Finding coverage for small offices: many small-office and home-based businesses either don't have or can't find insurance; here's how they can rectify the situation

Nation's Business, June, 1997 by Stephen Blakely

Many small-office and home-based businesses either don't have or can't find insurance; here's how they can rectify the situation.

After running a successful computer-training company from their home in Germany for six years, Anita Denunzio Wagner and her husband, Frank, moved back to Florida in 1996, bringing their business with them. To their surprise, the biggest obstacle to starting up Next Generation Training in their home in the United States was simply finding insurance for the business.

"Florida has hurricanes and is considered a high-risk area," Anita Wagner says, "so many insurance companies have stopped serving this area," reflecting the legacy of Hurricane Andrew in 1992, which cost the industry a record $15.5 billion in insured losses.

But the reason some insurers wouldn't cover her business, she continues, "was because we were a home-based business, and as soon as they heard 'computers,' they were turned off."

With their livelihood invested in $10,000 worth of computer equipment and the room they had added to their home near Clearwater to serve as a training studio, the Wagners decided they needed risk insurance: property-loss coverage, in case of theft, damage, or destruction of their computer gear, and liability protection, in case of accidental injury to a client during instruction.

Not insuring the business--an option that some firms choose--was a risk they refused to take.

"I had a really hard time finding insurance," Wagner recalls. "It was the nightmare of my life."

Alter several months of research, the Wagners discovered the Small Office Home Office Association (SOHOA) in Reston, Va. It offers its members an insurance package designed specifically for small businesses and underwritten by the ITT Hartford Group. For a $450 annual premium, the Wagners now have insurance for their equipment (even when it's on the road) as well as business-premises liability coverage up to $2 million.

While the Wagners ultimately solved their insurance problem, their experience illustrates a larger issue: Small-office and home-based businesses, whose numbers are increasing rapidly in the United States, too often don't have or can't find the insurance they need.

For almost any company, experts warn, operating without property or liability coverage is a huge risk. A small-office or home-based business that burns down or is sued is probably doomed if it's not adequately insured.

"We estimate that 50 percent of small businesses are either not insured or are grossly underinsured," says Sean Mooney, executive vice president of the Insurance Information Institute in New York City and author of Insuring Your Business ($25), published by the institute. "Some of it's the entrepreneurial spirit--the last thing they think of is covering risk. Some of it's money--they can't afford the premium. But if a disaster occurs, they're out of business."

Most experts cite a few basic reasons for the small-business insurance problem. There's a shortage of affordable, tailored products from underwriters, they say, and business owners are either poorly informed about, or unable to afford, the coverage that is available.

But as this business sector continues to grow, a few big-name and niche insurance companies are beginning to offer policies designed to meet the specific needs of small and home-based offices.

A Growing Market

The market for insurance on small-office and home-based businesses has grown throughout the 1990s. There were roughly 4.2 million firms with nine or fewer workers in 1994, up almost 8 percent from 3.9 million in 198-8, according to the latest data compiled by the U.S. Small Business Administration. A large part of that growth is attributed to individuals working at home.

The numbers may be even greater, according to a separate calculation--the U.S. Bureau of Labor Statistics' survey of "homeworkers," a broadly defined group that includes white-collar professionals who take work home. The latest survey concluded that 20 million people worked from their homes in 1991.

The Home Business Institute, a trade association in White Plains, N.Y., estimates that since that survey, the number of people who work at home has risen to 25 million, a 25 percent increase. (See the chart on Page 32.)

Experts cite three main reasons for the boom in small-office and home-based businesses:

* The wave of corporate restructurings in recent years flooded the labor market with many skilled workers who have turned to nontraditional employment.

* Powerful and low-cost computers enable small shops to produce highly sophisticated products combining text, data, and graphics.

* With the Internet and other modern communications technologies, small and home offices, regardless of their location, can "plug in" easily to the information-based economy.

"As corporate America is downsizing, people are looking at alternative work," observes Gary Roth, chief operating officer of the Insurance Services Group in Towson, Md. He is a specialist in insurance for small offices and home businesses and is SOHOA's broker. "The proliferation of the personal computer and the Internet," he says, "has made this type of business more viable. These developments have led to an explosion in this market. And the insurance industry has been largely ignoring it."