Insuring Your Home Office

Determine what your coverage needs are, then pick the best option for your business.

There are approximately 11 million home-based businesses in America, and according to the Independent Insurance Agents and Brokers of America, almost 60 percent of them are not insured. This leaves them open to potentially crippling losses due to damage, theft, lawsuits or interrupted operations.

The first step toward protecting your business is to determine your needs:

• Take stock of your tools and inventory. What would it cost to replace them? Even the basics of a computer and a printer can easily cost more than $2,500 to replace, and that's usually the maximum your homeowner's policy will recompense.
• Consider how long your operations could be interrupted before your business would be adversely affected. If continuity is key to your business, you will need a more comprehensive insurance plan.
• Think about liability coverage in case someone is hurt on your property. Do clients or delivery people come to your home regularly?
• Find out whether you need to provide insurance for employees. Some states require that all employees have worker's compensation coverage, and you may need to pay for health and auto insurance as well.

Depending on your business' needs, you have four insurance options:

1. Homeowner's insurance. This is the most basic coverage. Read the fine print on your policy. It may limit or exclude claims that are related to a home business. Typically, you can raise the coverage limit to $10,000 or add an endorsement or rider to the policy for greater protection. Also think about liability coverage. The typical homeowner's policy covers social visitors but not business-related guests. If you often have clients, employees or delivery people on your premises, look into the costs of a liability endorsement (a rider that specifically protects you against lawsuits brought about by clients or business-related personnel).

2. Home office policy. This combines homeowner's insurance with a business policy and can be less costly than adding endorsements or buying separate coverage. Policies vary, but they typically offer greater liability coverage plus coverage for equipment, loss of income and documents and expenses for a period of time while the business is non-operational or has to relocate. This type of insurance is generally suited to small businesses without a lot of inventory, employees or visiting clients.

3. Business owner's policy (BOP). The most comprehensive coverage, a BOP will compensate you to an even greater degree for liability and property loss or damage. BOPs also insure the structure that houses your business, so it may overlap with your homeowner's policy. A BOP may also include coverage of multiple locations or property stored outside your home.

4. Self-insurance. Here your business isn't covered by a company but assumes its own risk. You take the money you would pay into an insurance policy and put it into a bank account to be used if you need it. This option is best used when you have a limited amount of property and little risk of liability.

The cost to insure your home business can be as low as $250 a year. But the more comprehensive your plan, the higher your bill. While you may not be able to reduce your insurance needs, there are ways to reduce your bill.

As with any type of insurance, one way to lower the cost of your policy is to increase your deductible. The more risk you take upon yourself, the lower your rate will be from the insurer.

Another effective strategy is to shop around to make sure you get the lowest rate. The cheapest insurance may not provide the most effective coverage, so make sure that coverage, terms and conditions meet your minimum requirements before signing a contract.

Take steps to avoid claims, which drive up your premiums. Install smoke detectors and other security features, maintain your grounds and equipment well and make backups of all files. Sometimes your insurer will lower your premium if you provide proof you've taken measures to reduce your risk.

You should review your policy about once a year or whenever there is a major change in your business.