By Diana Kowatch, CPCU, AU, AAM, CPIW
One of the fastest growing business segments in our society today is the home business. Conservative estimates indicate that the "home office" market alone consists of over 41 million businesses. These operations range from the employee who brings work home at night; to part-time, "extra-income" ventures; to full-time occupations. Included are operations such as baby-sitting or day care; craft or hobby risks; small catering or food processing; dressmaking, tailoring, or clothing design; photography; stenography or data processing and on and on and on. The list is endless.
The coverage provided in homeowners policies, even with its available endorsements, is woefully inadequate (at least until now.) On the other hand, commercial policies are often expensive compared to the income earned; or those policies may be unavailable when the proprietor or business does not have adequate prior experience or financial information/credibility.
To resolve this situation, the Insurance Services Office (ISO) has developed a new endorsement to add to a homeowners policy. This endorsement, the Home Business Insurance Coverage, HO 05 90, has been nicknamed the HOBIZ™. It has been filed in 47 states with approval dates starting June 1, 1997.
The concept of this endorsement is similar to that of a "mini" BOP, providing property, business liability including products-completed operations, business income/extra expense, and crime. NOTE, however, that the business liability is not as broad as a commercial general liability policy (CGL). Premises liability coverage is limited compared to the CGL, and the definition of coverage territory is more restrictive.
Eligibility
Criteria have been set for those types of home businesses eligible for the HOBIZ endorsement as follows:
Ownership--To be eligible, the business must be owned by one of the named insureds listed on the homeowners policy or by a partnership, joint venture, or other organization that the named insured is a part of--but it is very important to note that the partnership, joint venture or organization can only be comprised of the named insured and that named insured's resident relatives. Corporations are not specifically addressed in the ISO eligibility. They neither are included or excluded. Since corporations are one type of "organization," it would appear that corporations are eligible; but it would also appear that the ownership and all corporate officers also must be either a named insured or a resident relative.
The business may be operated by a business name other than the named insured shown in the homeowners declarations. The business name may be listed in the HOBIZ endorsement schedule.
Location--The business may be operated only from the "residence premises" declared in the homeowners policy and must be used principally as a residence. The business may be operated out of another structure as long as that structure is located on the described "residence premises."
Employees--To qualify, the business may have no more than three employees. As corporations are not specifically mentioned, no guidance has been provided as to corporate officers--active or inactive--so there may be some questions if a corporation exists. The possibility of one or more active officers, one or more inactive officers, and one or more employees is certainly highly possible. Would a business with two active officers, one inactive officer, and one employee qualify? The ISO eligibility is not clear. It is hoped that as individual insurers set their own company-specific criteria, this gray area will be addressed.
Receipts--Only business that generate $250,000 in annual receipts, or less, may be considered for the HOBIZ endorsement.
Ineligible businesses
If the business operation involves any of the following operations, the HOBIZ endorsement may not be used:
* manufacture, sale, or distribution of food products
* manufacture of personal care products such as shampoo, hair color, soap, perfume, or similar items that are applied to the body or that may be consumed
* the sale or distribution of any personal care products that are manufactured by the insured such as shampoo, hair color, soap, perfume, or similar items that are applied to the body or that may be consumed
* any other business that is operated from the residence premises which can be covered under either the Permitted Incidental Occupancy (HO 23 41) or the Home Day Care Coverage (HO 04 97) endorsements--businesses that commonly qualify for these two endorsements are some day care, offices, professional, studios, and some private schools
The ISO eligibility does not list any other type of exclusions to the program but, instead, provides a structure where the individual insurer may develop a format for which business types it will and will not write under this endorsement. As products/completed operations coverage is provided, most insurers will not be expected to cover high products-hazard risks, such as machine shops, any type of metal goods manufacturing other than purely decorative, and toy or furniture manufacturing.
Classifications
ISO has developed four broad classifications for use with this program; however, they have left the decisions regarding the classification, eligibility, and acceptability of specific business types within those four classifications to the individual insurers. The four classifications are as follows:
OFFICE--defined as professional or administrative activities for customers such as accounting, resume writing, telephone answering, and similar type operations.
SERVICE--defined as businesses that provide repair or other services for customers. Examples include repair operations such as bicycle, clock, jewelry, computer, electronics, or non-repair services such as housecleaning, carpet or drapery cleaning, videotaping and the like.
SALES--designed for businesses that sell products (other than crafts made at the residence premises) and commonly may include operations that sell books, magazines, costume jewelry, plants, flowers, stationery, other paper products and so forth.
CRAFTS--for businesses that sell crafts made at the residence premises, such as ceramics, dolls, quilts, clothing, etc.
Once again, it is important to remember that each insurer will be setting its own business-specific eligibility, and thus vast differences can and will appear. What is acceptable to one insurer will not always be true for all.
Coverage analysis
The endorsement provides coverage for business exposures by redefining two terms found in the homeowners program: "business" and "insured."
