure the named insured and family members, as defined in the con-tract, for the ownership and use of described and defined automobiles. It was not designed to provide coverage for a business. The current version of the Insurance Services Office, Inc. per-sonal auto contract is the 1998 edition (00 01 06 98). However, the 1989 (00 01 12 89) and 1994 editions (00 01 06 94) are still being used.

If you look at the declarations page of your personal auto insurance policy you probably will see one of the form numbers shown above. The form number is key to coverage in one area that can relate to a home business, use of a non-owned pickup or van. Non-owned pickups or vans are subject to the following exclusion of "loss to any non-owned auto being maintained or used by any person while employed or otherwise engaged in any business" in both the 1989 and 1994 editions of the personal auto policy. This means that if you borrow or rent a pickup or van to deliver your products you would not be covered for auto liability or physical damage by the 1989 and 1994 editions of the personal auto policy. The 1994 edition would provide coverage for a "temporary substitute" vehicle. The 1998 edition of the personal auto policy would cover business use of non-owned pickups and vans. Non-owned pickup and van coverage is also subject to the 10,000 pounds Gross Vehicle Weight limitation in all three editions the personal auto policy.

The personal auto policy covers autos owned by the named insured, shown in the declarations, and any non named spouse provided that spouse is a resident of the named insured's household. Vehicles titled in the name of your business should be insured on a business auto policy. If you buy a new vehicle that is titled in the business name, the newly acquired vehicle provisions of the personal auto policy are not applicable. For example, all of your current vehicles are titled in your name, you purchase a new vehicle and it is titled in the business name. Until you buy in-surance specifically for that new vehicle, you are uninsured.

All three editions of the personal auto policy exclude property damage to "property owned or being transported." Also excluded is "property damage to property rented to; used by; or in the care of" the insured. If applicable, you would have only the $250 limit provided by your home-owner's policy, for business property off premises, to cover such a loss. Under a business auto policy cargo coverage is an available optional coverage.

Passengers in your vehicle may receive payment under bodily injury and medical payments of the personal auto policy in some circumstances. However coverage is not provided for "bodily injury to an employee# during the course of employment".

Personal umbrella policies provide an excess layer of liability coverage above the homeowners policy and the personal auto policy. Personal umbrella policies are not standardized policies. Most personal umbrella policies define business as it is defined in the homeowners policy. Most personal umbrella policies exclude the business activities of the insured. However, some per-sonal umbrella policies will cover business exposures that are covered by the underlying policies. Check the contract language to see how business exposures are addressed.

As an insurance consumer you must read your insurance policies and discuss coverage needs and options with your agent. This is even more necessary if you are a home based business owner. Your coverage needs may change from month to month. When your business is in a growth mode it could easily outgrow its insurance coverage. The time to determine how much or what kind of coverage is needed is before you have a loss! Don't let an insurable loss, which is not insured, put you out of business.

Mr. Engel is the personal lines underwriting manager for the Mid-Continent Group. He has over twenty-five years of personal lines underwriting experience. Visit the Mid-Continent website, www.mcg-ins.com

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