From a technological standpoint, running a business from home has never been easier. Smartphones, emails, fax machines, the Internet and video chat have all led to a major surge in what has been termed “homepreneurs.” In fact, it’s believed more than half of all U.S. businesses are based out of an owner’s home.

Unfortunately, many of these people have become entrepreneurs by necessity, having been laid off during the recent recession.

“These are people who did not aspire to own a business, but circumstances dictated that they look at freelance opportunities and other business ventures,” said Ken Yancey, CEO of nonprofit entrepreneur mentoring group Score.

When Cynthia Jermin received a pink slip and lost her dream job at an investment bank, she left with a smile and a plan. “I had a smile on my face, because I was ready. I saw it as an opportunity to embark on this entrepreneurial journey,” said Jermin. Instead of looking for a new position, Jermin, who had been an assistant vice president at Credit Suisse, decided to start a business. With the financial support of her husband to avoid going into debt, she turned her guest bedroom into an office and launched Fundamental Life Products from her house in Queens. “It was better to start small and grow, than to rent a space, rent a factory, hire people and then, six months in, you’ve run out of capital, and you have to let everybody go,” said Jermin.

When most people launch into a home-based business, they immediately turn their attention to the material means to launch their enterprise. They stock up on paper, ink, pens, dry-erase boards, push-pins and all the technological bells and whistles (computer, printer, modem, etc.) so they can get up and running as soon as possible. But often they don’t consider insurance coverage. So before they know it, they have invested a lot of money and time into this venture, but never think about how they will protect it.

The popular misconception is that since the business is in your home, then it must be covered by your home insurance policy.  But before you make this assumption, ask yourself a simple question, “What kind of insurance should I buy to protect a business: Home insurance or business insurance?” When the question is phrased like this, the answer is nearly always business insurance.

Although there is some limited coverage for certain types of small business activities on a home policy, most policies have several exclusions for anything business-related. Since the home policy is designed to protect a home, with its normal risks and exposures, the home policy needs to limit or exclude areas not normally associated with a home. So don’t assume your home insurance will protect your small business activities.

According to an article in Entrepreneur magazine, one reason owners forgo insurance is confusion over what may be already covered by a homeowner’s or a renter’s policy. But most home-business owners have little or no coverage from their homeowner’s policy. People don’t realize that if the UPS guy comes to their home office with a business package in his hand and slips and hurts himself, there is no coverage for that injury in their homeowner’s policy.

Herein lies a major problem. The most costly exclusion on a home policy may be in the area of liability. Most home policies provide comprehensive liability protection of $300,000 for normal home activities, but the policy will specifically exclude most business activities. With today’s legal system, liability exclusion is a major financial gap in your protection.

Another limitation is business property or inventory. If your home-based business has any kind of inventory, it could be inadequately protected. If your home business involves repairing computers for clients, and at any given time there could be a dozen laptops sitting on a shelf in your office, you will not be protected if there is a fire or a flood and that inventory is damaged or destroyed. Although there is some limited coverage on the home policy, the coverage is just that – limited – and with exclusions based on where your inventory may be stored.

A business policy that is based on your type of exposure will cover your business liability, which is the most costly exclusion on the home. You can also choose the amount of liability protection to meet your needs. A business policy is designed to protect your business property and inventory with increased limits that you choose, and better coverage for where you choose to store them.

A Smaller Umbrella

What can solve the problem for many home-based businesses is an in-home policy, which covers a broader spectrum of contingencies, including loss of critical documents or theft of funds being taken to the bank for deposit. An in-home policy is a plan against injury or theft covering as many as three employees. Rates typically run from $250 to $500 and the plans can cover as much as $10,000 in losses.

“Most serious home-based business owners may want to consider picking up at least an in-home policy,” said Rebekah Marshall, multiproduct insurance manager at the National Federation of Independent Business. “This covers business equipment and liability [for injury],” she said. “That’s important if people are coming in and out.”

So if you have a home based business, ask yourself these important questions:

Do clients come to my home?

Do I have inventory?

Do I depend on the income from this home business to support my family?

Do I have business property or equipment?

If you answered yes to any of these questions, you should request an insurance review of your home and home-based business exposures.

Starting a home-based business has many potential rewards. After all, Apple, Hershey’s, Mary Kay Cosmetics and even the Ford Motor Co. all started out of somebody’s home. But whenever there are rewards, there are usually just as many challenges. Starting up a home business is stressful enough without worrying if you have enough insurance to protect your investment, or believing erroneously that your homeowner’s insurance is a necessary umbrella to protect you should a hard rain fall.

If you’re doing business at home, you’re smart to have insurance. Because at the end of the day, the amount of sales you generate doesn’t matter. The amount of loss you could face should something go wrong is what really counts.