Statistics show that one out of four Canadian households have a part-time or full-time home-based business, and that number is growing.
If you are operating a part or full-time business out of your home, you have already made a conscious decision to reduce the financial risk of having your own business, in terms of low start-up capital and low overhead. But a home-based business is vulnerable to liability risks. Keep in mind that almost all basic homeowner policies specifically exclude any claims for losses incurred in your home or around your property as a consequence of home business activity. Here are a few examples and the types of insurance that would protect you:
- You have an electrical power surge which damages your home office computer equipment and destroys all your clients’ records. (Business property/business replacement cost insurance added to your home insurance.)
- You operate a computer tutoring business and someone who comes to your house slips on the stairs, injures her back and is off work for six months. You are sued. (General liability home insurance with additional coverage for business.)
- You have a short-circuit in your computer equipment, resulting in the house burning down and loss of business revenue. (Home fire insurance coverage with additional business use coverage/business interruption insurance.)
- You have expensive desktop publishing hardware and software in your basement office. Your home is broken into and all your equipment is stolen. (Business property/business replacement cost insurance, added as a supplement to home insurance.)
Now that you are aware of the potential risks relating to having the home office, the next step is to select the right protection.
Your goal is to ensure you are fully covered at all times. This can be achieved by periodically reviewing your risk and keeping your insurance representative promptly informed of any changes in your business that could affect your coverage. Such changes include buying more equipment, building an extension on your home, or using your personal car for business. If you are using your car for business and personal purposes, have your insurance company cover the car for business use. Otherwise, your policy coverage could be void if you have a claim. It’s not worth the risk, and besides, the extra premium is nominal.
You may need to increase your liability limits. Or, a change in circumstances may mean that you no longer need a certain type of insurance or level of coverage. Periodic reviews will save you from being over-insured and help avoid overlaps and gaps in coverage, thereby keeping your risks and premiums lower. This is especially important if your business is growing.
To help plan your insurance program, assess your business and identify the likely risk-exposure areas. Decide which type of protection will work the best for you–absorbing the risk, minimizing the risk or insuring against the risk.
To reduce the cost of insurance, shop around for competitive rates and negotiate for lower premiums if your loss experience is low. If you need a high level of expensive protection, increasing the deductibles should lower the cost of the premium. Look on the Internet, or in the Yellow Pages under “Insurance Brokers”, and contact at least three of them for quotes.
For example, most home insurance companies will provide additional protection, which is referred to in the industry as a “rider” or “endorsement” to your existing home insurance policy. This would cover business equipment losses, or increase the third-party liability coverage to include injury to people on your property for business-related reasons.
These riders generally exclude business-interruption losses, product liability, off-premises loss or disability income coverage. You may therefore want to check out group insurance coverage for other aspects of your home business. Certain organizations have excellent insurance programs for their members. Contact your local Chamber of Commerce, the Better Business Bureau, or the Retail Merchants Association for more information.
Studies show that only one-quarter of home business owners are covered for theft, damage or other loss of business equipment. More than two-thirds have no business interruption insurance. Nine out of 10 have no disability insurance, and most do not insure the business use of their cars. The majority do not have extra homeowner insurance coverage for their home business, and in addition, many homes are underinsured or lack adequate replacement value coverage.
To protect your assets, adequate insurance is a must for the home-based business owner. If you don’t have the proper additional insurance coverage, your claim will very likely be rejected. The premium cost for any additional coverage for business purposes is a 100 per cent tax-deductible expense against your business income.
