Insuring summer businesses owned by pint-sized CEOs

From lemonade stands to dog-washing operations, summer businesses give youngsters the chance to learn the value of a hard-earned dollar.

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But as any entrepreneur knows, things can go awry with even the best-laid business plans. What if your junior landscaper kills the neighbor's rare azaleas? Or your little peddler's lemonade turns stomachs sour? Know what your little CEOs are up to -- and check your home insurance policy.

Typically, home insurance provides just $2,500 in coverage for business-related property, and excludes business activities from liability coverage.

So the big questions are whether your kid's venture counts as a business, and whether you're covered if your entrepreneur hurts others or damages their property.

Homeowners insurance and your child's summer business

Most policies define a business as a "trade, profession or occupation engaged in on a part-time, full-time or occasional basis" that earned $2,000 in the last 12 months, says Christine G. Barlow, a Chartered Property Casualty Underwriter and associate editor of FC&S Online, which interprets insurance policies for the industry.

Although most policies exclude liability coverage for business activities, an exception is typically made for insured household members under age 21, as long as they have no employees, Barlow says.

Under these definitions -- the most recent ones developed for the industry -- most kid-run businesses would be covered by a parent's home insurance policy. (See: "6 types of home insurance policies and what they cover.")

But some insurance companies use different definitions, says Bill Wilson, a Chartered Property Casualty Underwriter. That could mean your kid's entrepreneurial endeavors don't have coverage through home insurance, says Wilson, who is also associate vice president of education and research for the Independent Insurance Agents & Brokers of America and director of the Big "I" Virtual University.

"Everything hinges on the policy's wording," Barlow says. (See: "Insuring your summer: Is your $900 gas grill covered?")

Here's how insurance coverage would kick in under most -- but not all -- home insurance policies:

1. Your 14-year-old runs over your pastor's foot when mowing the church lawn. You would be covered for the pastor's injuries as long as your kid used a push mower. But you wouldn't be covered if your teenager used a riding lawn mower, Wilson says. That's because most standard home insurance policies exclude liability coverage for riding mowers when operated on nonresidential property.

2. Operating a car wash in the driveway, your 12-year-old scratches the paint when scrubbing a new BMW. You could pay for the damage and make a liability claim on your home insurance policy. Or the car owner could make a car insurance claim if he or she had comprehensive insurance, which covers damage caused by factors other than traffic accidents. Then, the car insurer could come after your home insurance company to pay the claim, Barlow says.

3. Your 6-year-old runs a lemonade stand and spills on a customer's designer handbag. Your home insurance liability coverage would pay for the damage. But you might have other trouble, depending on local regulations. Some cities made news last year for shutting down lemonade stands because they didn't have the appropriate licenses and permits. Lemonade stand proponents then launched Lemonade Freedom Day, encouraging people to open stands all over the country. This year's big day is Aug. 18, according to LemonadeFreedom.com.

4. Your 21-year-old college student, a self-employed tutor, spills coffee on a customer's laptop.

If your student made more than $2,000 in the last year from tutoring, his efforts would qualify as a business and there would be no liability coverage. There would be coverage, however, if he made less than $2,000 -- or the accident occurred before he turned 21.

Follow these steps if your kids have early business aspirations:

• Read your home insurance policy. "Also, talk to your insurance agent," Wilson says. "Better safe than sorry -- I'd rather know upfront whether the company will pay if there's a claim."

• Consider buying more liability insurance. A typical home insurance policy provides $100,000 of liability insurance, Wilson says. "Most homeowners should consider at least a $1 million umbrella policy, particularly if there is a significant exposure to the general public that would be covered by the umbrella." (See: "How much umbrella insurance should you have?")

• Talk to your kids about insurance. "Even children can be introduced to basic business principles and the rewards of entrepreneurship, and one of those important principles is insurance," says Adam Toren, co-author (with his brother, Mathew Toren) of "Kidpreneurs." Founders of YoungEntrepreneur.com, the Toren brothers have been running businesses since grade school.
• Ask about business insurance if your kid's venture takes off. Adam Toren was 7 and Matthew was 8 when their grandfather set them up to sell stunt toy airplanes at a folk festival. The planes sold out quickly, and the brothers caught the entrepreneurial bug. Twelve years later, using proceeds from an assortment of endeavors, they bought a billiard hall and café after Adam graduated from high school.

"We had to make sure we had a solid insurance policy, as this was not only a large space with a lot of expensive assets, but we invited the public into our facility," Toren says. "We talked to a friend of ours whose father was in the insurance business, and we made sure we covered all our insurance bases."

Is your tyke an up-and-coming tycoon? Toren says ask an insurance professional when a business insurance policy is necessary.