When the business has no money, and the entrepreneur lends the business its home and car...

When entrepreneurs start a business, the organization has no money. This sounds obvious and reductive. But here is what usually happens next.

Since the business has no money, the entrepreneur buys assets in their personal name. Or they use assets that they already own to grow the organization. I get it. They are trying to breathe life into something that is not alive.  Sometimes the only essence of life that is available comes from their personal coffers. I have seen it countless times.

For example, a person that owns a home will use it to run a sober home, or an assisted living facility, or a group home for the intellectually and developmentally disabled.

Then that entrepreneur will realize they need to transport clients from their house to doctor’s appointments.  The bank will not give their business a loan, but they will loan money to the person.

Now they have a house in their personal name that they are renting to a group home, and they have a 15-passenger van insured with Geico on a personal auto insurance policy.

Here is the rub:

Insurance follows ownership. And Insurance companies build their products to match the individual or operation named on the policy.

That means if you buy a homeowners insurance policy, the insurance company assumes a family living in the house.

Or if you own a vehicle in your personal name, that you are driving it to and from work, or running errands on the weekend. They didn’t design that product to cover a vehicle that transports individuals with disabilities to a doctor’s appointment.

Insurance companies include exclusions in their policies to ensure they don't have to cover situations they didn't intend to cover.  Here are a few of the exclusions that social entrepreneurs need to be wary of:

1.      Business operations exclusions on a homeowners or rental property policy. Many policies exclude coverage if you rent your personal house or rental property to a business. The most common situation I come across is when a personal residential property is rented to a group home.

2.      Personal auto insurance policies typically exclude coverage for taxi services, meaning if you transport people for a fee, you may not be covered.

3.      Family members driving vehicles covered under a commercial auto policy.  Business auto policies are written to cover businesses and people working for the business. Sometimes entrepreneurs will buy a vehicle in their business name for tax purposes. In this situation, it’s important to clarify whether family members are permitted to drive the vehicle. 

Starting an organization is harrowing and difficult. It is important to keep in mind the limitations of the insurance products you’re using while building your operation.