Home-Based Business Exposures

The United States has experienced a rapid growth in home-based businesses in the past decade. The Insurance Information Institute reports that there are more than 11 million home-based businesses in the country, a figure that is expected to rise in the coming years. A survey by AAIS, however, found that a majority of these businesses do not have the proper insurance coverage.  

Standard homeowners policies are designed to cover family activities, not business activities. However, they do provide limited coverage for home-based businesses. Homeowners programs also make available a variety of endorsements that can be used to expand, supplement, or replace the form’s basic coverage on home-based businesses.  

The key point here is that a personal lines producer’s clients, especially those who are business owners, often face loss exposures that are not contemplated by standard personal lines insurance coverages, and it behooves the producer to recognize these exposures and take steps to ensure that they have been properly addressed. 

Need for Separate Home-Based Business Coverage and Criteria 

One of the first steps in analyzing potential exposure gaps for home-based businesses is to determine the level of total annual compensation the business generates. For many homeowners policies, if the business activity results in $2,000 or less in total compensation for the 12 months prior to the policy period, the endeavor is not considered a “business” exposure per se and thus not subject to the various business exclusions and limitations of the policy.  

But if its activity results in $2,000 or more in annual compensation (or is expected to in the near future), insurance protection for this home business can be added to the homeowners policy via a “home business insurance coverage” (HO 07 01) or similar endorsement, if the business first meets all of the following criteria. 

  1. The business is operated from the residence premises that is declared on the declarations page and used principally for residential purposes. 
  1. It has no more than three employees and has gross annual receipts of $250,000 or less.  
  1. It is not involved in the food business or the personal care products business (with limited exceptions for businesses such as Avon, Amway, and Mary Kay).  

One other set of criteria applies to this endorsement. It can only be used for the following types of business ownership arrangements. 

  • Sole proprietorships; 
  • Partnerships (provided that the partners are composed only of the named insured and resident relatives); 
  • Closely held (or privately held) corporations, provided that the corporation is composed only of the named insured and resident relatives; or 
  • Joint ventures, provided that the joint venture is composed only of the named insured and resident relatives 

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This endorsement provides business property, business income, extra expense, personal liability, and medical payments coverage. For other types of businesses outside these two sets of criteria, the purchase of the appropriate commercial insurance coverage, such as a Business Owners Policy (BOP), is necessary. 

Want to know more about home-based business exposures and the types of available insurance coverage? Check out Homeowners Insurance Made Simple in our Insurance Continuing Education Course Catalog. 

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