There are clearly gaps in coverage for home-based businesses under the unendorsed
homeowners policy, gaps that are often enforced by the courts. Different homeowners
endorsements, however, can be added to address loss exposures arising from these
businesses but many of them still leave gaps, in coverage.
ISO Business-Related Homeowners Endorsements
A simple way of expanding the limit for business property under the homeowners
policy is via the Insurance Services Office, Inc. (ISO), increased limits on
business property (HO 04 12) endorsement. This homeowners endorsement increases
the $2,500 limit of liability for business property located on the residence
premises by the amount shown in the endorsement schedule up to $10,000. The
problem with this endorsement, however, is that it does not affect the business
liability exclusion. Thus, its value to home-based businessowners is suspect.
Another endorsement, the business pursuits (HO 24 71) endorsement, is also
not the best option for the home-based businessowner. This endorsement expands
business pursuits liability coverage and is geared toward occupational categories
such as sales, clerical, and instructional. The endorsement, however, does not
apply to any business that is either owned or financially controlled by the
insured or by a partnership of which the insured is a member.
A better option is ISO's home business insurance coverage (HO 07 01) endorsement, promulgated in 2000 due to the growing number of home-based businesses in the United States. There are four principal classifications applicable to this program, as shown in Exhibit 16.1.4.
| Classification | Description |
| Office | Applicable when the business concerns
professional or administrative activities for its customers. Examples
include accounting, resume writing, telephone answering, and technical
writing. |
| Service | Applicable when the business provides
repair or other services for its customers. Examples include computer
repair, pet-sitting, bicycle repair, clock and jewelry repair, housecleaning,
and photography. |
| Sales | Applicable when the business involves
product sales, other than crafts made in the home or other structures
and when sold from the home. Examples include the sale of books, magazines,
costume jewelry, cosmetics, household products, plants and flowers,
and stationary. |
| Crafts | Applicable when the business involves
selling from the home, other structures, or other locations, crafts
made in the home or other structures. Examples include crafts such as
ceramics, dolls, flower arrangements, miniatures, and quilts. |
| |
The home business must meet the following four criteria to be eligible for
coverage under this endorsement.
-
It must be owned by (a) the named insured, or (b) a partnership, joint
venture, or other organization that is composed only of the named insured
and resident family members.
-
The business must be operated from the residence premises, which is primarily
used and designed for private residential purposes.
-
The business can have up to three employees but cannot produce gross
annual receipts over $250,000. Larger businesses need to be insured under
the appropriate commercial coverage forms, such as the businessowners policy
(BOP).
-
The business cannot involve the (a) manufacture, sale, or distribution
of food; and (b) manufacture of personal care products and the sale or distribution
of these types of products. However, the exception concerns a business involved
in the sale or distribution of nationally recognized personal care products
(e.g., Avon) manufactured by a reputable company.
This endorsement (informally referred to as HOBIZ) provides business property,
business income, extra expense, personal liability, and medical payments coverage.
Additional business property covered includes accounts receivables and valuable
papers and records.
Valuable liability coverage not found in the unendorsed homeowners form is
provided with this endorsement. For example, personal liability coverage is
extended to include personal and advertising injury, covering incidents such
as infringement on copyrights in advertising and written publication of material
that violates a person's right to privacy. Products and completed operations
coverage can also be included in the liability coverages. Note that there is
no professional liability coverage (e.g., accountant's errors and omissions)
with this endorsement. A separate professional liability or errors and omissions
(E&O) policy is necessary to cover this loss exposure.
There are also several more specific endorsements utilized in connection
with the HOBIZ endorsement. For example, the additional insured-vendors (HO
07 51) endorsement adds liability coverage for vendors or distributors arising
out of the specified vendor's sale or distribution of the named insured's products.
Thus, if the insured operates an Amway business in his home and occasionally
uses a vendor to help sell these products, the vendor can be designated as an
additional insured.
