A Firm Policy - insuring home offices

Kiplinger's Personal Finance Magazine, Feb, 2001 by Kimberly Lankford

INSURANCE | Ordinary homeowners coverage offers little protection for a HOME BUSINESS.

SCOTT Szeliga didn't think much about insurance when he started renovating homes several years ago. The Highland, Md., man had a policy to cover liability on the job and figured his homeowners coverage would pay if anything happened at the office--which, after all, was merely a room in his house with basic furniture and equipment. It never crossed his mind that he needed special protection.

That was a mistake, which Szeliga learned as his home office grew into a home suite--an entire wing added to his house that contains six computers, a shop area and space for four employees who support 12 others in the field. He now covers it all with a full-fledged business policy. But in the early days, he was unaware of the risks he was running.

Like many people with home offices, Szeliga had no idea how little would be covered under his homeowners policy. In fact, the minute you do business in your home, parts of your insurance coverage can drop by tens of thousands of dollars.

While your homeowners policy may, for example, cover $60,000 in personal property, the limit for business property frequently drops to a skimpy $2,500. If a fire destroys your home office and the $15,000 worth of computers and office furniture in it, the insurance company may limit your recovery to just $2,500 if it discovers the room was used for business. And that low ceiling may still stand even if you have a rider on your policy that raises the coverage for personal computers, because it may not apply if you use those machines for a business. Worse, most homeowners policies cover just $250 of business property that is stolen or destroyed when you're away from home--a laughably low amount if your laptop is stolen and has to be replaced.

But the most unwelcome surprise concerns your liability coverage. You may have a $ l-million limit on your homeowners policy, but your coverage level usually falls to zero for liability related to your business--if, say, a client falls down your stairs. "I didn't realize all the things that aren't covered," confesses Szeliga.

Even if you have a modest home office--with a basic computer system, fax machine, scanner, telephone, books and office furniture--you could have thousands of dollars worth of property that is barely covered by your homeowners insurance. "as soon as you start to make money in your home, you run the risk of your insurer denying the claim because it's business property," warns Lawrence Wentz, an independent insurance agent in Horsham, Pa.

Home-based consultants, graphic designers, computer programmers and anyone else with a traditional office are at risk. But you could also run into problems if you do most of your work at outside job sites but maintain an office in your basement, as do many contractors, plumbers, photographers and electricians.

Wentz insures a clown (what if someone trips over those big, floppy shoes?) and a photographer who videotapes high school football games (and takes a lot of expensive equipment with him).

The protection you need

THE CHEAPEST way to increase your business coverage is to get a home-business endorsement added to your homeowners insurance policy. In most cases, for less than $100 a year you can raise your business-property and liability limits to the same level as the rest of your homeowners coverage. In other words, that will buy you the coverage you may mistakenly think you already have.

That strategy works for Sarah Shelley, who recently launched an arts-administration business after years of working as the executive director of a dance festival in San Francisco. She works out of a small office in her downtown apartment, with little more than a computer and printer. To protect herself, she pays $500 a year for a renters policy and an extra $100 for $60,000 worth of business-property and $500,000 of liability coverage.

"I was surprised it was so affordable," she says, echoing the sentiments of many small-business owners who steer clear of adequate insurance for fear of its cost.

Business policy

ALTHOUGH SUCH ADD-ONS are economically sufficient for modest offices such as Shelley's, they can leave big gaps if you have more-complicated home-office insurance needs.

As your business and the risks associated with it grow, it can become cost-effective to get a business-owners policy. The Hartford offers one specifically tailored to home-based businesses, with annual premiums ranging from $150 to $300. Other policies cover any kind of business--in your home or in a separate space--and usually cost $200 to $1,000, depending on what's being covered. For example, Wentz's clown client pays $200 a year for a policy that provides $5,000 in personal-property and $300,000 in liability coverage.

The best place to start shopping for a policy is the company that issues your homeowners or renters policy. You may get a discount if your business policy is with the same firm. That can also simplify things if it's tough to distinguish between home and business property when it's time to make a claim. "It eliminates an argument about who's responsible for what," says Mike McCartin, an independent insurance agent in College Park, Md.