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Elli, sounds like a bullshit excuse to me. I used to work in the insurance industry (in Ontario), and we had specific product for "at home businesses". That's how we insure our home office right now; as an extension of our home policy.
I think the insurance companies concern revolves around the third-party liability issues. They are concerned that one of your clients will file suit against you for poor work (eg. you make an error or omission), and that they will be dragged into it (even though they don't intent to insure you for this).
I'd escalate this to the insurance companies management, and ask for an explanation in writing. And, ask them what would make the risk acceptable to them.
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