The loss payable provisions (HO 07 52) endorsement provides for situations
involving a loss payee or lender's loss payee under a contract of sale. For
example, assume Donna operates a sole proprietorship out of her home and purchases
sophisticated computer equipment for this business. She signs a contract for
the sale of this property, including the financing. The computer store has a
financial interest in the equipment. Thus, if a major fire decimates Donna's
home, the store could be protected with this endorsement.
The special coverage for valuable papers and records (HO 07 57) endorsement
extends coverage for valuable papers and records from a named perils basis to
an all-risk basis up to $2,500. Thus, if the insured sells a limited number
of historical documents via the Internet out of his home, broader coverage (e.g.,
mysterious disappearance) would be provided with this endorsement.
AAIS Home-Based Business Endorsement
| Classification | Description |
| Offices | Includes businesses such as word processing,
tutoring, real estate agents, counseling, and insurance agents. There
is no professional liability coverage and the classification does not
contemplate any products or completed operations loss exposures. |
| Service | Includes businesses such as hair styling,
photography, furniture upholstering, and house sitting. There is no
professional liability coverage, but cosmetologist’s liability coverage
is available as an option. Completed work exposures are contemplated
in the service rating information. |
| Retail | Includes the sale of cosmetics, collectibles,
vitamins and healthcare products, and artwork. Products liability exposures
are reflected in the retail rating information. Businesses, however,
that manufacture their own products or sell products packaged under
their own label, are ineligible for coverage under the home-based business
program. |
| Crafts | Applicable to businesses that make
and sell crafts. This classification includes craft sales at other locations
and on consignment. Examples include flower arrangements, wood products,
fabrics, and decorative clothing. Products liability exposures are reflected
in the crafts rating information. |
| Food | Applicable to businesses that make,
handle, distribute, or sell food to be consumed either on or away from
the residence premises. Examples include baked goods, canning, fruit
and vegetable stands that do not have pick-your-own operations, and
picnic baskets. There is no liquor liability coverage if the insured
is involved in manufacturing, distributing, selling, or serving alcohol.
Products liability exposures are contemplated in the food rating information. |
| Bed and
Breakfast | Applicable to small bed and breakfast
operations with a maximum of six rooms for overnight guests. The bed
and breakfast must be owned and operated by one or more persons insured by the underlying policy. A
liquor liability exclusion applies for liquor sold for a charge and
liquor that is given away and not sold when a license is required for
such activities. Products liability covers products consumed on or off
the residence premises. |
| Source:American
Association of Insurance Services, AAIS Educational Materials—HO Section
1: Home-Based Business Program Revision 2.0, 1998, pp. 1.2, 1.3. |
Ineligible classes include the following.
- Contracting operations that offer installation services
- Child and adult care services
- Home healthcare services
- Lawn care services
- Risks with more than a single business conducted on the premises, with
some exceptions
To be eligible for coverage, the home business must meet the following requirements.
- The business must be owned by one or more insureds on the underlying
policy.
- The business must be an incidental occupancy of the insured residence.
- The annual gross receipts cannot exceed $250,000.
- Business operations cannot be permanently conducted at any other locations
under the same legal name.
- The business cannot have more than three employees, including family
volunteers.
Property coverage is expanded to accommodate the needs of the home-based
businessowner under the AAIS endorsement. Thus, other structures used to store
business property are covered. The full personal property limit applies to business
property. Property coverage options include guests' personal property coverage
for bed and breakfast businesses, accounts receivables, loss of income, extra
expenses, and spoilage coverage.
The liability limits include a general aggregate limit and a products-completed
work hazard aggregate limit. Liability coverage options include personal injury/advertising
injury, expanded contractual, non-owner auto/hired auto, cosmetologists liability,
watercraft, and incidental fire legal liability. There is no professional liability
coverage under this endorsement.
Businessowners Policy
For certain home-based businesses that may be ineligible for any type of
homeowners endorsement coverage (e.g., businesses whose annual receipts exceed
$250,000), the businessowners policy (BOP) provides another option. The ISO
BOP is a package policy designed to provide both property and general liability
coverage for eligible small businesses. It is written on special BOP forms and
rated in accordance with special BOP rates and rules.
