This was originally published in the 'Legal Alert', an internal DeWolfe Companies publication. The target audience was realtors with a home office.
By Mark E. Buckley, CPCU, AIM, AU, API; Technical Specialist - DeWolfe Insurance Agency
If you can not convince them, confuse them -Harry S. Truman
I was heartened to hear that the first insurance article generated some enthusiastic conversation. However, that was the least complicated of the three articles to write. The first article covered simple steps to be taken to ensure proper coverage on your Automobile policy. This article will discuss property insurance generally and insurance implication of using property for business specifically. It will discuss some of the issues around business in home exposures, emphasize those issues that would be most relevant to DeWolfe employees and associates, and present what limitations and exclusions exist in a standard Homeowner policy. Then the relevant discussion questions will be identified. Finally, possible solutions if available will be enumerated. This article will not address the most significant business exposures. These would include farming activities, day care operations, and rental of your home. Instead focus will be given to less significant or incidental busines exposures that are more relevant to our employees and associates.
If you have a business exposure in your home, coverage will be affected. The standard Homeowner policy is not designed for commercial exposures. However, coverage is available by endorsement if the business exposure is incidental. An incidental business exposure might include a paper office that has a computer and fax machine or a piano teacher that had a few students come to the home each week. If the dwelling has a significant business exposure, then a commercial policy must be written. The dividing line varies between commercial and incidental. The exposure would be more than incidental if the business uses a majority of the square footage of the home, has employees, or has significant foot traffic.
The standard Homeowner policy is divided into two sections. Part I is the property section. Part II is the liability section, which will be discussed in the next article. Part I is further divided into four parts. Coverage A is for the dwelling. Coverage B is for other structures, such as a garage, that you own. Coverage C is for personal property and Coverage D is for loss of use.
If you have a significant business exposure, you may not be eligible for a Homeowner policy. If there is a claim, you might find yourself without coverage. If the exposure is incidental, such as a paper office with some furniture and equipment, your basic policy is intact. Coverage A will respond to a loss to your dwelling. However if you conduct your business in a detached structure such as a garage, there is no Coverage B for that structure. Coverage C will cover your personal property, but any property used at any time for business purposes is limited. Coverage D will respond to pay loss of use. However there is no business interruption coverage under the Homeowner policy.
The appropriate measures you should take to protect your personal property depend on several factors. The severity of the situation depends on the degree of exposure present. Even a small paper office can have substantial values of fax machines, copiers, computers, etc. You should discuss your situation with your insurance agent. The conversation should revolve around several questions.
In order to understand the potential liability exposures, your agent will ask what the type of business is, is there any customer traffic in the home, and are there any employees. Your agent will ask if you have any commercial insurance for the business. The homeowner insurance company might be more comfortable with the exposure if they know that claims arising from the business will be paid by a commercial policy.
The most relevant questions will revolve around the ownership, value, and location of the property. These questions will include:
The Homeowner policy will only cover property that you own personally. If the property is owned by the business, then the business needs to insure it.
If the property is kept in your garage, then you have self-insured your garage. You have unknowingly retained the exposure that you thought was insured. Your agent will at a minimum suggest that you purchase an HO-42 Permitted Incidental Office Occupancy endorsement.
The Homeowner policy limits how much will be paid for any property that is used at any time for business purposes. The amount of property can vary widely from a desk and chair to the latest catalogue of scanners, mobile phones, laptops, printers, etc. The special limits of liability or internal limits are $2,500 for property on the residence premises and $250 for property away from the residence premises. If the amount of property that you own that is used in business is more than this, your agent will suggest one of several options. These options could include the HO-42 Permitted Incidental Office Occupancy endorsement, the HO-314 Special Computer Endorsement, the HO-12 Increased Limits on Business Property endorsement, or an HO-65 Personal Articles Floater. Each of these options has its benefits and limitations.
