Multiple small businesses are operating in Pakistan, and the majority of them are unorganized. However, we are going to discuss the importance of insurance for home-based businesses.
Ideally, people who are running any business from their homes, for example, chefs running home-based catering businesses, and people like accountants, make-up artists, graphics designers, freelance writers, personal trainers, translators, videographers, tutors, and photographers, are all people who need home business insurance.
While running a home business is exciting, new entrepreneurs are usually unaware of many risks that can come their way. You need some form of home-based business insurance to protect your business from financial difficulty.
Defining Home-Based Business Insurance
When someone runs a business out of their residence, home-based business insurance is liable for property damage, injuries on the business site, for instance, an employee that slips in your office, customer injuries, and lawsuits.
A standard home insurance policy covers a certain percentage amount of the property. This means that if you lose more than the set percentage in an accident in the house, your insurance company will only compensate you up to that set limit. In a scenario where your business inventory gets stolen in a burglary or burnt in a fire, you will not be compensated satisfactorily.
A home insurance policy does not generally cover “other structures” used for business purposes, like a detached shed where you have a studio or your office.
If you have an expensive video camera placed in this studio, you will get limited coverage for its damage. This is why it is better to get separate home-based business insurance. This can be done by either adding an endorsement to your existing homeowner’s insurance policy or through an individual small business insurance policy.
While many of us may assume that insurance is not necessary for a particular business, many home-based companies will benefit from getting business insurance.
How to Buy Home-Based Business Insurance
Usually, if you have a home insurance policy, adding an endorsement to it will give you extra coverage for a small operation out of a home. However, larger businesses or more high-volume professions will need specialized coverage through a stand-alone business insurance policy.
Adding an Endorsement to Your Homeowners Insurance Policy
Homeowners insurance companies usually offer endorsements that can be added to an existing or even new homeowners’ policy to give the beneficiary more business-related coverage.
Some companies offer buyers the option to get an endorsement that matches their specific business needs, such as coverage that can protect the inventory of a home-based business.
Purchase a Standalone Business Insurance Policy
Stand-alone business insurance policies usually offer more comprehensive coverage and with higher limits. This type of policy gives better coverage limits for business equipment and liability compared to a typical home insurance policy endorsement.
For example, a standard business owner policy (BOP) will offer coverage for both business property and liability. These policies are suitable for a business that has visitors coming and going. They are also better than a homeowner’s endorsement if you have multiple business properties to insure.
Types of Home-Based Businesses Coverage
If you’re running a home-based business, one of the best ways to get coverage is with a business owner’s policy (BOP). Such a policy groups together three key coverage types: general liability insurance, commercial property insurance, and business interruption insurance. It is usually cheaper to buy a BOP since you get three policies in one, and most companies allow you to add additional coverage types as needed. Purchasing each of these policies individually can be much more expensive.
Common Types Of Small Business Insurance To Consider.
General Liability Insurance
A general liability insurance policy covers accidental injuries and property damage your business operations may cause to others.
For example, if you run a painting company out of your home and accidentally spill paint on your client’s furniture, your general liability insurance would pay to repair or replace the furniture. It also covers your legal fees and settlements if you get sued over an accident.
Commercial Property Insurance
Commercial property insurance covers your business property in case of theft, loss, or damage by any problem that is included under your policy, like a fire or theft. Commercial property insurance is also known as “business property insurance.”
Business Interruption Insurance
Suppose you are forced to close your business due to a problem covered by your policy (like a fire). In that case, business interruption insurance clauses will cover expenses like lost income, payroll expenses, and relocation costs if you have to move to a new location temporarily. Business interruption insurance is also known as “business income insurance.”
Commercial Auto Insurance
If you use a car for work purposes, such as delivering a product or meeting with clients, you will need to buy commercial auto insurance. Your individual car insurance policy will not cover work-related accidents.
Professional Liability Insurance
Professional liability insurance covers your business from claims of mistakes made during the course of running your business.
For example, if you are a designer and a client claims you provided them with faulty clothes, your professional liability insurance can cover your legal fees, judgments, and settlements. Professional liability insurance can also be shown as errors and omissions insurance.
Workers Compensation Insurance
Workers compensation insurance pays the medical bills if one of your employees gets injured or sick due to a work-related incident. Sole proprietors are usually exempt from workers’ compensation requirements, but if you have employees it always makes sense to get compensation insurance.
Other Home-Based Business Insurance Options
Depending on your business type, you may need specialized coverage such as:
- Commercial umbrella insurance. Once you reach your liability limit on your business insurance, commercial umbrella insurance kicks in. For example, if you are sued for Rs. 1 million but only have Rs. 500,000 in business liability coverage, your umbrella policy will kick in to cover the shortfall (up to the umbrella policy’s limit).
- Cyber liability insurance. If your business is the target of a cyberattack or data breach, cyber liability insurance covers generic expenses such as data recovery, investigative services, and identity recovery. It also covers legal fees, judgments, and settlements.
- Employment practices liability insurance. This pays for settlements of claims brought against you by employees, such as violation of employee rights or wrongful termination. Employment practices liability insurance also covers your legal defense costs.
How Much Does Home-Based Business Insurance Cost?
A business owner’s policy will cost a minimal monthly amount. This amount will include general liability insurance, commercial property insurance, and business interruption insurance. Your home-based business insurance costs will depend on multiple factors, like the following:
- The type of business
- The types of coverage you buy
- Number of employees
- Business equipment and property
- Coverage limits and deductibles
Many business owners, especially those that are home-based or work as independent contractors, have the mistaken belief that they are protected from the sorts of risks that could result in a significant insurance claim.
However, the reality is that no business is entirely free from risk, and the financial implications of not having appropriate insurance coverage can be devastating.
Sadia Zaheer holds a Masters in Business Administration from IBA, Karachi. After working in several financial institutions in Client Management, Corporate Lending, Islamic Banking and Product Management she jumped careers to pursue a career in writing.
She is a Finance, Business and HR Development writer with four years of experience. She reads a lot and takes care of her multiple cats to remain calm.