Insurance/Liability and Business/Legal Question (LONG)

[Guest guest]

There are several insurance companies out there that specialize in the home

based crafters and home based businesses. You do not have to drop out of sales

opportunities because of the insurance issue.

Here is an article written on the very subject:

Business Insurance in the U.S.

For the Handcrafted Soap Maker

Whether you are a part-time professional soap maker who sells products at the

occasional craft show, or a full-time veteran soap maker who ships cartons of

soap to national chains, business insurance is a must. Without insurance, one

loss might put you out of business for good. The majority of us are making soap

in our homes' basements or kitchens, an environment known as a home-based or

in-home business.

Homeowners (or Renters) policies were not designed to cover in-home businesses.

At the very most you may be limited to $2,500 in Property coverage for such

business items as filing cabinets, inventory, and equipment in your home, and

$250 in coverage for property away from home. Your Homeowners policy does not

provide Liability coverage for your in-home business, either. Business Liability

insurance is for those claims for which you are legally liable as a result of

bodily injury or property damage of another arising from your business or

products.

Option 1: The Incidental Business Endorsement

There are several ways to cover the in-home business exposure. One option is to

have an Incidental Business Endorsement added to your existing Homeowners'

policy, which would provide Property coverage for your home-based business. In

addition, you should have this endorsement amended to include Business Liability

coverage. If your insurance agent is able to provide this endorsement, an

additional premium will be charged for the extension of coverage. In most cases,

however, this Incidental Business Endorsement will not be an option, as most

insurers of Homeowners policies are not willing or able to extend Business

coverage to Homeowners insurance.

Option No. 2: RLI's In-Home Business Insurance

An In-Home Business Insurance policy is another option for your home-based

business. Due to its affordable premium and comprehensive coverage, most in-home

soap makers opt for this type of policy. Although few insurance companies sell

In-Home Business Insurance policies, the RLI Insurance Company has created a

niche by specializing in this particular kind of insurance. If your business

qualifies for RLI's In-Home Business Insurance program, for a modest premium

(around $250 dollars), you can purchase $500,000 in Business Liability limits

and a minimum of $5,000 in Personal Property (business equipment, supplies, and

inventory) limits. For an additional premium of approximately $65, the Business

Liability limit can be raised to $1 million. The Personal Property limit on the

RLI policy can be increased up to $50,000, subject to need and additional

premium. Plus, you can also purchase Money & Securities coverage (for protecting

your cash at craft shows, etc.), and Electronic Data Processing (EDP) coverage

for your computer and related equipment. These lines of insurance would also be

subject to additional premium.

Click here to determine if you may qualify for RLI's In-Home Business Insurance,

and to learn more about the coverage.

Option No. 3: A Business Owners Policy (BOP)

In the event that your soap making business does not qualify for RLI's program,

and you cannot obtain an Incidental Business Endorsement from your Homeowners'

insurance company, the third and final option is to purchase a Business Owners

Policy, also known as a BOP. The BOP will have Property and Liability lines of

coverage similar to those outlined above for RLI's program. You should buy this

type of a policy (or any policy, for that matter) from an experienced insurance

agent who represents reputable (i.e., financially solvent) insurance companies.

A.M. Best, an independent insurance company rating agency, utilizes a rating

system which ranges from A++ to F. In general, an insurance company with a

rating of less than A may be suspect. RLI, for example, has a Best's rating of

A+. The Best's guides can be found in the business section of most main public

libraries. Your insurance agent should also have a copy of this annual guide.

Determining the Amount of Business

Liability and Property Limits to Purchase

No matter which insurance coverage option you purchase, you will have to make

decisions as to the amount of limits to purchase for your business. Most

Liability coverage for the above mentioned options starts at limits of $300,000

to $500,000. In most cases, for a small additional premium, the limit can be

raised to $1 million. Additional Liability limits can also be purchased in

excess of $1million. How much Liability insurance should a soap maker carry? The

old rule of thumb used to be the amount of insurance needed to protect one's

assets. In today's litigious climate, however, $300,000 - $500,000 can be eroded

quickly by court costs and legal fees, let alone by awards for damages and

settlements. This is why buying limits of $1 million or more may be a good idea.

Your insurance agent can help you determine the Property limits you should

carry. In general, you want to buy property limits which would make you whole in

the event of a total loss. The biggest mistake most people make is underinsuring

their Property exposures. Let's say that your property is valued at $10,000, and

your policy limits are for $8,000. In the event of a total loss, you would end

up $2,000 short.

Other Things to Consider

When Purchasing Property Insurance

As an aside, it is a good idea to have the Coinsurance Clause waived and the

Property coverage on the policy valued at Replacement Cost. Also, you should

purchase All Risk Property coverage. The name is a bit of a misnomer, however.

It means All Risks as defined in the terms, conditions, and exclusions of the

policy. Most Property insurance policies exclude floods and earthquakes, for

example.

Flood and Earthquake Insurance

As previously mentioned, most property policies exclude the perils of Flood and

Earthquake (a.k.a. Earth Movement). These lines of insurance, however, are

readily available, and should be considered when insuring your soap making

business (and your homeowner's exposure, as well).

Flood insurance was non-existent until 1968 when Congress passed legislation to

create the National Flood Insurance Program (NFIP). This government program

offers flood coverage for a reasonable premium as long as your local community

carefully manages its flood prone areas. Contrary to popular belief, you do not

have to live near a body of water to experience a flood: storms, melting snow,

hurricanes, and water back-up due to overloaded drainage systems are also ways

you may be at risk for floods.

