Setting up a home business? Don't forget to buy insurance cover

Many people who run their own companies from home put themselves at risk by not taking out proper protection. Chiara Cavagliari reports

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After the downturn comes the recovery, and normally in its vanguard are thousands of start-up businesses. But with bank finance tight at best and non-existent at worst, entrepreneurs have to start small, sometimes from their own homes. And this is where hidden dangers lie.

According to new research from business insurance provider Insurantz.com, out of 1,000 new start-up entrepreneurs interviewed, one in seven are unwittingly exposing themselves to risk of not receiving a payout should they suffer fire or theft by relying solely on their home contents and buildings cover.

"It's so easy to set up a business from home these days that the line between home and work can become blurred. As far as the insurance industry is concerned, however, no such blurring exists; they make a clear distinction between home contents and business equipment," says James Pickering, the managing director of Insurantz.com.

Many insurers will allow you to extend a standard household policy to cover your business, but if you do not inform them, not only would any relating claim be void, but the whole insurance policy could be invalidated. As a result, even if your claim has nothing to do with your business operations, you're in danger of being refused a payout.

What's more, even if cover is in place, there is likely to be a specified limit on value which may not offer sufficient protection. The best way to start, therefore, is to make a comprehensive list of everything you would need to replace if your business was affected by an unexpected incident. The chances are your business assets are more valuable than you think, so you may well need to reassess the overall level of cover in place. As businesses are always evolving, it's also worth carrying out an inventory every year to see if you need to make any changes. Don't be tempted to scrimp on cover to save money.

"Two-thirds of our brokers have seen customers reduce protection this year with many trying to save money by reducing the sum assured, for example, or failing to increase it with inflation. But small businesses must make sure the key areas of cover are in place," says Graeme Trudgill from the British Insurance Brokers Association (Biba).

Another potential pitfall is employers' liability. Insurantz found that more than a quarter of businesses employing one or more members of staff do not have this cover in place, despite this being a legal requirement. Employers' liability won't be covered by your household policy so failing to take this out could leave you exposed to costly legal action.

The confusion surrounding insurance for small- and medium-size enterprises (SMEs) is understandable, particularly for "micro businesses" employing just one or two people who fail to take on their legal obligations when they make the jump from sole trader to employer. "A lot of the current crop of 'bedroom entrepreneurs' don't see what they do as a business in the traditional sense and so don't see business insurance as applying to them," says Mr Pickering.

There are various levels and types of insurance which will be suited to different business models. A manufacturer may need product liability, for example, to protect against damage or injury arising from any products they sell. Equally, an electrician relying on his van would be out of pocket if his vehicle was off the road unless his had business interruption cover to compensate for the shortfall. This insurance safeguards against loss of revenue for a set period of time (typically a number of weeks or a few months) should disaster strike whether that be due to personal incapacity, unforeseen natural disasters such as flood damage, theft and IT failure.

If the public has access to your business premises you will also need public liability cover to protect you against claims from third parties. Key person cover is yet another consideration, particularly for smaller firms that rely on one person to run the business. This typically pays out if the nominated key person dies, although some cover critical illness too. As with other term assurance policies, you take out cover for a specified period such as 10 years.

When it comes to finding the right package, think twice before accepting any policies offered with your business loan. A local insurance broker is your best bet for getting a good price and comprehensive cover as they can deal with several insurers and find a policy to suit your specific needs. It can also be worthwhile speaking to your trade association which might have a policy package in place for your particular industry. Smaller businesses may need only standard packages – for example, Morton Michel specialises in childcare insurance – but it always pays to get some advice first.

"Every business is different and there are many variances so you do need to dig a little deeper. A broker will look at the details of your business and your own risks to find a suitable policy," says Mr Trudgill.

Gareth Edwards: Arrowsmith Marketing

For Mr Edwards, 48, from Stourbridge, a narrow escape from a fire in his three-bedroom detached home really drove home the need to get the right protection for his e-marketing firm, Arrowsmith Marketing.

"We had a fire at home about 18 months ago and fortunately we didn't have any consequential damage, but it all came into perspective for me. I suddenly realised that there were aspects of working from home that I hadn't looked into," he says.

Without data backup protecting the tools of his trade, Mr Edwards says damage from a fire could have brought the business to a screeching halt and having to replace laptops and printers would have had a big impact on cash flow. "If you're in an office, thinking about those things comes along with the territory but at home you presume it's all covered," says Mr Edwards.

Having comprehensive cover has also proved something of a sales point for him. "Having indemnity cover makes it easier to work in the public sector because they like those things to be in place. It shows that I have thought about my role working with other companies and puts forward a more professional image," he says.