Although you don’t want you to spend money insuring against disasters that will probably never strike, it’s foolish to do business without some basic insurance coverage. What’s more, you may be required by law or by those you do business with (lenders, landlords, and others) to have some types of insurance. The trick is to get only the coverage you really need—and to pay as little as possible for it. Here’s a brief description of some common forms of insurance protections.
Business property insurance compensates you for damage or loss of your property—both the physical space where you work (your home office, for example) as well as the equipment and other furnishings of your business. If you operate a home business, you can probably take care of your property insurance needs through an endorsement to your homeowners’ policy, particularly if you don’t have much pricey business equipment. But don’t assume that your homeowners’ policy will cover business losses—most offer very limited coverage, if any, for business property. If you rent commercial space—for example a studio for your jewelry business—your lease may require you to carry a specified amount of property insurance.
- A “named peril” policy protects against only the types of damage listed in the policy—typically, fire, lightning, damage to vehicles, vandalism, storms, smoke, and sprinkler leaks. A “special form” policy offers broader coverage, commonly against all but a few excluded risks (often including earthquakes), and is more expensive.
- When you’re buying property insurance, you’ll have a choice between an actual cash value policy, which pays you whatever your damaged property is actually worth on the day it is damaged, or a replacement cost policy, which pays to replace your property at current prices. A replacement cost policy is always more expensive, but it’s often worth the extra money.
Liability insurance covers damage to other people or their property for which you are legally responsible. This includes, for example, injuries to a customer who trips on your son’s skateboard on the way to your home studio, and damage caused by your crafts products (called products liability coverage). Liability insurance policies typically pay the injured person’s medical bills and other out-of-pocket losses, any amount you are ordered to pay in a lawsuit for a covered claim, and often the cost of defending you in such a lawsuit. If you have a home crafts business and are seldom visited there by clients or customers, you may be able to get a relatively inexpensive liability endorsement to your homeowners’ policy.
If you have a car, you probably already have insurance that covers your personal use. However, your personal insurance policy may not cover crafts business use of your car. If it doesn’t, you’ll want to get business coverage to protect against lawsuits for damage you cause to others or their vehicles while using your car for business. If you don’t do much business driving—and particularly if you don’t often have business passengers, such as clients or customers— you can probably get coverage simply by informing your insurance company of your planned business use (and paying a slightly higher premium).
Business Interruption Coverage
If your crafts business becomes your primary source of income, we would recommend that you obtain business interruption insurance—a policy that replaces the income you won’t be able to earn if you must close, rebuild, or relocate your business due to a covered event, such as a fire or storm. These policies typically provide money to replace your lost profits, based on your business’s earnings history (as shown by its financial records), and money to pay the operating expenses you still have to pay even though you can’t do business (like rent and overhead). Since you are not totally dependent on your crafts business, you may not wish to spend money on this type of policy.
When you’re shopping for this type of insurance (or any other, for that matter), always check the exclusions and coverage. For example, some policies may provide an “extended period of indemnity,” which kicks in after you reopen, to cover your continuing losses until you are fully back on your feet.
Many insurance companies offer package policies geared to the needs of small businesses. If you run a home crafts business, you may be able to get less expensive coverage through an in-home business policy. These policies typically also cover business property and liability, and some provide business interruption protection. According to the Insurance Information Institute, an in-home business policy will cost something in the range of $250 to $400 a year for about $10,000 of coverage. However, your business will have to meet the insurance company’s requirements for coverage, which may include having very few employees, bringing few business visitors to your home, or purchasing your homeowners’ insurance from the same company.
If your home crafts business can’t meet these requirements, or if you run a business outside of your home, you can consider a business owners’ policy or BOP. These packages typically include business property insurance, liability protection, and some business interruption protection. Figure that a “mom and pop” home-based business with revenues up to the low six figures can expect to pay an annual premium of anywhere from $1,500 to $4,000 for a BOP.
Typically, neither a BOP nor an in-home business policy provides coverage for professional liability (malpractice), employment practices liability (often referred to as EPLI) to protect you from lawsuits brought by current or former employees, workers’ compensation, or other employee benefits (health or disability insurance, for example). Also, you will almost certainly have to pay separately for automobile coverage if you use your car for business.
Insurance for Employees
Do you have employees? Keep in mind that when you hire employees, you take on some financial obligations. In addition to paying wages and Social Security and Medicare taxes for each employee, you’ll also have to pay for unemployment insurance and, in a handful of states, disability insurance. And you’ll probably have to purchase workers’ compensation insurance.
- Workers’ compensation insurance. This insurance pays your employees for work-related injuries and reimburses them a portion of lost wages if they cannot work due to injury. You buy it either by paying into a state fund or by buying a policy from a private insurer. Some states don’t require employers that have only a few employees to get this coverage; contact your state insurance or labor department to find out your state’s rules.
- Unemployment insurance. If you have even one employee, you will probably have to pay for unemployment insurance (UI). UI is a joint program of the state and federal governments. It’s funded by a payroll tax on employers, which goes into a fund from which workers who are laid off or fired for reasons other than serious misconduct can draw money while they’re unemployed. The amount you have to pay will depend on how many employees you have and how many unemployment claims your former employees have made (if any).
- Disability insurance. Five states (California, Hawaii, New Jersey, New York, and Rhode Island) provide temporary disability insurance to workers who are temporarily disabled and unable to work. In California and Rhode Island, employees pay the cost of this insurance through payroll deductions; in Hawaii, New Jersey, and New York, employers pay into the plan. If you do business in one of these states, go to your state labor department’s website to find out more about your obligations.
Tips on choosing insurance wisely:
- Maintain enough property and liability coverage to protect yourself from common claims—for example, fire, theft or accidental injury.
- Buy insurance against serious risks that would cost you the most if they occurred (so long as the insurance is reasonably priced for your business).
- When possible, keep insurance costs down by selecting high deductibles.
- Do your best to reduce hazards or conditions that can lead to insurance claims.