Will home insurance cover my home-based business?

Small businesses make up 98 per cent of the Canadian economy and many of them are home-based.

While you think your home insurance may provide the coverage you need, think again. That’s because home insurance isn’t business insurance.

A survey done in 2022 found almost 40 per cent of small business owners said they didn’t have a business insurance policy, and another 25 per cent said they don’t think they need it. The survey interviewed 222 small business owners and self-employed professionals in Canada.

Among the 40 per cent who don’t have a business insurance policy, the reasons varied. One quarter (25%) felt they didn’t need it, while others said they didn’t because it costs too much (16%). Another 16 per cent said it was because they had personal home and auto insurance, while another 13 per cent admitted they hadn’t thought about it.

But they should. Let’s take a look at how home insurance and coverage for a home-based business differs.

Understanding your home insurance policy

Home insurance helps protect your home and your belongings in case of theft, loss or damage. It can also help cover additional living expenses if you're temporarily unable to live in your home due to a covered peril. Typically, your policy will cover:

• damage or loss to the interior or exterior of your home
• damage, theft or loss of your personal household possessions
• personal property stolen from your vehicle
• damage or injury to others who visit your home or property (personal liability)
• accidental damage you cause to somebody else’s property

Generally, your home insurance policy covers you and your family members. It won't cover claims related to your home-based business. And while your home insurance policy may provide limited coverage for damage or loss of business equipment it may not be enough.

Why would I need insurance for my home-based business?

According to the Insurance Bureau of Canada (IBC), a separate home-based business insurance policy can better protect your investment. IBC notes if you decide to run a business from your home, you must inform your insurer. Using your home for purposes that your insurer isn’t aware of may cancel your policy.

Here’s what’s important to know about why insuring your home-based business is important:

• Most homeowner’s policies only offer a small coverage limit for books, tools and instruments necessary for a business, profession or occupation only while the items are in your home. It doesn’t cover your inventory, for example, if it is stolen or damaged due to an unexpected risk such as a fire.
• If your work takes you away from home, your equipment may not be covered. Any products, equipment or supplies that may be stolen or damaged while in a vehicle won’t be covered under your personal auto or home insurance policies.
• Liability is perhaps the greatest risk with a home business. Commercial liability insurance would generally cover you against amounts you’re legally obligated to pay for bodily injury – a customer is unexpectedly injured - or property damage to others and would pay the legal costs to defend you in a lawsuit. Personal liability on your homeowners policy would typically not cover such situations.
• Your professional liability isn’t covered under a home insurance policy. If you’re paid to give professional service or advice, you need professional errors and omissions insurance. If a client suffers a loss because of errors in your work, they could file a lawsuit against your business.

You can speak with your broker to determine the type of coverage you need to protect your business. It’s advisable to do this as soon as you register your business and as it grows. As a business owner, it’s your responsibility to manage risk.

Different ways to insure your home-based business

Depending on the type of business you have, there are different ways to obtain coverage including:

1. An add-on endorsement to your home insurance policy. This can be done by adding a rider to your existing policy. This may be suitable if you’re a part-time business owner or freelancer. Most policies have an additional coverage cap for business property, which can vary anywhere between $2,000 to $5,000, depending on the insurer.
2. A standalone home-based business policy. This may be more suitable if clients come to your location or you keep inventory on hand.
3. Commercial home business insurance. This is similar to what many small businesses use. It is the most comprehensive and ideal if you have employees and carry more risk.

What if I just want a rider on my home insurance policy?

If you plan to proceed with an add-on endorsement, here are some criteria to qualify:

• The named homeowner or family member living at the residence must own and operate the business.
• The business owner needs to be the sole proprietor, but spouses living at the same address can be partners.
• The business needs to operate solely within your home.
• The address needs to be used as the primary residence since this is an add-on for home insurance.
• The business can’t have employees.
• Income can’t exceed $250,000 CAD.
• The space in your home needs to serve as your principal place of business.

It should be noted that if you live in a condo, be sure to check your condo insurance policy to make sure that operating a business doesn’t violate the terms of your agreement. If you rent a home, townhouse, or condo and belong to a homeowner’s association, they may require you to have business insurance to cover any potential damage or liability associated with your business.

- With files from Canadian Underwriter