HOMEOWNERS POLICIES: PART TWO
What businesses are your clients operating on their personal properties?
By Christopher W. Cook
In the last installment, we dissected the homeowners policy and looked at different policy forms, what’s covered in each individual policy section, and available endorsements.
Remember how this was supposed to be a two-parter? Well, the second half of Nicole Broch’s session from the 2020 Independent Insurance Agents (Big “I”) of Indiana virtual convention had so much valuable information, that this twofer will now become a hat trick.
Pre-COVID-19, according to the Small Business Association (SBA), there were 41 million home-based businesses in the United States. This number could potentially be as high as 50 million after people were furloughed or laid off during the peak of the pandemic. Considering that the second part of Broch’s session focused on the definition of “business” when it comes to the homeowners policy, limitations, exclusions and endorsements, it became too difficult to trim everything into one feature.
On that note, let’s begin part two: their first assignment. (That was the subtitle to the second Police Academy movie. Never mind. Moving on.)
In general, when it comes to a business being operated out of a residence, “the homeowners policy was never created to address business exposures,” said Broch, an instructor with Insurance Education & Professional Development. “Sometimes we can find a little Band-aid to put on a homeowners policy for something that might squeak in under personal exposure, but I want to caution that just because there might be a Band-aid or an endorsement doesn’t always mean it is the best option for the insured.
“Home businesses are great ways for insureds to have a hobby … and make a little bit of money off it. When that home business is no longer a hobby, and becomes something more sustainable, that’s when we need to be heavily involved with our insureds.”
—Nicole Broch, CIC, CISR, PLCS
Insurance Education & Professional Development
“If we know what the business that they’re conducting is, and we know that we’ve got a BOP (business owner’s policy) market for it or it needs a commercial package, trying to put it onto the home-owners policy is irresponsible for us to do. We’ve got to make sure that we’re looking at using a suture instead of a Band-aid. If it needs a suture, move it over to the commercial lines side, and get it off personal lines, which is not properly geared to handle commercial exposures.”
What do Apple, Hershey’s, Mary Kay, and Ford have in common? Believe it or not, they all began as somebody’s home business.
“Home businesses are great ways for insureds to have a hobby, turn it into something they love and make a little bit of money off it,” Broch, who has earned the CIC, CISR, and PLCS professional designations, said. “When that home business no longer is a hobby, and becomes something more sustainable, that’s when we need to be heavily involved with our insureds.”
When it comes to a home business operated by one of your insureds, the question shouldn’t just be “are you running a business out of your home,” but rather:
- What type of business?
- What do you sell?
- What do you manufacture?
- Whom do you sell it to?
- How do you sell it?
- Who owns it?
“Are they insured [under a home-owners policy]? Maybe,” Broch said. “There are some who will have no problem. Maybe they’ve got coverage for property because it’s being operated inside of their attached structure or inside of their dwelling. But if they’re doing it in an outbuilding, they’re definitely not insured.
“And do we have a general liability of concern? Do we have professional liability? Do we have all sorts of gaps in coverage under a homeowners policy? Absolutely. And most insureds don’t want to buy a BOP because they think it’s too expensive. That is when a good risk advisor comes in.”
The key is not just to ask about what their occupation is but to ask specific follow-up questions. For example, workers in trade professions should be asked if they work after hours.
“If you are a plumber and you work for a plumbing company, when you come home, you’re still a plumber,” Broch said. “If you’re doing a side job, we need to know about it as personal lines risk managers, because what we’re going to find is that they have a potential gap in coverage that we didn’t ask about.”
Do teachers provide at-home tutoring on the side? Do salon workers also cut people’s hair out of their home? “We need to be asking these questions,” Broch said. “Add a question to your new business and renewal questionnaires about home businesses. And even if they’re not doing it in their home, ask about what they’re bringing home with them as business personal property.”