In general, the BOP is designed for insuring small businesses. However, eligibility
is based on the nature as well as the size of the insured's business. For a
business to be eligible for coverage under a BOP, none of its locations can
exceed 25,000 in square footage (excluding basements not open to the public)
and $3 million in annual gross sales. The following types of businesses are
ineligible regardless of their size.
- Manufacturers
- Auto repair or service stations; auto, motor home, mobile home, and
motorcycle dealers; parking lots or garages
- Bars and pubs
- Places of amusement
- Banks and other financial institutions
- Self-storage facilities that provide outdoor storage of motorized vehicles
of any type
Many of the property coverages which are optional in the home business endorsements
are automatically covered under the BOP, such as business income, extra expenses
and valuable papers and records. Liability coverage under the BOP is similar
to those offered through home-based business endorsements, such as personal
injury and advertising injury protection. Like the endorsements, the BOP does
not provide any professional liability coverage.
Although the BOP can be written for certain home-based businesses, it is
designed for traditional small businesses with commercial locations. Thus, the
home-based business endorsements are a preferable way of covering these exposures
since the endorsements were written specifically for home businesses.
Other Insurance Lines
The chief focus of this discussion concerns how the unendorsed homeowners
policy is insufficient for home-based businesses. However, a brief mention of
other types of property and casualty insurance for these businesses is in order.
This includes an overview of loss exposures pertaining to automobile, excess
liability, professional liability, and workers compensation coverages.
Automobile In most cases, an insured's personal auto policy (PAP) provides coverage
for automobile-related losses arising from the home-based business. For example,
the ISO PAP contains a general business liability exclusion, but this exclusion
does not apply to the maintenance or use of a private passenger auto, a pickup
or van, or a trailer used with one of these vehicles. Thus, a business-related
auto loss arising from a large commercial vehicle (e.g., 3-ton truck) would
not be covered. Most home-based businesses, however, do not utilize vehicles
of this size.
There are other personal auto liability exclusions that could apply. For
example, there is no bodily injury coverage to an employee of an insured. The
home businessowner would need to procure workers compensation coverage for this
loss exposure.
There is also no liability coverage for a loss arising out of a vehicle being
used as a public or livery conveyance. In this case, a commercial auto policy
may become necessary, based on the circumstances and the extent of the business
use. Note that this exclusion pertains primarily to delivery and conveyance
of people (e.g., taxicab) and not the incidental hauling of property. [SeeLife
& Cas. Ins. Co. v. Brame, 22 S.W.2d 439 (Ky. 1929).] Thus, if the insured
has a part-time, home-based business of repairing lawn mowers and occasionally
delivers the repaired mowers back to customers, this exclusion would not likely
apply.
However, if the primary purpose of the vehicle is to deliver products, the
exclusion normally holds. In Morris v. Buttney,
606 N.W.2d 626 (Wis. App. 1999), the insured owned a delivery service and negligently
caused an automobile accident. The insured argued for coverage because he hauled
property rather than people, contending that the "public or livery conveyance"
exclusion applies more to the transporting of passengers as opposed to the delivery
of packages. The Wisconsin appellate court disagreed, affirming the circuit
court's ruling that this term applies to the "transport for hire of things as
well as people."
One final applicable liability exclusion pertains to losses emanating from
automobile-related business activities such as selling, buying, servicing, storing,
or parking vehicles. If the home-based business deals primarily with automobiles
(e.g., using the Internet to buy and sell used cars), the PAP's liability coverage
does not apply. A separate commercial auto policy is needed in this case.
If the insured uses her automobile in connection with her home-based business,
she should advise her agent to verify the appropriate personal auto rating classification
is used. The business rate is typically higher than a "drive-to-work" rate but
low business mileage or incidental business use could also be a factor that
could decrease the rate.
Excess Liability A personal umbrella policy or a personal excess liability policy provides
high limits of liability to protect an insured against a catastrophic liability
loss. These policies grant liability coverage that stacks on top of the primary
liability coverage provided by the underlying policy. A personal umbrella policy
is highly recommended for the owners of home-based businesses, particularly
when customers visit the home.
