One of the most common questions presented to us is, "Am I a small business and, if yes, what small business insurance needs do I have"? Small is a subjective word, meaning different things to different people. For the sake of conversation here, let's just define small business as any S-Corp or C-Corp type business where the owners themselves constitute the full body of the Board of Directors. "Small" is not usually defined by total revenue sales but rather a combination of business operations management complexity and overall business risk. Almost all home-based businesses can reasonably be considered "small business". As we explore the kind of risks you face and the kind of insurance you might need we're going to take a life-cycle approach, starting with the most incidental of business pursuits and work our way up to the Fortune 500 level.
Work From Home
Technology and social trends have driven a wave of telecommuting. Many of us work at home at least on some days while some may work from home all the time. For that reason, more and more homes contain a designated office area; with increasing frequency that area is a room.
If the work you do is not for your own business you can often amend, or endorse, your homeowner's insurance policy, condominium owner or renters insurance policy to extend liability protection for incidental office exposures. Employees working from home can modify their homeowner policy to easily and inexpensively increase the limits for coverage of business property. Once again, we must distinguish between the business owner working from home and the business employee working from home. This distinction is significant enough (and complicated enough) that you're very well advised to discuss the subject directly with your team of independent insurance agents like us here at TriState.
For employees, a typical standard limitation is usually $2,500 for loss to business property on your residence premises but only $250 for business property away from your residence. Many insurers will, in exchange for some small additional premium, allow your Homeowner Policy to cover $5,000 or $10,000 of business property. And for a telecommuter, that's often the best solution.
Home Based Business
According to the Casey Home Based Business Study, 62% of all small business are home based and this includes real estate sales and sales and distribution of products as a part time business. If your home-based (VA, MD, or DC) business is not your main source of income you still need to consider additional risks which may not be covered, even under an amended Homeowner policy. Here are a few:
- Business-related personal property (equipment and furniture) in excess of the Homeowner Policy limitation - both on and off premises
- Inventory you store or have on hand
- Business property of others while in your care or under your responsibility
- Accounts receivable
- Valuable papers and records
- Electronic data coverage
You may need liability to extend to personal injury, products and completed operations, incidental contractual liability, and general commercial liability.
Automobile - If you are driving people around for business reasons, transporting supplies or products or visiting customers your personal auto policy may not provide coverage.
Most of these additional risks and more can be picked up through a Home Based Business policy. These policies usually allow for up to 3 employees and will allow more adequate limits of protection for liability and property.
If your home business is your primary source of income you will want coverage for business interruption and extra expense. Fortunately, this protection is usually included in a Home Based Business policy. There are a few other kinds of insurance you should be thinking about as well.
- Disability Insurance - If you become disabled and are unable to work and generate income, this insurance will help to keep you "paid" during that period. It won't cover ongoing business expenses, however.
- Life Insurance - Many employers provide at least some life insurance protection to their employees. Since you are the employer, you are on your own on this one. Life insurance is also used as a vehicle for perpetuating a business in the event of the death of an owner; this is sometimes known as Key Man Life.
- Health Plan - The same thing applies here as to Life Insurance. If you don't have an employer supplying or subsidizing this important protection for you, you'll need to get it on your own.
- Workers Compensation -- All states require employers, even home based ones, to purchase Workers Compensation if they have employees. Workers compensation insurance offers a schedule of benefits for employees unable to work because of a job or workplace related injury or illness.
Small Business Level
Most Home Based Business Insurance policies assume most of your business is done from home. If that is not the case, you may need a type of policy that will provide coverage for you as you work away from home. There are also limits for Home Based Business policies regarding number of employees and maximum protection limits for Business Personal Property, Business Interruption and Loss of Income and other risks. If you find your business has grown beyond the kind of protection a Home Based Business Policy can provide you may need to consider a Business Owners Package policy.
A Business Owners Package policy (BOP) is a bit like a homeowner policy for your business. A BOP provides a certain amount of coverage for your Building, Business Personal Property, Business Interruption, Liability and more in one package. The policy can be customized to include protection for automobile and business specific exposures as disparate as those related to accounting firms, retailers and dry cleaners.
BOP policy requirements vary from insurer to insurer but if you employ 50 employees or less, have relatively few business locations and are in an easily categorized industry, your business may qualify for a BOP. The same coverage can be acquired by mixing and matching other policies but combining everything in a Business Owners Policy usually results in a lower premium than customized coverage. Many companies also construct BOP policies around very specific kinds, or classes, of business. These are often referred to as program policies.
Additional protection you might want to consider at this stage of the business life cycle, other than those mentioned above, include:
- Employment Practices Liability - EPL protects you from claims made by current or former employees of discrimination, wrongful termination, harassment and related allegations.
- Professional Errors and Omissions Insurance - E&O, formerly known as professional liability, covers a variety of advisor or professional roles and pays legal costs and damages should a mistake you make cost a client money. Some common business that might need E and O Insurance include financial planners, computer consultants, real estate agents and appraisers, mortgage brokers, consultants, graphic designers and hair stylists. The list of types of businesses that might need E&O is quite long; one provider alone lists 160 classifications.
- Directors and Officers Insurance - D&O is like an E&O policy for company officers. It can pay legal costs and damages if officers are sued for their performance in running the company.