MARKETING
Survey shows most home-based businesses
not adequately covered; many agents and companies
have yet to discover this growing market
By Phil Zinkewicz
Okay, it's Monday morning and the work week begins. You awaken, move to the kitchen for that cup of adrenalin and then journey to the bathroom for your morning ablutions. Finally, you're dressed and ready for that daily commute. It's a treacherous one. There's that throw rug that moves under your feet when you least expect it. You may have to step over a dog or two. Nevertheless, by dint of serious effort and concentration, you have made it through the foyer, past the living room and bedroom--and into your office.
According to the Bureau of Labor Statistics of the U.S. Department of Labor, you are one of the 19.8 million people who usually do some work at home as part of your primary job. And, if you work out of your home at least once a week, you are part of the 15% of workers who make up the nation's total labor force.
Those findings are from a special supplement to the May 2001 "Current Population Survey" (CPS) and represent the latest available statistics for at-home work.
Following are additional results of the survey:
* Half of those who usually worked at home were wage and salary workers who took work home from the job on an unpaid basis. Another 17% had a formal arrangement with their employer to be paid for the work they did at home. The remainder who worked at home--30%--were self-employed.
* Wage and salary workers who were expressly paid to work at home worked there 18 hours per week on average; those who were just taking work home from the job usually worked about seven hours per week at home.
* Four-fifths of those who regularly worked at home were employed in managerial, professional and sales jobs.
* About eight people in 10 used a computer for the work they did at home, and about six in 10 made use of Internet or e-mail access.
* Two-thirds of those who usually worked at home reported that they did so because they needed to "finish or catch up on work" or because it was the "nature of the job."
Nearly 60% of these [11 million home-based] businesses do not have insurance coverage ... Agents are aware that at-home businesses can represent an exciting new market, but many are not aware of the nuances of at-home business exposures and are fearful of ... an errors and omissions lawsuit.
Most lack insurance
Interesting as these findings may be, even more interesting are the findings of a recent survey completed by International Communications Research on behalf of the Independent Insurance Agents & Brokers of America (IIABA). The survey found that most of America's 11 million home-based businesses are vulnerable to significant financial losses because they do not have the proper business insurance coverage. The survey revealed that one in 10 U.S. households operates some type of full- or part-time home-based business. However, nearly 60% of these businesses do not have insurance coverage. When asked about the lack of insurance, nearly 40% of home-based business owners said they thought they were protected by some other type of coverage, while almost 30% said their businesses are too small to insure. Notably, nearly 20% could not give a reason for not having insurance.
A similar survey in 1997 found that there were 8.4 million home-based businesses in the United States and that 60% were not properly insured.
"In 1997, we found that a majority of home-based businesses were not properly insured," says Madelyn Flannagan, IIABA vice president of education and research. "The fact that this has not changed confirms a lack of knowledge about the importance of business insurance coverage. Proper insurance coverage can protect business owners from losses that can devastate a home-based business."
By not having business insurance, says Flannagan, home-based business owners are at risk for significant financial losses associated with theft, accidental damage, natural disasters, vehicle accidents and liability if an employee suffers an injury while on the job or a business guest is hurt while visiting. Homeowners insurance normally does not provide protection in these situations, she says.
The survey also reveals that home-based business owners with low incomes are less likely to have business insurance coverage. However, a surprising 41% of business owners in households making more than $75,000 per year also lacked adequate business coverage. Additionally, home-based businesses with no insurance are slightly more likely (11%) to have experienced a financial loss than those with insurance (9%), according to the survey.
"Income and business size should not be a deterrent when it comes to protecting a home-based business," says Flannagan. "Protection now can provide security and peace of mind as a business grows and produces more income."
According to Flannagan, while levels of coverage and premiums depend on the risk associated with each business, a comprehensive commercial policy can cost a home-based business as little as $250 a year.
Agents weigh in
So much for surveys. What do agents themselves think about the home-business market? Rough Notes spoke with three agencies that write coverage in the home-business area, and they all generally agree that the exposure represents a mixed bag of contradictions. Yes, carriers are selling commercial coverages for at-home businesses and, depending on the type of business, at affordable prices. But companies apparently are not aggressively marketing the product. Yes, agents are aware that at-home businesses can represent an exciting new market, but many agents are not aware of the nuances of at-home business exposures and are fearful of dipping their toes into waters that might lead to an errors and omissions lawsuit. Yes, consumers recognize that there are specific exposures that go along with operating a business out of the home, but most mistakenly believe that they are covered under their homeowners policies, and carriers as well as agents have not done sufficient work to educate them.
Steve Sparkes of the Corvallis, Oregon-based Barker Uerlings Insurance Agency has a dual interest in home-business insurance coverage because not only does he sell the coverage as an agent, but his wife recently started a home business of her own.
