Guides
Running a business from home: the insurance gaps
A homeowners policy caps business property, excludes business liability and lost income, and skips work vehicles and staff. Where the gaps are and the fixes.
A standard homeowners policy is written for a household, not a business. The ISO HO-3 (HO 00 03) caps business equipment at $2,500 on the premises, excludes liability arising out of a business conducted at your home, and does not pay for lost income, business data or business vehicles. If your home business has customers visiting, inventory, employees or meaningful revenue, you need a separate policy or a business endorsement, and the earlier you ask the cheaper the answer.
The wording below comes from the May 2011 edition of the ISO HO-3 hosted by the Maine Bureau of Insurance. Newer editions and your insurer's own forms differ in places, so check your policy. This guide is the overview; business property at home: what a homeowners policy pays covers the property cap in detail and home daycare insurance: what your homeowners policy leaves out covers child care, which has its own rules.
What counts as a business
The form defines "business" as a trade, profession or occupation engaged in full time, part time or occasionally, and any other activity engaged in for money or other compensation. It then makes exceptions, including activities for which no insured receives more than $2,000 in total compensation in the 12 months before the policy period begins, volunteer activities and certain unpaid or relative day care. A weekend craft seller who nets a few hundred dollars may fall outside the definition. A consultant, a dog groomer, a tutor, a baker selling to customers, an online reseller and a contractor working from a home office are inside it.
That definition matters in both directions. It drives the property cap, the liability exclusion and the application question "do you operate a business on the premises?" Answer it accurately. An undisclosed business can be grounds for a denied claim or a nonrenewal, depending on the facts and your state's law.
The gaps, one by one
| Exposure | What the standard HO-3 does | What fills it |
|---|---|---|
| Business equipment and supplies | $2,500 special limit on the premises, $1,500 away; settlement at actual cash value unless you have replacement cost on personal property | Increased business-property limit by endorsement, or a business owners policy |
| Inventory and stock for sale | Counts toward the same cap; some insurers' forms exclude it | Business property coverage on a commercial policy |
| Customer or client injured at your home | Excluded: bodily injury arising out of a business conducted at an insured location, and medical payments to others are excluded the same way | Business liability by endorsement, or commercial general liability |
| Advice, designs or services that go wrong | Excluded: the form has a professional-services exclusion | Professional liability (errors and omissions) |
| Lost income if a fire shuts you down | Not covered. Coverage D pays additional living expenses and fair rental value, not business income | Business income coverage on a business owners policy |
| Customer files, drawings, books of account | Not covered; the form covers blank media and retail software, not business data | Business data or cyber coverage; see home cyber insurance and cyberbullying coverage |
| Detached garage, studio or shed used for the business | Excluded under Coverage B | Property coverage on a commercial policy |
| Vehicle used for work | Motor vehicles are excluded from the property coverage | Commercial auto policy, or a business-use endorsement on personal auto |
| Employees hurt on the job | Not covered by homeowners; workers' compensation is a state-law duty | Workers' compensation policy; see household employees and workers' comp for the household version |
| Products you sell that injure someone | Excluded as business liability | Products and completed operations coverage on a commercial policy |
The form does keep a narrow exception to the business liability exclusion for an insured under 21 who runs a part-time or occasional, self-employed business with no employees, such as a teenager mowing lawns or babysitting.
Why the liability gap is the one that hurts
The property cap costs you a few thousand dollars. A lawsuit costs more. Personal liability coverage defends and pays for covered claims against you, but the business exclusion and the professional-services exclusion remove most claims that arise from the business. A claim that is excluded may still cost you a legal fight with your insurer over whether the activity was a "business," so the sensible time to settle the question is before a claim.
Say you run a hypothetical tutoring practice from your dining room, and a parent trips on the front step while dropping off a student and breaks a wrist. A homeowners insurer reading the form can point to the business exclusion, and its medical-payments coverage excludes the same loss. Contrast the same accident with a business liability endorsement or a general liability policy: the claim is defended and paid under that coverage. The hypothetical shows the difference between a home with occasional visitors and a home where customers arrive on a schedule. See Liability exclusions: what Coverage E won't pay for the other exclusions in play.
Ways to fix the gaps
Insurers offer a ladder of solutions, and what you need depends on how big and how risky the business is.
- Increase business property limits. Many insurers sell an endorsement that raises the on-premises and off-premises business property limits. This suits a freelancer with more equipment than the cap. See home business endorsement and endorsements, riders and floaters: what the words mean.
- A home-business or incidental-occupancy endorsement. Some insurers add a limited amount of business liability and property coverage to the homeowners policy for low-risk operations, such as an office-based consultant with no customers on the premises. ISO has filed forms for this, including Permitted Incidental Occupancies endorsements: HO 04 42 for a business such as an office, studio or private school at the residence premises, and HO 24 43, a liability-only form for a listed business conducted at another premises named in the endorsement. Insurers also have their own forms. Eligibility is narrow: expect questions about customers visiting, employees, sales and the type of business.
- A business owners policy (BOP). A BOP packages commercial property, general liability and business income coverage for small businesses, and it is the usual answer once you have inventory, employees, visitors or real revenue. Insurers decide whether a home-based business qualifies and which class of business is eligible.
- A stand-alone commercial general liability policy, sometimes plus professional liability, when your risk is liability and your equipment is modest.
- Add an umbrella over the top. An umbrella policy generally follows the underlying policies, so it does not fill a business exclusion that the underlying policy has. Ask the umbrella insurer whether it covers business liability.
- Schedule high-value equipment by name so it sits outside the cap; see scheduling jewelry, art and valuables.
Rental and short-term-stay businesses
Renting a room, an ADU or the whole house short term is a business use as well. It is covered by neither the standard form nor most home-business endorsements, and platform host protections have conditions of their own. See Insuring an Airbnb or other short-term rental and home-sharing endorsements for occasional hosts.
Check beyond insurance
Home business also involves law, not just coverage. Your city may require a home-occupation permit, your homeowners association may restrict customers or signage, a lease or mortgage may limit commercial use, and your state may require workers' compensation once you hire. An insurer may ask for these when you apply for a business policy. They also affect a claim, because a business operated against zoning or HOA rules can complicate it. Ask your local government and your HOA before you buy coverage.
A short audit
- Write down what you sell, who comes to the house, whether you have employees, and what equipment, stock and records live in the home.
- Total the replacement cost of business equipment and inventory, and compare it with $2,500.
- Read the business, professional-services and Coverage B exclusions on your own policy, and highlight any endorsements.
- Ask the agent in writing what the insurer will do with your type of business, and what it would cost to add coverage.
- Ask for quotes on the endorsement and on a BOP. Compare the coverage, not only the price.
- Back up your business data off-site.
- Keep business records, receipts and photographs of equipment where you could reach them after a fire; see how to make a home inventory for insurance.
Run the question through the homeowners coverage gap checker if you want a second pass.
Key takeaways
- The HO-3 caps business equipment at $2,500 on the premises and $1,500 away, and excludes business data, lost income, business vehicles and employees.
- Business liability is excluded, so a customer injured at your home is the gap most likely to cost real money.
- A business is anything done for pay on a regular basis; the $2,000 exception covers only tiny, occasional activity.
- Fix the gap with a business-property endorsement, a home-business endorsement, a business owners policy or general liability, depending on size and risk.
- Tell your insurer about the business at application and renewal, and check zoning, HOA and lease rules too.