"Business" "...means the trade, profession or occupation described in the Schedule of this endorsement that is conducted at or from the "residence premises" and is owned by: a. You; or b. A partnership, joint venture or other organization of which you and your resident relatives are the only partners, members or stockholders."
"Insured" now means not only the named insured but any residents of the named insured's household who are relatives, but only if they are partners, members or stockholders in the insured's business operation; however, the named insured and any resident relatives must be the only partners, members, or stockholders of the business. If there are any other partners, members, or stockholders, the business is not eligible for the program and not defined as an insured, thus not covered.
SECTION 1--PROPERTY
A. Other structures used for business
In the basic homeowners policy, any structure other than the dwelling itself that is in any way, at any time, used for business purposes is not covered. By using this endorsement, any structure on the residence premises that is used for business may be scheduled with a limit of liability and description and thus afford coverage.
B. Coverage C--Personal Property
Personal property used for business purposes may be covered, up to the limit selected and stated in the endorsement, while located in the dwelling that is located at the "residence premises" insured in the homeowners policy. The option also exists to designate and set a specific limit for personal property coverage in other structures as long as located at the "residence premises."
If no limit is shown for business personal property, then the $2,500 currently provided for in the homeowners policy is all that will be available.
Also covered as personal property is the property of others in the insured's care, custody, and control as well as leased personal property that the insured has a contractual responsibility to insure.
* Money
The unendorsed homeowners policy provides only up to $200 for money, bank notes, bullion, gold (other than goldware), silver (other than silverware), platinum, coins, and medals coverage. With the HOBIZ coverage, the limit is increased to $1,000. This $1,000 is the maximum available for the combination of personal and business loss. For example, it does not give $200 for personal money losses and $1,000 for business money losses; it only increases the total limit provided.
* Valuable papers and records
Not covered as personal property is the cost to research, replace or restore business information on lost or damaged material in any format whether it be paper, electronic, and so forth. Note, however, that later in the Additional Coverage, some coverage for this exclusion is added back.
* Off-premises
The limit for business property while it is away from the residence premises is increased to $5,000 from the $250 set in the homeowners. This increase in off-premises protection does not apply to money and securities.
* Property not covered
In addition to the types of property not covered in the underlying policy, one additional type of property is added--contraband or property that is used in the course of illegal transportation or trade.
C. Section I--Additional Coverages
Two coverages provided in the homeowners policy as homeowners additional coverages are expanded for commercial application. They are:
1. Trees, Shrubs And Other Plants-- normally, this type of property grown for commercial use is excluded; but in the HOBIZ endorsement, it is now covered.
2. Credit Card, Fund Transfer Card, Forger and Counterfeit Money--was limited to $500 in the homeowners with none available for business use. It has now been increased to $1,000, and the business use restriction has been eliminated.
Five new "business" additional coverages have been added.
1. Accounts Receivable--with a limit of $5,000 on premises and $2,500 away from the residence premises.
2. Valuable Papers and Records--with a limit of $2,500.
3. Business Income--actual loss sustained (the business income definition has been added in this endorsement). Included with Business Income is additional coverage for Extended Business Income which provides protection for up to 30 days after the business has been restored with reasonable speed when a covered business income loss has occurred.
4. Extra Expense--actual expenses incurred (the extra expense definition has been added in this endorsement).
5. Civil Authority--covered is the actual loss sustained for business income and extra expense as a result of action by a civil authority prohibiting access to the residence premises.
EXCLUSIONS
The following additional exclusions apply:
1. Dishonesty--no coverage exists for any loss or damage from any dishonest or criminal act that is caused by or that results from the actions of the insured or anyone with any interest in the property, any of their partners, employees, directors, trustees, authorized representatives or anyone at all that property has been entrusted to for any purpose. This exclusion applies whether or not any of the mentioned persons was acting alone or in collusion with anyone else, and it also applies whether or not the actions occur during business hours or in the course of employment.
A couple of exceptions to the exclusions are applied. Not excluded are acts of destruction by employees. (Theft by employees is definitely excluded, but acts of destruction are covered.) Also not excluded is loss or damage to accounts receivable and valuable papers and records by carriers for hire.
2. False Pretense--in cases where loss or damage has occurred because the insured, or someone the insured entrusted with property, voluntarily parted with the property through a fraudulent scheme, trick, device or false pretense, there is no coverage.
3. Business Income and Extra Expense Exclusions--
a. any delay in rebuilding, repairing or replacing property or resumption of operations that is caused by strikers or other persons; or suspension, lapse, or cancellation of a license, lease, or contract.
b. consequential loss.
4. Accounts Receivable and Valuable Papers and Records Exclusions--are similar to those found in standard commercial property policies.
Section II--Business Liability Coverage
Coverage E--Personal liability is extended to cover business liability for on-premises and products-completed operations hazards as long as the occurrence takes place in the coverage territory and during the policy period and results from the necessary or incidental use of the residence premises to conduct the business. Coverage also is extended to include both personal injury and advertising injury liability. Review the policy wording carefully. This is not an all-encompassing commercial general liability policy, but rather a modified version providing on-premises liability at the residence premises, limited off-premises protection and products/completed operations coverage.
