April 16, 2021

How Liability Insurance Can Protect Home-Based Food Businesses

Insurance is an important part of building a resilient business that will last over a longer term. Not only does it help keep you, the food artisan and business owner safe, it also helps protect your customers and your property. 

At the national Cottage Food Conference, we heard from Rachel Armstrong, Executive Director of Farm Commons. Her organization works with farmers and businesses across the U.S. to help them understand how farm and food laws can impact them. In her conference session, she outlined how and why insurance is so important for independent home-based food businesses — and how these businesses can use insurance to manage risk. 

To understand the risk that can be associated with opening a cottage food business, you need to understand cottage industry laws and regulations.

Understanding Cottage Food Laws

Cottage food laws are an exemption from standard state rules that require compliance with the food code. Some states are more strict than others and have bigger exceptions, allowing a wide range of businesses to fall under cottage food rules. 

Understand the subtleties of your state’s rules. This is a prerequisite for insurance — if you’re not compliant with a state’s rules, you’re open to all kinds of liability from the state and from customers. 

To really understand the many variances between what states consider certain foods, let's look at an example. What is jam? In different states, jam can be considered many things. You need to understand the percentage of sugar required to make the jam shelf stable, and what makes jam, well, jam in your state — so look at your state’s definitions. 

After you perfect your recipes, you need to learn your state’s packaging and labeling requirements. What should go on your label? Are there certain types of packaging or notices that need to be included on your food? It’s also important to know where your products can be sold: at a farmers’ market, roadside stand, from home, by delivery, online, or elsewhere. Again, each state has its own set of rules around packaging, labeling, and selling.

Insurance for a Home-Based Food Business

After you’ve done due diligence around your state’s cottage food laws, it’s time to dive into local zoning codes to make sure you’re allowed to operate a home-based business. On an even more granular level, you might need to check with your HOA, apartment, or condominium association to ensure that you’re not breaking any rules by running a business from your home.

If you’re producing cottage food, you need to know that you’re still responsible for any food safety incidents that may occur — just like a restaurant or manufacturer. In fact, you might even be more culpable for incidents than you would be for foods produced under standard (non-cottage food) codes. 

Legal liability occurs via negligence, and if your food makes someone sick, you could be responsible for their medical bills or other fees. It’s very difficult to predict what negligence could be, but generally, it’s related to being deficient or not doing what is supposed to be done. The law defines negligence as the failure to do what a reasonable person would do under the same circumstances. It’s not measured against what you could have or should have done, it’s measured against what other people in the same circumstances would have done. What do people in your situation normally know and do? This makes it hard to know if you’re behaving negligently. 

Insurance can be a good risk management policy. A good policy can connect you to an attorney who can help you build a case that you did not work negligently. With the right evidence and team, you’ll be better able to protect yourself and your business. Insurance may also help you pay out your liability if you are found to be negligent.

Homeowner’s Insurance for Cottage Food

Look into your homeowner’s policy to see if it covers any level of business enterprise. Unfortunately, most homeowners policies don’t extend coverage to cottage food operations. If you’re on a farm, however, your farm coverage policy may cover incidental business endorsements, so check with your insurance agent. 

If you’re starting with a homeowners policy, call your agent and ask if they have a policy for you. If they don’t, look for referrals from other cottage food producers. Talk with your state or local associations that work with cottage food producers to see if they have referrals. The FLIP program is another good resource. 

Commercial Insurance for Cottage Food

A commercial policy is exactly what it sounds like — businesses have this policy to cover the production and risks related to their venture. It’s often more expensive than an incidental business policy, but you should always do your research to find the right option for you. 

One common misconception that independent food business owners have is that an LLC can release them of all liability, but an LLC is not a substitute for insurance. An LLC protects your personal assets from business liabilities. On the other hand, insurance protects your business from business liabilities. If someone sues your cottage food operation and you have an LLC, it protects your home or personal assets — but it doesn’t protect your business. LLCs and corporations have their benefits, but it’s important to remember that they don’t replace the need for insurance.

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