Know your home office insurance needs

Your business is in its infancy — so much so that you might not even have an office yet. You’re still working from home. It’s just you and your computer in your den or you and your tools in your garage.

That’s fine, but here’s something you might not have thought about: What happens if something goes wrong in your home work area? What if someone steals your tools or your computer gets trashed in a basement flood?

You probably haven’t thought about this because you figure the damage will be covered by your home insurance. If you do, you might be in for a nasty surprise.

Home insurance contracts often come with specific language that exempts your insurer from paying on claims that apply to the parts of your house that are used for a homebased business. Property insurers recognize that a lot of people work from home, so they offer supplementary insurance to cover your home for business uses. You might grumble over that, thinking it’s just another money grab on the part of the insurance industry. And maybe it is, but that’s tough. When you sign the insurance contract, you agree to the terms.

The situation isn’t academic. A few years ago, the Insurance Bureau of Canada conducted a study that found 39% of Canadians operating a small business out of their homes didn’t have business-specific insurance.

I found that stat a little alarming because I assumed this problem would more likely arrive with very new businesses. The relatively high percentage of uncovered home businesses suggests to me that a lot of people aren’t taking on business-specific insurance, even after a home-based business has matured into a steady stream of income.

As I’ve written in the past, once your business is up and running, you really should incorporate so you can separate your personal assets from business assets. You shouldn’t expose your personal property to the financial risks that will arise in your business.

As you go through the incorporation process, your advisors will probably ask you about insurance. In fact, some lenders, investors or partners might require you to have business insurance in place as a condition of financing. You’re leaving yourself exposed if you think your personal home insurance will cover your business materials, because it probably doesn’t.

So far I’ve only discussed property insurance, but this only scratches the surface. More sophisticated businesses need to consider things such as professional liability protection, errors and omissions insurance for corporate officers and directors, or business interruption insurance. You might also want to consider benefit packages for employees or yourself.

Whether you buy any of the insurance I’ve mentioned thus far is purely a business decision that boils down to your tolerance for risk or your contractual obligations with other parties. So I can see where you might dismiss insurance as a luxury you can’t afford.

But there are some basic forms of insurance you need to consider by law. A prime example is workers’ compensation. These programs are mandatory in Canada, although each province has its own rules on when you’re required to pay premiums. I single out workers’ comp for special mention, because sometimes people like to view workers as “independent contractors” who might be responsible for their own insurance arrangements. Be very careful about this. Some provinces have strict rules that prevent employers from using such arrangements as a means to avoid workers’ compensation liability. The bottom line is that you have to understand your exposure to risk. Bigger businesses have bigger risks, so they’re in greater need of coverage. I get that, and if your business is new, I can understand why you think insurance is not yet something you need. But don’t make the mistake of thinking your home policy has you covered as you get your business off the ground.