Home based businesses are a great way to start a new venture, add extra income, or just transform a hobby into something that pays for itself. Regardless of the motivation behind the home business the risk of loss is real and the homeowner insurance policy leaves far less coverage than most realize.

The standard homeowner policy provides no Liability Coverage for anything related to your business, including bodily injury or property damage to any person (e.g. customers, suppliers, delivery people, or employees) hurt as a result of something related to your business. A good example of what could happen would be a customer, salesmen, or delivery person who falls on your sidewalk while coming to see you, or a customer using your product in a way you did not intend and as a result is injured. Coverage for some of these liability exposures can be added by endorsement to a homeowner insurance policy, while some require a Business Liability or Workers’ Compensation policy.

Most homeowner policies allow you to purchase a Home/Office Liability endorsement for around $20 per year. This is very inexpensive coverage but it is also very LIMITED coverage since it only applies to your premises. Furthermore, the Home/Office endorsement leaves you without coverage for activities off your premises, as well as without product liability coverage for a product you may be producing or selling. The only way to fully cover your liability exposure is to purchase a Commercial General Liability policy or similar type coverage such as a BOP (Business Owner Policy). Premium for this type of coverage starts at around $250 which is the minimum premium charged by many insurance companies to issue a business policy. It could cost much more depending on the risk involved.

Also excluded on your homeowners policy is coverage for an employee, or subcontractor, who might get injured on the premises or while working on your behalf. If you pay a person as a subcontractor, or as an employee, you are responsible for their injuries and are required by law to carry Workers Compensation Coverage. Although having to purchase Workers' Compensation coverage is another financial drain on the business it does afford you several important protections that could save you thousands of dollars.

• First, the injured worker’s medical bills and lost wages are covered 100% by this policy, for the term of the injury.
• Second, you can’t be sued by the employee since this is the sole recourse available to the injured employee for their injury and damages.

The standard homeowner policy has limited coverage for business property. This is the thing that hits home for most small businesses, since many (if not most) have investments in computers, fax machines, copiers, manufacturing equipment, etc. The standard homeowner policy typically provides only $2,500 for business property at the house and $500 away from premises (note: companies vary on this coverage so it is important to check your specific policy).

Another very IMPORTANT thing that needs to be considered is where you locate your business property. If you use in your business any structure that is not attached to the main house (e.g. a detached garage or shed) as an office, warehouse, etc. the coverage for that "Other Structure" becomes EXCLUDED on the homeowner policy. (For example -- Bill, a Carpenter, setup a wood shop for his business in the back of his detached family garage. The garage is no longer covered by his homeowners policy, regardless of whether or not part of the garage is still used for personal items).

As the above clearly illustrates, the homeowner policy offers little or no coverage for your home based business. There are several ways for a small home based business owner to find and arrange proper coverage:

• Option 1, have your insurance agent amend your current policy to include additional coverage for your business. In the last year, several insurance companies have started offering new endorsements for home based businesses.
• Option 2, and probably the best option, purchase a Business Owner Policy (BOP). This policy will have property and liability coverage packaged together plus a lot of extras such as loss of Business Income & Extra Expense, Crime Coverage, Accounts Receivable Coverage, and a lot more.
• Option 3, purchase a Commercial General Liability or Package policy. This type of coverage may be the only option available depending on the nature of your business especially if you are involved in manufacturing or commercial cooking.

Don't be penny wise and dollar foolish. Spending a few dollars for insurance now may ultimately protect you from personal ruin.