"My wife decided to go back to college," says Sparkes. "In order to do that, she had to leave her job, so now she runs a home-based notary public business specifically for the real estate industry. So we have experienced first hand the modifications in insurance coverages that need to be made when a home business starts up. We had to purchase property and general liability for the business as well as professional liability for my wife. We purchased the property and general liability coverage through an endorsement to our homeowners insurance policy and the professional liability through St. Paul Travelers. We knew what was needed, of course, because I'm in the insurance business. But many people who start businesses don't realize that homeowners insurance excludes general liability for at-home businesses and the coverage for property is very limited. Even when they do realize these things, there is resistance to buying the coverage."
Nevertheless, Sparkes maintains that the at-home business market is on the verge of becoming a burgeoning business. "Met Life also did a study similar to the Big I survey, and the Met Life study concluded that this is a market that is about to explode," Sparkes says. "But the irony is that, although companies recognize that this is an area with tremendous growth potential and are offering the coverages, they are not 'waving the flag.' Perhaps the reason is that there has not yet been enough claims experience collected, so it's difficult to know the proper premium. Some at-home businesses are fairly innocuous, but if someone is operating an automotive business out of the garage, there are product liability exposures to deal with in addition to the other exposures. If you're selling pottery and have a special kiln at your home, then the fire risks are increased. The area has a potential for significant growth, but there are still too many unknowns."
"Flying on the cheap"
Trey Hutt of the Panama City, Florida-based Hutt Insurance Agency says that in Florida, people who have at-home businesses either are not aware of additional exposures or, if they are aware, prefer "to fly on the cheap."
Says Hutt: "Agents, of course, should be working with companies to educate the public about the gaps that exist in their homeowners policies regarding commercial exposures and how inexpensive at-home business coverage can be. The problem is that we have a great many problems in Florida in terms of insurance and very often the agent already has a lot on his or her plate. It's easy for at-home business exposures to become a blip on the radar. As for companies, many of them see this area as being not profitable enough to spend the time and money in marketing the products."
Sam Bennett, a partner in the Harrison Agency in Columbia, Missouri, says that consumers indeed need to be educated as to the gaps that exist in their homeowners policies when starting up an at-home business; but he adds, too many agents are not well-versed enough about personal lines policies to inform them. Bennett specialized in personal lines throughout his 17-year career in the business. He is a Certified Insurance Counselor and has instructed classes for The National Alliance's Certified Insurance Representative (CISR) program since 1999, and he recently began instructing its Certified Insurance Counselor (CIC) program.
In terms of agents selling at-home business products, Bennett says, "It is impossible for us to know if a person has a business at home unless we ask them and they answer us truthfully.
"Let's say someone is employed at a plant and is laid off. That person may begin doing some drafting design at home to make ends meet," he continues. "There's no reason to believe that this temporary situation will flourish into an at-home business, so the person doesn't bother to tell his or her agent. And it can be any type of business that starts up slowly and then grows. Someone can be doing taxes for eight or 10 people or fixing cars or operating a beauty salon at home. The question is: What does the homeowners policy cover in these situations? The answer is in the HO policy itself and its definition of business."
Low limits for business
Bennett says the typical homeowners policy contains a broad definition of at-home business, but there are also broad exclusions. For example, in the Homeowners 3 Special Form, under business coverages, the definition of business reads: "A trade, profession or occupation engaged in on a full-time, part-time or occasional basis; or any other activity engaged in for money or other compensation." That sounds broad enough, but low limits apply, such as $2,500 on property on the residence premises used primarily for business purposes and $500 on property away from the residence premises used primarily for business purposes. There is also a total exclusion for general liability and the loss of business data, including books of accounts, drawings or other paper records, computers and related equipment.
So, in short, while the homeowners policy may offer broad coverages for the residence and its owners, coverage of the residence for business use is severely curtailed.
"Most people don't know this because they rarely read beyond the portion of the policy that tells them what is covered," says Bennett. "Unfortunately, many agents are not fully aware of these exclusions either. Often, if an agency specializes in commercial lines, the personal lines portion of the business is relegated to someone at the agency way down on the totem pole. So it's a matter of agents being educated so that they can educate the consumer."
However, says Bennett, "The consumer must bear some of the responsibility here as well." The agent cannot know if and when a homeowners insurance client has taken on some at-home business unless he or she has been informed by the customer.
Tips for clients
In this regard, IIABA advises agents to offer the following tips to consumers:
* Check your homeowners policy. Homeowners insurance was never meant to cover business exposures. Coverage for certain business items is limited, and homeowners coverage provides no liability insurance for home-based businesses. Additionally, a homeowners policy affords no business interruption coverage in the event that a loss causes a home-based to cease operations. However, a home-based business owner may be able to obtain an endorsement to add these coverages to an existing homeowners policy.
* Check business insurance policy options. There are several options for home-based businesses, including an incidental business endorsement, a businessowners package policy and an in-home businessowners policy.
* Protect yourself. If a home-based business is a full-time occupation, business owners must consider protections such as life insurance, health insurance, disability coverage and workers compensation. *