The appropriate endorsement will depend on whether you need to insure fixed property such as computers, furniture, office equipment, or moveable property such as a laptop computer.
Your employment status is a significant issue when we talk about liability endorsements. Some endorsements are only available to employees, while others are available to independent contractors and business owners. If you are uncertain as to how to classify yourself, contact your agent.
Is the business primarily conducted in an office elsewhere? Is the office in the home the primary place of business or just a paper office? Do clients visit you at the home to conduct business? Is the home office located in your garage? Each of these questions will help determine the best insurance options for you.
So what should you do if you have a business exposure in the home? Your first step is to make your insurance agent aware of the exposure. The standard Homeowner policy is not designed for a business in the home. With the growth of businesses in the home at almost 10% annually, the industry has started to respond. Now that nearly 3 in 10 homes have some type of business exposure, companies have started to modify their contracts. Let's discuss some options with a standard policy.
HO-42 Permitted Incidental Office Occupancy. This endorsement provides limited premises liability protection, allows coverage for other structures used in the named business, and increases the on premises business property for the business to the amount you have for coverage C. However, it does not increase the off premises limit or increase the limit for business property other than the property used in the described business. Therefore, if your spouse also has a home business exposure, that property would still be subject to the $2,500 business limit. Also, the endorsement only applies to furnishings, supplies and equipment.
HO-12 Increased Limits on Business Property. This endorsement increases the business property limit. However, it does not apply to samples held for sale nor does it apply to business property of a business that is actually conducted on the residence premises. Furthermore, the off premises business property limit is only increased proportionally to the increased limit on the endorsement. In general, this endorsement is not very useful.
HO-314 Special Computer Endorsement. This endorsement broadens the causes of loss that would be covered if there was damage to your computer. However it does not increase the on premises limit of $2,500 or the off premises limit of $250 that applies to property used at any time for business purposes.
Several companies have their own independent policies and endorsements. They vary greatly in the benefits provided under their policies. Your insurance agent should be able to guide you to the best solution. Some companies have increased the business property limit on the Homeowner policy from $2,500 to $5,000 or $10,000. They have usually made proportional increases in the off premises property limit. Some companies have amended their computer endorsement to allow for business use. Some have modified their Personal Articles Floater to allow for electronic equipment or computers. Others have broadened their definition of incidental business.
Many companies have designed Home Business or Business in the Home Endorsements. They have met with limited success. Typically these are modified Business Owner policies that can be attached to a Homeowner policy. The cost is usually similar to purchasing a separate commercial policy. However the eligibility for the endorsement is usually strict. A personal lines company will not want to write a Business in the Home Endorsement on any business with significant professional, product or premises liability. As I mentioned in the last article, there is a strong demarcation between commercial and personal insurers. They are generally unwilling to insure exposures outside of their comfort zone.
This has been a fairly exhaustive or exhausting discussion of the business exposure. Whether I have 'convinced or confused' you, there are steps you need to take. There are several steps that need to be taken to insure proper business coverage. First, recognize that using personal property for your business affects your insurance coverage. Next, communicate with your agent about the nature of the business and the type and amount of property involved. Finally, in consultation with your agent try to find the best option available to you.
Our agency is accustomed to analyzing the property exposures of our many clients. Many of our clients are DeWolfe employees and associates. Please contact Alice L... at ###-###-#### to review your current coverage. There are many aspects of insuring your property that are beyond the scope of this article. You should review your entire insurance program with a professional insurance agent.
Throughout this article, endorsements and forms have been mentioned. These forms are copyrighted products of Insurance Services Office. The wording in this article is that of the author but the result of reading and studying the materials produced by ISO. The names and form numbers of the endorsements have been generalized. ISO has revised its forms several times over the past decade, with another revision occurring this year. The terminology I have used is a mix of the newer and older versions of the endorsements and policies. Insurance Companies use these forms published by ISO as well as their own independently produced forms. No specific company forms were incorporated into the writing of this article except by general reference.