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How to properly insure your home-based business

As jobs evaporated during the Great Recession, millions of Americans fought back by hanging out their shingle and starting a home-based business.

Although they may not realize it, those new business owners are in good company. More than half of all U.S. small businesses are based in an owner's home, according to 2007 Census Bureau data, the most recent available.

how to insure home based business Some business owners may rely on their homeowners insurance to protect them. But these policies only offer limited coverage.

In addition, your personal car insurance policy may not cover your vehicle when you use it for business purposes.

"Many people are unaware of the risks they may face," says Lynne McChristian, Florida representative for the Insurance Information Institute (III).

Types of insurance coverage home-based businesses may need

Some home-based business owners may not consider their venture to be a "real" business. For example, freelance writers, people who sell crafts on eBay and personal trainers may not think of themselves as owning a business.

However, that’s a mistake, McChristian says.

"Just like any large business, an in-home business is subject to data loss, liability claims and lost income," she says. "These would not be covered under a standard home insurance policy."

Risks that a home-based business may face include the following.

1. Personal liability.

If customers, employees or other business contacts regularly visit your home-based business, failing to have the right insurance puts you at risk, McChristian says.

"There may be little or no insurance coverage for injuries they sustain on the site," she says.

Your home insurance policy typically provides liability protection, but it doesn't always extend to people who visit your property for business purposes, McChristian says.

Peter Moraga, a spokesman for the Insurance Information Network of California, says liability coverage can also protect you if you’re accused of libel.

"For example, if you’re a blogger, you can get sued for what you say," he says.

2. Property damage.

Owners of home-based businesses also shouldn't overlook the need to protect their own home and possessions.

Damage to your home could result in loss of data -- such as paper files or documents stored on a computer or server -- that could put a temporary halt to business, says Lori Conarton, spokeswoman for the Insurance Institute of Michigan.

"Another risk that the home business owner may not consider is loss of income if the business is temporarily damaged," she says.

Most commercial business policies will reimburse lost income in such circumstances.

Moraga says a personal home insurance policy should offer some coverage of business equipment -- such as computers and fax machines -- but there may be per-item coverage limits.

In fact, homeowners insurance policies typically limit coverage to $2,500 for business equipment while at home, and $250 when the equipment is off the premises, according to the III.

Moraga says a commercial insurance policy provides higher levels of coverage for home-based business owners who have expensive equipment, or who keep a lot of inventory.

He cites the example of a woman who sells cosmetics and keeps boxes of inventory in her garage.

"A garage is often among the first areas to be damaged by flooding," he says.

Auto damage and liability.

Your personal auto policy may provide coverage for some business use of your vehicle.

However, some activities may be specifically excluded from coverage on a personal auto policy, McChristian says.

"If the personal car is used to deliver products of any kind -- from pizzas to hand-crafted jewelry -- the driver may need a commercial auto policy," she says.

It’s especially likely that you will need a commercial auto policy if your vehicle is used primarily for business.

3 ways to get your business coverage.

There are three main ways to secure coverage for your home-based business.

"The coverage expands with each level, from basic to better to best," McChristian says.

The three types of coverage -- from least comprehensive to most -- include the following.

1. Endorsement to homeowners policy.

If your business is still small, your insurer may give you the option of purchasing additional business coverage through an endorsement to your homeowners policy.

This coverage can be extremely cheap. For example, less than $20 in additional annual premium costs can double your business equipment coverage from $2,500 to $5,000, according to III.

However, III says this option typically is offered only to businesses with annual receipts of less than $5,000.

If such an endorsement doesn't work for your business, there are two ways to purchase business insurance coverage outright.

2. In-home business insurance.

This type of policy offers a scaled-down version of the type of coverage you would get with a much larger commercial policy. Premiums are lower than a typical commercial policy because the coverage levels aren’t as comprehensive.

"An in-home business insurance policy rolls homeowners and business coverage into one policy," McChristian says. "With this coverage, a home-based business owner would not be duplicating what’s in his or her homeowners policy; they would be filling in gaps."

III says a typical in-home policy might cost $300 annually and provide $10,000 in business property coverage. Your premium may vary depending on the amount of liability coverage you carry, which can range between $300,000 and $1 million.

These policies also offer one year of coverage for lost income and payment of business expenses should your business have to close its doors temporarily due to damage to your home, or business equipment that has been stolen.  

3. Business owner's policy.

Some at-home business owners may consider a business owner's policy, commonly known as a BOP.

"A business owner's policy is more comprehensive and includes business interruption coverage and professional liability coverage," McChristian says.

A BOP makes sense for home-based businesses that have an inventory or conduct business onsite, she says.  

Like the in-home business insurance policy, McChristian says the cost of a business owner's policy varies widely.

"Every business is unique," she says. "The costs depend on what products and services are offered and the risks faced. It could range from as little as $500 a year to thousands for a more sophisticated operation."

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