Real Small Business

Adequate insurance coverage is as vital to your home-based business as your computer or fax machine. Unfortunately, many home business owners neglect insurance -- either because they can't find the right coverage, it's too expensive, or they just don't know what's available.

This can be a costly mistake, since a lack of insurance can permanently shut down your home business and even cripple your personal finances, should you be the victim of a lawsuit, fire, injury, or any other unforeseen calamity.

There's a lot of misinformation out there about what kind of insurance a home business really needs. We've assembled some of the most common myths below.

Home Office Insurance Myth 1

Your homeowner's insurance policy will cover most losses to your home business.

Don't count on your current homeowner's policy to protect your business. Most homeowner's policies don't cover extra buildings (such as carriage houses or converted garages) frequently used for business, nor do they cover the loss of business data or injuries to clients or colleagues that occur on your premises. In addition, even if your policy does include business property in your home, it may only cover up to a few thousand dollars -- hardly enough to replace a valuable computer system should disaster strike.

Many insurance companies offer a specially designed rider for your homeowner's policy that will extend it to include property, equipment and general liability coverage for your home-based business.

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Home Office Insurance Myth 2

An expensive business owner's policy is your only option for complete coverage for your home-based business.

There are many cases where your homeowner's policy -- even with a rider -- can not cover your home-based business. If you're incorporated, if you have employees working from your home, or if your business assets are too great for your homeowner's policy, you will need to look at buying a business owner's policy (BOP). BOPs are designed to meet the needs of small businesses, and typically include coverage for property, equipment and general liability.

Another option is home business insurance. These policies are less expensive than BOPs, because they are often only available to home businesses that have minimal product liability, professional liability and off-premises exposure. If you have a lot of expensive equipment, have a good chance of being sued, or have employees working from your home, chances are you'll be excluded. Home business insurance also does not cover things like inventory kept at your home office. If your current insurance broker does not carry home business insurance, you can find one who does by contacting the Independent Insurance Agents of America, 127 S. Peyton, Alexandria, VA 22314; phone: 703-683-4422.

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Home Office Insurance Myth 3

You're home-based, so you won't be able to get disability-income insurance.

It's true that many insurers are hesitant to offer disability-income insurance to home-based businesses, especially one-person businesses. They are often put off by the first few years of unstable earnings, and the difficulty adjusters will have in verifying claims.

Still, it's not impossible to find DI coverage for a home business. Show insurers that you have a record of growth and stability. If you didn't qualify for DI insurance during your first few years of business, re-apply after your business has been established for 3 or 4 years. Longevity will work in your favor.

Some other methods for convincing insurers include:

    - Obtaining long-term contracts or agreements from clients whenever possible, to show that you'll be around for the long haul.

    - Preparing a financial forecast statement (with an accountant's independent audit) which accurately shows your firm's financial strength and staying power.

    - Hiring support staff, which demonstrates you're committed to permanence.

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Home Office Insurance Myth 4

A home-based business doesn't need workers' compensation coverage.

Workers' comp requirements vary from state to state, but the general rule is you need to carry workers' comp if your business has employees. This is true whether you're located in a traditional office or home-based.

Several states don't require workers' comp insurance for very small companies -- those with fewer than 3-5 employees. Sole proprietors and partners in a partnership are also usually exempt. Think twice before you exercise this option. Without coverage, you may be sued by an injured worker for medical and disability costs, plus damages. In fact, if you're unincorporated you might want to consider workers' comp even if you don't have any employees; it can cover you as the owner if you're injured at work.

Call your state's insurance commissioner's office to find out more about your state's workers' comp requirements. Your insurance agent or broker should also be able to provide details of your state's requirements.

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Home Office Insurance Myth 5

Your existing auto insurance covers business use of your car.

If you occasionally use your personal car for business purposes, or you sometimes have clients in your car, you will probably need to extend your personal car insurance to cover business use. It's a good idea to check your current policy to see what kind of business use is covered. If you keep valuable products in your trunk, remember that most auto insurance does not cover the contents of your car, so you will need to make sure that your product policy covers loss outside your home.

If employees or others use your family car for business purposes, put their names on your policy. If your employees use their car while working for you, you may need to get separate non-owned car insurance. Any vehicle that is used primarily for business will likely require a separate business auto policy.

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Home Office Insurance Myth 6

You're properly covered, so you don't have to give any more thought to insurance coverage for your business.

As your home-based business expands, so will your insurance needs. What was adequate coverage in your start-up phase could prove insufficient as the value of your business (and your equipment) increases. It's quite possible that you will outgrow the coverage your homeowner's policy rider or home business insurance provides.

Make it a habit to check with your broker about your insurance needs as your business grows. In fact, you should review your policy with your broker at least once a year. Does your policy currently meet your needs? Is all your equipment covered? Is there anything you can do to reduce your premiums?

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