Homes may be insured with the NFIP for limits up to $250,000 for the building,

and $100,000 for contents. Renters can also purchase the contents coverage.

Non-residential premises may be insured for limits up to $500,000 for the

building, and $500,000 for the contents, for a total of $1 million in limits.

The premium for Flood insurance is affordable: for $50,000 in contents coverage,

the average annual premium would amount to around $35 to $50. For homes and

non-residential buildings in low to moderate flood risk areas, annual premiums

are very reasonable.

Flood insurance is easy to purchase. Although underwritten by the U.S.

government, Flood insurance is available from numerous insurance companies and

agents. Your insurance agent should be able to obtain a quote and place the

coverage for you. We strongly recommend that you discuss with your agent the

best way to cover your in-home business and your homeowner's exposure via the

National Flood Insurance Program. As there is a 30 day waiting period before

coverage incepts, be certain to plan ahead: don't let the erratic weather of

Global Warming get the best of you!

Earthquake (or Earth Movement) is also normally excluded as a peril on your

business (or homeowners) property policy. Earthquake coverage, however, is

usually written as an additional line of insurance to your existing business (or

homeowners) property policy. This coverage is for the direct damage to property

by the violent shaking of the earth, but normally excludes losses resulting from

other perils (such as fire, explosion, flood, etc.), even if these perils are

triggered by the earthquake. Generally, subsequent tremors and aftershocks which

occur within 168 hours of the initial occurrence are considered to be the same

event, and therefore, are covered.

Deductibles for Earthquake coverage are usually based on a percentage of value

of the property insured at the time of loss. (In contrast, most other property

deductibles are on a flat rate basis: e.g., $100 per occurrence, and so on.) In

most cases, separate deductibles for Earthquake coverage will apply for losses

to your building and your contents. As an example, a building valued at $200,000

and contents valued at $50,000, with a 10% deductible, would require that you

pay the first $20,000 of loss for your building, and the first $5,000 of loss

for your contents.

As with most lines of coverage, premium for Earthquake insurance will vary by

insurance company and location of your property. Rates may vary from a modest

premium for low risk areas (certain areas of the Midwest, for example), to a

substantially higher premium for high risk areas (California, etc.). One way to

reduce the premium in high risk areas would be to request a higher deductible.

All of these issues should be discussed with your insurance agent. Again, we

emphasize the need to discuss with your agent how to best insure your in-home

business and homeowners' exposures in order to avoid any gray areas.

Business Interruption and Extra Expense

Now that we have examined two perils which are normally excluded on a property

policy, we will focus on two additional lines of coverage which can be added to

your business property policy: Business Interruption and Extra Expense. Business

Interruption (a.k.a. Business Income) coverage reimburses lost earnings when

your business's operations are temporarily interrupted due a property loss

caused by an insured peril. This coverage normally includes salaries, taxes,

rents, net profits and other operating expenses which are necessary to restore

your business operations during the period of interruption. The Business

Interruption coverage will be subject to a deductible (usually expressed by a

number of days) and a dollar amount, which will be your Business Interruption

Value.

Your Business Interruption Value is determined by the completion of a Business

Income Worksheet, which you can obtain from your insurance agent. This value

then becomes the dollar amount of earnings to which the policy's Contribution

Clause applies (in other words, the dollar amount the insurance company will pay

or indemnify subject to the terms and conditions of the policy). It is

imperative to discuss with your insurance agent seasonal fluctuations of

inventory which might affect the valuation of your business. Establishing

accurate records is critical to adequately insuring your Business Interruption

exposure. While it is important to consider purchasing all lines of insurance

mentioned, please keep in mind that most businesses which experience a major

Business Interruption loss are unable to survive without this coverage in place.

Extra Expense is another line of property coverage to consider. Whereas Business

Interruption would pay for your lost profits during an interruption of your

business operations, Extra Expense would pay for expenses incurred which help to

avoid or minimize the curtailment of your soap-making business's operations. As

an example, let's say that your roof is damaged by wind (a covered peril on your

property policy). Business Interruption coverage would pay for the loss of

business income or the insured period that you are unable to occupy your

building, and Extra Expense coverage would pay the additional cost to rent an

office and/or soap making premises while your building's roof undergoes repairs.

Your insurance agent will best be able to assist you in the amount of coverage

to purchase.

Business Auto

Now that we have investigated four important lines of property coverage, let's

turn our attention to your Business Auto exposure. If you are currently using

your personal auto for business activities such as transporting supplies or

products, visiting prospective or existing customers, etc., it is imperative

that your automobile insurance provides coverage for accidents which may occur

while conducting business. In some instances, your Personal Auto policy may

cover the business use of your vehicle. Depending on the scope of your business,

however, and the type of vehicles you own, you may have to purchase a separate

Business Auto policy. Again, it is imperative to discuss this scenario with your

insurance agent to determine the best way to cover your Business Auto exposure.

Workers' Compensation Insurance

There are additional types of insurance to consider as well: some of them may

even be mandatory. Workers' Compensation, which covers employees in the event

they are injured on the job, is required in some states with as few as two

employees. It is imperative to discuss this coverage with your insurance agent

to determine your obligation, if any, to carry this coverage. Failure to comply

with your state's Workers' Compensation laws could result in substantial

penalties and fines. Further, you could be sued by your employees for failure to

maintain this coverage, and would have to pay for these damages and expenses out

of your own pocket.

Lee C Brown, Ph.D, D.Pharm.

President

Fantastibath Products

www.Fantastibath.com (retail)