Starting a business at a home? Don’t stint on your coverage

Suszanne Parker knows that people often are watching their pennies closely when they decide to operate a business from their home.

But Parker, who handles commercial coverage for AAA Insurance from its Spanish Springs office, worries that many owners of home-based businesses are penny-wise and pound-foolish with their insurance coverage.

They’re too often willing to put their livelihood, as well as their financial assets, at risk to save $30 or $40 a month.

“If you think about it, $350 a year isn’t anything,” she says.

The federal Small Business Administration says many people who launch home-based businesses operate on the mistaken assumption that a good homeowners’ policy will address their needs.

“More than likely your homeowners’ insurance will not cover your home-based business,” says Barbara Weltman, an attorney and blogger who provides advice through SBA.gov. “In fact, operating a business out of your home may negatively impact some of your other homeowners’ coverage.”

It’s not unusual, Parker says, that the slow evolution of a home-based business will leave serious gaps in insurance coverage.

She cites, for example, a quilting enthusiast who spends $10,000 — maybe even $30,000 — on a long-arm quilting machine. Looking to justify the cost of the machine, she begins selling quilts.

And that creates a home-based business with some specific needs.

“That equipment is business property, not personal property,” explains Parker. “Once money is exchanged, that changes the property.”

Think a $30,000 quilting machine is an extreme example? How much does a home-based business have tied up in personal computers, routers, printers and other electronics?

It’s not uncommon, SBA experts say, for folks to discover after a loss that the value of computer gear is under-covered on homeowners’ policies, a potentially crippling shortfall for a home-based business that relies on technology.

And don’t forget that inventory of raw materials down in the basement or those boxes of stuff out in the garage that will be shipped in response to online orders.

If clients or potential customers — someone placing an order for a quilt, for instance — visits the home-based business, the business owner needs some general liability coverage, says Parker, noting that the coverage is generally fairly inexpensive.

Don’t assume, she says, that the umbrella policy you purchased to take care of big liabilities will provide protection for business liabilities. In many instances, umbrella policies specifically exclude business activities from their coverage.

Michael Flanigan, managing co-owner of the Flanigan-Leavitt Insurance Agency in Reno, says operators of home-based businesses should expect their insurer to pay close attention to the degree of separation between the home and the business. For instance, are there separate instances that help keep business risks and homeowner risks separate?

“You’re mixing homeowner’s insurance with business insurance in some instances,” Flanigan says.

Another consideration: Business use of a car or truck.

If a business owns the vehicle, Parker notes, the insurance coverage will be in the name of the business as well. That’s part of the state law requiring auto insurance.

But folks who use their personal vehicles as part of a home-based business operation should talk to their insurance agent about a rider or perhaps a separate policy to cover the business use.

As increasing numbers of professionals ranging from engineers and architects to attorneys work from home-based offices, Flanigan says they need to ensure that they are carrying proper professional liability coverage — errors and omissions coverage, for instance — no matter where their office is located.

Like their peers who run businesses in traditional offices and storefronts, operators of even the smallest home-based business probably will be looking at a packaged “Business Owner Policy,” one that bundles coverage for a number of risks into a single package that’s less expensive than a series of individual policies.

Business owners customize the package — removing, for instance, employee-related coverage for a firm with no workers.

But Parker says business owners should be careful about the coverage they decide that they don’t need, erring on the side of caution.

It’s critical, too, for business owners to be provide as detailed and accurate information to their insurance agent to ensure that coverage are correct.

And because business operations grow and change, regularly scheduled reviews will keep the proper coverage in place, Parker says.