Uncovering Business Activities In The Home
Sam and Hilda take a quote on their homeowners policy without ever meeting the agent. They simply call and ask for a price comparison. There appears to be a significant cost savings and they decide to move their coverage. The agent has measured the outside of the home, taken a picture, and is now completing the application over the phone. He comes to the question "Any business pursuits?" How do you think Sam answers that question?
One of the primary responsibilities of an agent is to uncover exposures to loss. It is a responsibility to the client who needs to know what will not be covered under the insurance contract. It is also an obligation to the insurance company writing the account; the agent must develop both underwriting and premium-determination information.
The question traditionally included in the homeowners application is "Any business pursuits?" Unfortunately, this question may not uncover all the business exposures in the home. What is wrong with this standard industry question? The main problem is that the answer to this question will be greatly influenced by a person’s definition of what is a business. Sam may not consider his activities to be business-related until he is turning a profit. He will simply answer "Not at this time." Unfortunately, Sam’s definition of business will not carry any weight at the time of loss.
The Questions To Ask
In order to uncover all the possible business exposures in the home an agent should ask a variety of questions and be prepared to probe with follow-up questions. To do a thorough job, an agent must do some sleuthing. The following are some of the possible questions an agent might ask to uncover the exposures:
QUESTION: What are your hobbies and those of other family members?
The book Do What You Love And The Money Will Follow suggests one way to find harmony in modern society is to turn activities you enjoy into income-generating propositions. In actuality many businesses are born in the basement of a creative person. The business may start as a hobby but crosses the line to become a commercial venture long before the creator considers the insurance implications. Ask a person’s hobbies and then listen carefully for any business implications. Watch out for expensive hobbies. Many people come up with creative ways of defraying some of the cost of a hobby that requires a significant cash outlay.
Jim Jones shows two dogs that he has raised. When Jim built the kennel area in his back yard, he added capacity so he could board dogs of vacationing friends. He meets lots of dog-lovers at the shows and generates enough money from his boarding activities to pay all his show expenses.
QUESTION: Do you have a home computer and how is it used?
Over 35% of American homes now contain a personal computer. With an average cost in excess of $2000, many people justify the expense by using the computer for business activities. By probing how a family uses the personal computer in their home, you will uncover the housewife who does research from the den and the teenager who programs database software for local businesses.
QUESTION: What is the occupation of each person in your household? Who is your employer?
A client’s occupation is basic information that should be included in every personal lines file. An agent should know the occupation and employer of everyone in the household. This information can help you understand the account and will perhaps uncover a commercial prospect. It can also help uncover business activities in the home.
Some occupations scream "moon lighting". The firefighter builds birdhouses in his garage, selling them to hardware stores in the area. The controller of a manufacturing firm does the personal taxes of over 30 people in the area. Some professions naturally lead to part-time business ventures.
QUESTION: Are there any other sources of income in the household?
After determining the occupation and employer of every member of the household, this follow-up questions relates to other sources of income. Tracing the flow of money is one of the best ways of uncovering in-home business exposures.
In this area you may want to ask a series of questions:
- Are there any other sources of income?
- Any potential sources of income? (Refer to "What is a Business" section.)
- Any bartered income (The IRS considers bartered income to be taxable income, an insurance company and a court may also.)
Hidden Exposures
Some clients will be less-than-candid when discussing this issue. They will not volunteer information and may even avoid the questions. An agent should always be on guard for clients with hidden motives:
The Ostrich Syndrome
"If I never think about it, it will never happen." These clients do not want to deal with the issue, and will simply refuse to discuss it. Often they have their hand on their wallet, unwilling to do discuss anything that might increase the cost of their insurance. Unfortunately, at the time of claim an agent is likely to hear "Why didn’t you tell me."
The Tax Man
Some clients who moonlight do not report the income to the IRS. They fear that by buying insurance to cover a business exposure, the tax man may find out and come after them for undeclared income.
Zoning Ordinance
Sammy lives in a suburb that does not allow a business in the home. He has been running a desktop publishing enterprise from his home for two years and increasingly clients come to his house. He has been thinking of asking the zoning commission for a variance, but he knows it will probably be turned down. Hopefully, no one will find out for another year or two. By that time he will be able to afford to set up an office in a near by office park.
The Agent’s Responsibility
One of the agent’s primary responsibilities is to uncover those exposures to loss that are not automatically covered under the standard contracts used in the industry. In order to accomplish this you may have to add additional questions to the personal lines checklist. And, in the area of business-in-the-home you may have to do some sleuthing.
This article is excerpted from the book Business In The Home: A Six Step Approach, written by Phyllis Van Wyhe, CPCU, CIC.
