Unlike a business owner's policy, a homeowner's policy protects you from the economic harm associated with home ownership, as well as other covered risks listed in the policy. Even if you have incorporated your business or formed an LLC, you and your business are joined economically. Any economic disaster that hits you will make it hard for you to give your business the time and monetary support that it needs. A homeowner's policy can help insure that a non-business loss will not drag down your business.

And if you have a home-based business, you'll be especially concerned about shielding your residence from possible casualties or liabilities.

What's covered by a homeowner's policy? There are several different types of policy in terms of the types of risks that are covered. The most common type of homeowner's policy in use today (known as "comprehensive coverage" or "HO-3" in the insurance industry) covers a variety of risks beyond what you might expect. It is this general type of policy that we will discuss here. (Renter's insurance is closely related to homeowner's insurance — see the discussion below.)

Here are some of the major kinds of risks that are covered by a comprehensive coverage homeowner's policy:

• damage to home and personal property caused by fire, lightning, wind, or storm damage
• medical payments for occupants for injuries caused by fire, lightning, wind, or storm damage
• medical and legal liabilities to persons injured by accident while in the home
• loss or theft of personal property, even if not in your home, with some restrictions on things like jewelry or laptop computers
• liability to others for accidental damage to their property, even if not in your home
• liability for unintentional personal injury to others caused by the homeowner or his or her family
• liability for intentional personal injury to others caused by the homeowner's children who are below a specified age
• liability to others hurt because of your participation in a sporting event (for example, while playing golf, you accidentally strike someone with a golf ball)
• liability for damage or injury caused by pets (but damage caused by exotic pets — such as a cheetah — will not be covered)
• damage caused by vandalism, riot or civil unrest
• damage caused by falling objects (such as tree limbs)

Renter's insurance. Renter's insurance offers liability and property coverage for renters that is similar to that available under homeowner's policies. Renter's insurance policies are subject to the same exclusions that apply to homeowner's policies, most particularly the business use exclusion.

What's not covered by a homeowner's policy? It's important to know the types of risks your homeowner's policy covers. Just as important — and possibly more so — is to know what risks your policy does not cover. For our purposes, the three main risks that your comprehensive policy normally does not cover are:

• flood damage (including the water damage caused by a hurricane)
• damage caused by ground movement (such as earthquakes and soil erosion)
• claims arising from a business use of the premises.

Claims arising from a business use of the premises are, by far, the most important exclusion for home-business operators.

We say "normally does not cover" because some states require insurance companies to cover some of these risks (for example, California requires coverage of earthquakes), and because you can often obtain coverage by purchasing — at additional premium cost — a policy rider. A policy rider is an additional provision that you and the insurance company agree to add to a policy, usually at an additional cost to you.

Business use exclusion. Dealing with this exclusion is vital. You don't want to ignore it, hoping that it won't apply to your home office situation. It will — and possibly in ways that are even worse than you imagined!

Unless you have taken steps to have your home business covered, your homeowner's policy will exclude it from coverage: The insurance company will not reimburse you for liabilities that arise from the home office, or pay claims on damaged or destroyed business property. Such uninsured losses may be devastating:

 

A large tree limb falls on your home, wrecking a portion of your roof and rooms below (cost to repair = $30,000) and damaging a personal computer system that was exclusively used in your home business (cost to repair = $2,000). Coming into your home business area to fix your damaged computer, a computer technician trips and falls, breaking his leg (medical bills and liability payments = $20,000). If your policy does not cover losses arising from a home business, which of these damages (if any) will be reimbursed by the insurance company? This depends on your policy. If it merely excludes the business from coverage, you would still be covered for the $30,000 damage to your roof and rooms. However, if your policy becomes void upon the discovery of a home business on the premises, you will receive no compensation for any of the damages and will have to search for a new homeowner's policy, since your policy is no longer in force.

Your should be upfront with your insurance agent about your home business. If your business does not involve the coming and going of customers or employees, or the storage of hazardous materials or large quantities of valuable inventory in your home, your agent may be able to offer to cover your business by way of a relatively inexpensive rider to your existing policy.

You have two choices if your present insurance company will not offer a policy rider: investigate whether other insurers will offer such coverage, or purchase a business owner's policy.