INSURING A HOME BUSINESS
The ISO Coverage Form - Property Coverages
Insurance Services Office (ISO) has developed an endorsement, HO 05 90, that may be used to insure a home business. When this endorsement is attached to a homeowners coverage form, Section I provides coverage for the described business, and for property of others in the care of the business. Coverage C special limits of liability are expanded, and new additional coverages are added. Definitions are amended or added in accordance with the coverage provided. Particularly, the definition of "business" is changed so that "business" means "the trade, profession or occupation described in the Schedule of [the] endorsement that is conducted at or from the residence premises
Certain rules govern the home business endorsement. The home business must be owned by the named insured, or by a partnership, joint venture, or other organization comprised solely of the named insured and resident relatives. The business must be operated from the residence premises - which may include the home or an other structure that is on the residence premises - described on the homeowners declarations. The home must be used primarily for residential purposes. The business may have up to three employees, with gross annual receipts of not more than $250,000.
The endorsement is designed for four principal classes of business. The first of these is an office in which functions such as accounting, bookkeeping, clipping, or an answering service are performed. The second class is a service business, such as videotaping, bicycle repair, housecleaning, etc. The third class is sale of tangible products, such as books, costume jewelry, cookware, etc. The fourth class is sale of crafts, such as ceramics, leatherwork, needlework, etc., made in the home.
Certain types of businesses are ineligible. These include manufacture, sale, or distribution of food products, manufacture of personal care products such as shampoo or skin lotion, or sale of personal care items manufactured by the insured. Certain other businesses may be ineligible based upon company underwriting guidelines.
The endorsement may be used with standard homeowners forms HO 02, HO 03, HO 04, or HO 06.
The home business endorsement modifies the Section I property coverages in various ways. The standard homeowners form excludes, under coverage B, other structures used in whole or in part for business. The endorsement modifies coverage B so that another structure used for business purposes and described in the endorsement's schedule is covered for direct physical loss by a peril insured against.
Coverage C applies to both business and personal property. The endorsement accomplishes this by deleting the $2,500 special limit of liability for property on the residence premises used at any time for any business purpose. Additionally, the $250 special limit of liability for business property away from the residence premises is increased to $ 5, 000 (excluding adaptable electronic apparatus as described in special limits 10. and 11. of the homeowners form). Finally, the $200 limit of liability for money is increased to $ 1, 000. A note of caution - since the coverage C limit applies to both business and personal property, it is important to allow a sufficient amount of insurance.
In keeping with the endorsements intent to cover a repair business, coverage C is amended to include property of others in the insured's care for business purposes. Further, coverage C applies to leased personal property for which the insured has a contractual responsibility to insure.
Two standard homeowners additional coverages are expanded. First, the preclusion of coverage for trees, shrubs, and other plants grown for commercial purposes does not apply to trees, shrubs, plants, or lawns grown for the insured's business. Second, the preclusion of coverage for loss arising out of business use under the coverage for credit card, fund transfer card, forgery and counterfeit money has been deleted. Additionally, this coverage has been increased to $1,000 from the $500 provided in the standard homeowners policy.
The home business endorsement includes five additional coverages. There is coverage for accounts receivable on the residence premises for $5,000, and $2,500 for accounts receivable away from the residence premises. This amount is additional insurance, and pays for expenses incurred due to the inability to collect accounts receivable because of direct physical damage by an insured peril.
Coverage of $2,500 for direct physical loss or damage to valuable papers and records is provided as additional insurance. Included in this amount is the cost to research lost records for which no duplicates exist.
Time Element Coverages
Particularly attractive to the home business owner are the remaining three additional coverages: business income, extended business income, and extra expense. These are similar to the coverages provided under the ISO standard business owners forms. If the insured's business operations must be suspended because of loss or damage to property at the residence premises, business income coverage applies following a 72-hour time deductible, and continues for up to 12 consecutive months. Note that the loss or damage triggering the business income coverage must be to property- not necessarily business property -at the residence premises. This provision recognizes that damage to the dwelling or other structure in which the home business is located may force the business to suspend operations, even though business property itself sustains no damage. A deductible applies.
Extended business income provides coverage for the time following resumption of operations, until the business is actually up to pre-loss status, or 30 days, whichever is earlier. This coverage provides, for example, income while the insured re-establishes clients lost following the suspension of business operations. This amount is additional insurance; no deductible applies.
Extra expense coverage pays for necessary extra expenses incurred during the period of restoration that would not have occurred had there been no direct physical loss or damage. These expenses must be caused by or result from a peril insured against. The extra expenses are those taken to avoid or minimize the suspension of business or operations; for example, renting an office to continue the business following a loss. No deductible applies to this coverage, which is additional insurance.
Finally, there is loss of business income coverage caused by action of a civil authority in prohibiting access to the residence premises. The action must be due to direct physical loss or damage by a peril insured against. Coverage begins 72 hours following the action, and continues no longer than three consecutive weeks. No deductible applies to this amount. The insured should be aware that threat of direct physical loss causing the civil authority prohibition will not trigger coverage. So, for example, if a railroad tanker car carrying dangerous chemicals overturns, and the surrounding area is cleared until the car can be righted or the chemicals safely removed, there is no coverage for loss of business income since no direct physical loss occurred.
The home business endorsement adds exclusions that are in keeping with the coverage intent. There is no coverage for loss arising from dishonest acts committed by the insured, the insured's partners, or anyone having an interest in the property. Voluntary parting with property because of trick or device or false pretenses is excluded. Extra expense or increase in business income loss caused by either the action of strikers or suspension or lapse of any license or contract is not covered.
There are exclusions that apply only to the accounts receivable and valuable papers and records coverages. The exclusions found in the homeowners coverage form to which the home business endorsement is attached apply, except for neglect, war, nuclear hazard, and intentional loss. Other exclusions apply as well to these coverages, such as loss caused by erasure of electronic recordings caused by programming errors. A complete list is contained in the endorsement itself.
The home business endorsement adds new loss settlement conditions to the homeowners forms. For example, if a loss payee for covered business property is named in the schedule of the endorsement, then losses involving such property are adjusted as interests may appear. If the loss payee is a creditor with whom the insured has entered a contract for sale of covered business property, then settlement in event of a covered loss is with each loss payee, in their order or precedence, as interests may appear. If a claim is denied because of the insured's failure to comply with terms of the endorsement, the interests of a loss payee may still be covered if certain conditions are met.
The value of valuable papers and records is limited to the cost of blank materials and the labor to transcribe or copy the records. Loss to property of others in the insured's care is settled at actual cash value, but not more than the amount for which the insured is liable, plus the cost of any labor or materials or services arranged by the insured on personal property of others.
There is a limitation for loss of business income caused by direct physical loss or damage to electronic media and records. There is no coverage after the longer of 60 consecutive days from the date of direct physical loss; or the period, beginning with the date of direct physical loss, necessary to repair or replace other property at the residence premises caused by the same event.