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Insurance for home-based entrepreneurs: Who needs what?

Most in-home business owners avoid buying additional insurance for a variety of reasons. The biggest reason seems to be a lack of information about it. They just donœt know what they need and donœt want to take the time to find out.

Here is some information that could help you get started. We set up several hypothetical examples for a variety of in-home business situations and asked an expert from the Independent Insurance Agents of America to give us an idea of what kind of coverage might be needed. In addition, we analyzed the insurance needs of De Anna Post, the entrepreneur we mentioned in our main story on this issue.

As with any kind of information of this type, it is meant to be thought-provoking rather than an exhaustive examination of the subject. To find out what kind of insurance your company needs, you really need to talk with your agent and get a specific recommendation.

This information might help you develop some questions you might want to ask your agent.

Here are the different scenarios:

  • Janice is a daycare provider who hopes to open a daycare center in a big building of her own someday. But, while her children are at home, she plans to operate the business out of her specially equipped basement.
  • Fred has dumped his corporate job after years of aggravation and has plans to become the Mrs. Fields of gourmet jellies. For years, heœs made the delightfully wrapped delicacies as gifts for his friends. Theyœve raved about them and told him he should go into business. He plans to do just that.
  • Nicholas is a computer expert who does consulting and trouble-shooting for area businesses and individuals. His business has taken off lately and he's making really good money, but he plans to remain a home-based business for at least the next couple of years.
  • John and Sally are a husband-and-wife team who use the basement of their home as a base for their manufacturing operation. They outsource the actual production of the product - non-aerosol containers for cosmetics - to a local manufacturer. But most of their time is spent in the basement, running the business.
  • Mary has always loved the outdoors. So it was a natural for her to open her own landscaping business. While she technically works from her home, her real base of operations is the big trailer she hauls around behind her truck.

Janice's daycare

Janice is a 25-year-old daycare provider with two kids of her own. She takes in four children from other families. The troop spends most of the day in her specially designed basement, which has separate areas for playing, eating and sleeping. During drop-off and pick-up times, the children are often in other parts of the house. Two of the four kids catch the bus outside the house in the morning and are dropped off in the afternoon or at mid-day. Janice likes taking her charges on day trips, to ice cream manufacturing plants, parks and events. Sometimes she takes them on errands, such as to the doctor or the bank. Sheœs been in business for four years.

Even if Janice is the most careful and conscientious daycare provider, her situation is full of possible problem areas when it comes to liability. While her basement is specially geared towards children, the rest of the house and the bus stop outside might pose problem areas. The trips are probably fun for the kids, but they present additional possibilities for accidents and problems.

Unfortunately, there also is the ever-present threat of accusations of abuse or sexual molestation.

As a result, most insurance companies no longer offer general liability policies for daycare operations. Instead, specialty packages have been developed. The cost ranges from about $200 to $5,000 depending on risk factors. Most agents can help you secure insurance from this network of specialty providers.

Fred's gourmet jellies

Fred sells specialty gourmet jellies from his home. The jellies, individually wrapped, are made with fruit grown from his trees in his small orchard. Right now he is distributing statewide, but he has plans to expand nationally within a year or so. He does most of the test batches and some of the production from his home kitchen, which is set up with a six-burner Viking stove, which cost him more than $7,000. Because the business is taking off, he has contracted some of the production out to a local restaurant. He does the deliveries himself. Heœs thinking of starting up a mail-order catalog. Heœs been in business for a year and a half.

Fred needs to buy a general liability policy, which would cover him in case his jellies caused bodily injury to someone. He also might want to consider purchasing coverage for his inventory and stock on hand, neither of which would be covered by his homeowners insurance.

The kitchen stove would now be considered business property if it was damaged in a fire or another accident. He should check with his agent to make sure he has adequate coverage for that and all the other equipment he uses for his operation.

If he does do mail order, he should get personal and advertising injury exposure, which would cover him in case someone decides what heœs offered for sale isnœt what he promised it would be.

Since he is operating a small farm, he also should consider getting some farm liability insurance.

Finally, he should consider getting transit coverage to cover him while he is delivering the products.

Nicholas' computer business

One day last year, Nicholas answered a query in a newsgroup about a computer bug. As a result of his response, which was right on the mark, he was offered a high-paying job by a multinational computer corporation. Since heœs only fourteen, he decided not to take them up on it. But it prompted another idea - to start up his own consulting business that he runs after school and on the weekends.

He gives advice and does trouble-shooting for area corporations and individuals, charging between $25 and $100 an hour. He helps people set up their computers, does software training, installs hardware and provides advice to businesses planning to expand their operation. His mom drives him to and from assignments. Occasionally, someone might come to his house to do business.

His parent's homeowners insurance will cover Nicholas for some liability situations because he is under 18. But, if anything goes wrong with one of his recommendations for his clients, he would not be covered. He would need professional liability insurance for that.

Likewise, the family should check their homeowners policy to see how much of Nicholas' equipment would be covered. He probably will have to get additional insurance to protect the equipment, and to guard against any data loss in the event of a fire or theft.

Since there is some general liability exposure when he is at a client's office, he should consider buying general liability insurance in case he inadvertently breaks something or harms someone.

John and Sally's manufacturing business

John and Sally's manufacturing business is thriving after five years. They make non-aerosol containers for cosmetic companies. Their office is in their basement, where they have advanced computer systems, a three-line phone system and file cabinets full of information. They have meetings both in their office and in their client's office. They contract the actual manufacturing out to a local manufacturer. They package the orders and have them sent. Sometimes this is done from the house.

The couple should consider getting some product liability coverage. While they are not making the products, they have what is called vicarious exposure, or second-line exposure, since they are doing some of the assembling and packaging. If one of the products explodes or malfunctions, causing damage or injury, this coverage would cover that.

As with some of the earlier examples, this couple also would benefit from separate computer and equipment insurance. They also should have on- and off-premises liability coverage.

Since their business is thriving, they should consider loss-of-income insurance. They also should consider something called business interruption insurance. If, for example, the manufacturer they work with suffered a fire or other problem, chances are it would interrupt the business. This coverage is for businesses that are contingent upon the operation of someone else's business, and covers you in case they can't complete their contract.

Mary's landscaping business

Mary has been in the landscaping business for three years now. She now has several huge lawnmowers, edging equipment, mulchers and a wide array of gardening and grooming tools. She has a big trailer to haul it around on and a four-wheel drive vehicle. She plans to purchase a plow for the front soon, so she can do plowing in the winter. Her customers are mainly residential, but she is starting to take on some small corporate customers. Her home is her business base, but for the most part she is on the road, working.

While Mary does operate from home, she needs insurance to cover her while she is away from home. Her best bet would be to investigate inland marine coverage, which covers the lawn mowing business. She also would need to buy a business auto policy for the trailer and truck. She also needs liability for both the landscaping and snow plowing operation. If she has any employees, she needs to buy workers compensation insurance for them.

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