Coverage F--Medical payments to others is similarly extended to business occurrences.
EXCLUSIONS
* professional liability
* specified instances of personal or advertising injury such as breach of contract other than misappropriation of advertising ideas under an implied contract; the failure of goods product or services to perform or conform with advertised quality; wrongful description of price or goods/services; or any offices committed by an insured whose is in the advertising, broadcasting, publishing or telecasting business
* damage to impaired property or property not physically injured
* damage to particular property such as premises the insured has sold, given away, or abandoned; damage from premises *on which the insured or a contractor/subcontractor working on behalf of the insured is performing operations; or any part of any property that has to be repaired or replaced because work done by the insured was not correctly performed
* damage to your product or any part of it
* damage to your work or any part of it (unless performed on the insured's behalf by a subcontractor)
* employers liability
* recall of products, work, or impaired property
Exclusions to medical payments to others--
Excluded are any medical payments to others for bodily injury that occurs to any insured, to a person hired to work for or on behalf of the insured or tenant of the insured, to persons involved in athletics, caused by an injury otherwise covered under products/completed operations hazard, or otherwise excluded under the Coverage E--Personal Liability exclusions.
C. Section II--Additional Coverages
In the Personal Liability Additional Coverage 3 for Damage to Property of Others, the exclusion regarding the business of the insured is deleted. All of the exclusions in this endorsement already discussed as applicable regarding property damage apply to this additional coverage. However, the limit of liability for this coverage is increased to $2,500 per occurrence, subject to the aggregate limit shown in the schedule.
D. Section II--Conditions
Limits of Liability
1. The limit for products-completed operations hazard is the same as that for the Coverage E limit shown in the declarations.
2. The limit for all other business liability is twice the sum of the Coverage E and F limits shown in the declarations.
3. The limit for Damage to Property of Others is increased to $2,500 per occurrence.
Severability of insurance--
The coverage in this endorsement will be applied separately to each insured except for the Limits of Liability. The Annual Aggregate Limits of Liability are not increased in any way no matter how many insureds are involved.
E. Sections I and II--Conditions--Examination of Your Books and Records
A new final condition is added to allow the insurer the right to examine and audit the insured's books and records as they relate to the insurance coverage provided. The insurer many examine at any time during the policy period, plus any time up to three years after expiration. *
Nearly 60% of all in-home business owners are not properly insured, according to a new study released by the Independent Insurance Agents of America (IIAA). Thus, these home-based entrepreneurs can be a profitable niche market for independent agencies and their companies, the association concludes.
The study showed that of those without proper coverage, 44% said they did not buy business insurance because they mistakenly thought they were covered under another policy. Another 6% were simply unaware they needed it.
Cost was not reported as a major factor in most respondents' decisions to forego business insurance. Thus, lack of knowledge shows up as the largest impediment to purchasing this type of coverage.
The IIAA-commissioned study was conducted by International Communications Research (ICR) of Media, Pennsylvania, which firm surveyed 4,000 people aged 18 and over, including an equal number of men and women. The survey was conducted by phone over a 20-day period.
"Independent agents need to educate in-home business owners on the need to properly protect their businesses from expensive losses," said Madelyn Flannagan, IIAA's consumer affairs advocate. "This proactive step will protect agents from E&O exposures, and allow them to participate in an expanding niche market."
As further evidence of the expansion of the in-home business market, the association cites U.S. Bureau of Labor statistics estimates that there are more than 18.3 million home-based businesses in the United States today. Currently, that adds up to as many as 43 million Americans running entrepreneurial entities ranging from business services to day care to plumbing. Also, The Home-Based Business Report estimates that as many as 3 in 10 Americans will operate a home-based business by 2000.
IIAA's study indicates that among the most vulnerable home-based entrepreneurs are those between 55 and 64 years old. Sixty-eight percent of respondents in this category lack adequate coverage to protect their businesses--more than any other age group. Those that do have coverage in this age group most often choose the less comprehensive and often inadequate "supplemental business riders" to their homeowners policies, which do not offer coverage for theft and property damage or expensive liability claims and loss-of-income.
"This statistic is most disturbing because many of these entrepreneurs are retired or close to retirement and are supplementing their often limited incomes by running small businesses from their homes," Flannagan said. "Many would not be able to absorb large property or liability losses without depleting their retirement savings."
The study determined that women who own home-based businesses were better protected than their male counterparts. IIAA's research revealed that women entrepreneurs were almost 10% more likely than men to carry comprehensive business insurance to protect themselves from loss.
However, although women were reported as being slightly more "insurance savvy" than their male counterparts, female in-home business owners are still particularly vulnerable to financial risks caused by inadequate or non-existent insurance coverage because they make up a large and growing percentage of people working out of their homes as entrepreneurs. The Small Business Administration estimates that 300,000 women start home-based businesses every year.
IIAA's study was conducted through its National Communications Program--a partnership between the association, individual agents and 33 independent agency insurance companies. *