The personal umbrella policy is structured on either a "stand-alone" or,
less commonly, a "following form" basis. A stand-alone form relies exclusively
on its own policy terms, conditions, and exclusions, and is normally a longer
form. Conversely, a following form policy incorporates the terms, conditions,
and exclusions of the underlying policies and is thus a shorter form. Thus,
if the insured has a home-based business endorsement of some type and a following
form umbrella policy, then any liability loss covered under the underlying homeowners
form/endorsement would also be covered under the personal umbrella form.
If a stand-alone personal umbrella form is used, any business-related restrictions
should be examined carefully along with the form's "business" definition to
ascertain if there are gaps in coverage. For this reason, it is best for the
home-based businessowner to procure the umbrella policy from the same insurer
that provides the homeowners policy.
Professional Liability Professionals hold themselves out as possessing special skills and experience.
They are relied on by society to exercise intellectual judgment in their particular
areas of knowledge. Professional services often form the heart of the home-based
business. Examples include legal services, accounting, computer consulting,
Web mastering, financial advising, career coaching, and technical writing. Liability
losses arising from these activities are not covered by the homeowners policy
or endorsements nor by the BOP. Thus, a separate professional liability or E&O
policy needs to be procured. Professional liability insurance provides coverage
to protect traditional professionals (e.g., attorneys) and quasi-professionals
(e.g., Web masters) against liability incurred as a result of errors and omissions
in performing professional services.
Workers Compensation A high percentage of home-based businesses do not utilize any outside employees.
If the business does hire employees, workers compensation insurance may be required
subject to the jurisdiction and the number of employees hired. Workers compensation
insurance offers a schedule of benefits, payable regardless of any negligence
or legal liability on the employer's part, should an employee become injured
on the job. Coverage is available to the owner as well in most jurisdictions.
Conclusion
The strong growth of home-based businesses in America dramatically illustrates
the need for insurance agents to proactively engage in more risk management
activities with their personal lines clients. Rather than just sell homeowners
and personal auto insurance, the agent should actively ask the type of questions
that uncover unusual loss exposures. One study indicates that 1 out of 10 Americans
are running a business out of their home. As a result, specific up-front questions
concerning home-based businesses will uncover these activities, leading to the
proper insurance coverage and protection for these businessowners. If the insured
does have a home-based business, follow-up questions concerning the type of
business, annual revenue, number of employees, business visitors to the home,
manufacturing processes, and loss control measures are in order. The agent should
be an advocate for effective loss control measures for this business, just as
the risk manager is for a large company.
There is every indication that home-based businesses will continue to grow
in America, particularly with the expanding utilization of the Internet. Unfortunately,
a high percentage of these businesses are bereft of the proper insurance, with
many of the owners simply assuming that the business will be covered by a standard
homeowners policy. This policy, however, contains many business-related exclusions
and limitations, with the courts usually enforcing these restrictive provisions.
Therefore, additional coverage provided by the appropriate homeowners endorsement(s)
is typically the best measure to properly cover these business activities. As
a result, the insurance agent should play a proactive role in uncovering these
businesses, educating insureds about the potential gaps in insurance protection,
and procuring the proper endorsements and policies to adequately protect their
clients.
References:
American Association of Insurance Services, AAIS Educational Materials—HO Section 1: Home-Based
Business Program Revision 2.0, 1998, pp. 1.2, 1.3.
Insurance Services Office, Inc., Homeowners
Policy Program Manual, 2000, p. HO-28, HO-29.
International Risk Management Institute, Inc., Glossary of
Insurance and Risk Management Terms, 9th ed., 2006.
Olson, Robin K. Personal Risk
Management and Insurance, Dallas, TX: International Risk Management
Institute, Inc., 2006.
Robinson, Linda. Commercial
Property Insurance, Dallas, TX: International Risk Management Institute,
Inc., 2006, pp. XIII.E.1-8.
Ruquet, Mark, "Home-Businesses go Bare." National
Underwriter Property & Casualty—Risk & Benefits Management 108, no.8
(March 1, 2004): 11.