Expert Commentary

Insuring the Home-Based Business (Part 3)

Part 1 of this series examined homeowners policy restrictions regarding home-based businesses. Part 2 of this series discussed court decisions and interpretations of what constitutes a "business." This article looks at the proper endorsements and policies needed to adequately protect home-based businessowners.


Personal Lines Insurance
July 2006

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.

Table 1
ISO Home Business Classifications
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.

Source:Insurance Services Office, Inc., Homeowners Policy Program Manual, 2000, p. HO-28, HO-29.

The home business must meet the following four criteria to be eligible for coverage under this endorsement.

  1. 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.

  2. The business must be operated from the residence premises, which is primarily used and designed for private residential purposes.

  3. 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).

  4. 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

Table 2 AAIS Home-Based Business Classifications
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.


Opinions expressed in Expert Commentary articles are those of the author and are not necessarily held by the author's employer or IRMI. Expert Commentary articles and other IRMI Online content do not purport to provide legal, accounting, or other professional advice or opinion. If such advice is needed, consult with your attorney, accountant, or other qualified adviser.

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