When management consultants, computer experts, or wreath-makers run businesses from home, insurance is the last thing they think about, if they’re like the majority of home-based business owners.

There are 11 million home-based businesses in the U.S., and most (58 percent) are without insurance, according to a 2004 study released by the Independent Insurance Agents & Brokers of America (IIABA).

Some industry observers are calling for insurers to capitalize on this opportunity, while others doubt its potential profitability and regard it merely as another service for clients that avoids an errors and omissions exposure.

The question becomes: Is home-based business insurance a potentially lucrative but overlooked opportunity, or a market whose potential is overrated?

Demographics

Home-based businesses are the nation’s predominant form of small business. They make up 53 percent of the small-business population, and serve as incubators for many growing businesses, reports the Office of Advocacy of the U.S. Small Business Administration (SBA) in The Small Business Economy, 2004.

Home-based businesses are concentrated in relatively few industries, with 52 percent of home businesses in the services sector and 14 percent in retail trade. The remainder are in construction (16 percent); finance, insurance, real estate (five percent); transport, communication, utility (four percent); manufacturing (three percent); wholesale trade (three percent); and other (three percent).

More than 90 percent of home-based businesses are sole proprietorships and have no employees. Seventy-seven percent have gross receipts of less than $25,000. Ninety-six percent have gross receipts of less than $50,000. Three-and-a-half percent have gross receipts of $100,000 or more. Less than one percent have gross receipts of $500,000 or more.

The higher the income level of a home business, the more likely it is to be insured, but a substantial number of home business owners in the higher income range also do without insurance, according to the IIABA. Forty-one percent of home-based business owners making more than $75,000 a year lack adequate business coverage.

Why they risk it

One in 10 home business owners have experienced a loss or injury as a result of, or related to their business, the IIABA study found. So why do most home business owners fail to insure their businesses against exposures that could put them out of business?

Reasons offered by industry experts include the entrepreneurial spirit, which doesn’t tend to focus on risk; the inability to afford insurance; and the difficulty in finding tailored, affordable products. However, the main reason is that most home-based business owners are simply uninformed about coverage.

The IIABA study findings show that 39 percent of home-based business owners either think they don’t need insurance or that they have some other type of coverage for the business. The rest think the business is too small or poses no risk (29 percent), or they do not have a reason for having no insurance (19 percent).

The notion that a homeowners policy covers an in-house business has long been a common misconception among those who work from home.

A 1997 survey by the IIABA had similar results as the 2004 study. While the number of people who are running businesses out of their homes increased 30 percent since the last survey in 1997, the percentage of home-based business owners who are insured has not grown. Homeowners insurance normally does not provide protection for a home-based business from theft, accidental damage, natural disasters, vehicle accidents and liability.

Insurance columnist Chris Amrhein explains that most consumers don’t see their home-based businesses as an insurance issue, and they’d be shocked to find out that a product demonstration party they had at home for some clients is not covered under a standard homeowners policy. As he sees it, this is an underserved market for carriers and an agent’s errors and omissions claim waiting to happen.

“Insureds don’t see the need,” Amrhein says. “Agents don’t think to sell it. Companies don’t care if they sell it.”

Lack of demand

Indeed, some companies contacted for this article said they encounter too little demand for home-based business coverage to justify the cost of incorporating it into their underwriting operations.

“We’re not getting a lot of demand from our agents,” says Cindy Doble, vice president of Western National Ins. Co., Edina, Minn.

Before grappling with the automation issues involved, “we would need to find out exactly what the market is for that particular coverage in the states where we do business.”

John DiStefano, senior portfolio manager for Preferred Mutual Ins. Co., New Berlin, N.Y., reports a similar lack of demand for home-based business coverage in Preferred’s regular focus group meetings with agents.

Beyond that, carriers have reasons of their own to be cautious about expanding their exposure to home-based businesses, according to DiStefano.

“There are all kinds of things that can go wrong,” he says, especially when a home-based business is engaging in “e-commerce,” whose liability exposures are only beginning to be understood.

Although claim activity associated with e-commerce has not exploded to the degree some observers had predicted, its increased potential for defamation, trespass, breach of privacy, and infringement of intellectual property gives pause to insurers and reinsurers.

Agent inertia?

The essence of home-based business coverage is the ability to provide commercial coverage on a personal lines policy (see sidebar above).

This supposed advantage, however, runs into the mindset of most agencies, whose attitude is that “the money is in commercial lines, not personal lines,” says Amrhein.

“Overall, small business accounts are profitable,” Amrhein says, “but few agency folks seem to appreciate just how extensive is the need for home-based business coverage, so nothing happens.

“This results in a huge lost opportunity,” he adds.

Whether profitable or not, home-based business coverage give agents a good opportunity to enhance their service to clients, says John Konechne, president of Shores Agency, Grosse Pointe, Mich., and chairman of the IIABA’s Technical Committee.

“If [the home-based business coverage] is an add-on to a homeowners policy, it’s not much of a profit or loss situation for an agent,” Konechne says. “But it doesn’t take much effort, and it’s another step in taking care of your customers.”