We’ve mentioned the word “business” quite a bit already. How is the word defined on the Insurance Services Office (ISO) homeowners policy? Note that individual carriers and direct writers may have an altered definition. ISO states:
“Business” includes any trade, profession or occupation engaged in on a full-time, part-time, or occasional basis;
Any other activity engaged in for money or other compensation unless …
A teacher selling Scentsy as a “side hustle” is still a teacher because that’s their trade, profession, or occupation. However, a plumber is still considered to be a plumber, even if they only do one “side hustle” job a month, so they are considered a business by definition.
Broch explained that if an individual does not meet any of the criteria in Part A, like the teacher selling Scentsy, you look at Part B—any other activity engaged in for money or other compensation.
There are four exceptions (remember the “unless” from Part B) to the business definition looking at Part B:
- One or more activities for which no “insured” receives more than $2,000 in total compensation for the 12 months before the beginning of the policy period.
- Volunteer activities for which no money is received other than payment for expenses incurred to perform the activity.
- Providing home daycare services for which no compensation is received, other than the mutual exchange of such services.
- The rendering of home daycare services to a relative of an “insured.”
A few examples:
In number one, if a teacher makes $1,500 a month selling Scentsy, they would exceed the 12-month $2,000 total, which would now make them a business by definition.
In number three, if there is a homeschool pod where four parents take a shift watching each other’s children, it is not a business because it’s a mutual exchange of services.
In number four, if an insured’s mother-in-law is watching the insured’s children, that also does not qualify as a business.
During COVID-19, individuals who were either furloughed or lost their jobs started side hustles, many of these in direct sales. Broch noted that at-home jobs dealing with direct sales are not to be considered hobbies, but rather a business.
Some of these may include:
- Accounting services
- Art studios
- Beauty product sales (Mary Kay)
- Kitchen supplies sales (Pampered Chef)
- Lawn care services
- Pet care
- Web page designers
Limitations for property
Let’s break down the homeowners policy as we did in the previous installment and see how each coverage part affects a home business and what limitations each may have.
Coverage A—Dwelling. A home business will be covered under Coverage A when the business is taking place in the residence. An example is someone cutting others’ hair in their basement.
“On Coverage A, we’re fine; you can do anything you want,” Broch said. “But if you’re operating a business in your other structures [Coverage B], the ISO language is clear.”
Coverage B—Other Structures. When it comes to other structures, the language in Coverage B says:
We do not cover:
- Other structures rented or held for rental to any person not a tenant of the dwelling, unless used solely as a private garage;
- Other structures from which any “business” is conducted.
“If you are renting your garage, or if you are doing business out of your garage, both are considered business and we don’t cover that garage anymore,” Broch said.
If an insured has a sign on their property advertising their home busi-ness, that sign—which is set apart by a clear space (if you recall the definition of “other structure” from our previous installment) is another example of an “other structure” in which business is being conducted; therefore, it would also be excluded from coverage.
Advertising signs located on barn buildings would also exclude those other structures from the homeowners policy because they are now considered used for business according to Coverage B.
Coverage C—Personal Property. “If you’re storing your business personal property inside your other structure, even if you’re not doing business out of this other structure, you could have an issue,” Broch said. “The way that the language is written is that any other structure used to store business property is not going to have coverage on it. Now there’s a small giveback that it will cover that structure if the business personal property is solely owned by the insured.”
Broch warned that when individ-uals separate their business income and materials into a distinct entity (e.g., Nicole Broch, Inc.), then according to the home owners ploicy, the home-owner is no longer the sole owner of the other structure and its content. This would eliminate the giveback previously mentioned, and the physical structure would no longer be covered under the policy.
Ask your clients questions about their current employment status “because they’re going to become more and more impactful on a personal lines policy,” Broch said. “If they told you that they are now ‘Incorporated’ because that was the best way for them to be able to take a loss on their business or apply for PPU loans, or whatever the case may be, ask questions, because we don’t know unless we ask and they may not know to tell us, and we may have an uncovered loss.”
What exactly qualifies as business personal property? “In the personal lines world, we have no differentiation between items held for stock or for sale; we don’t have a definition for that,” Broch said. The important thing is to be aware of the personal property involved for the business and how quickly it can add up. An individual who sells Scentsy products at festivals can be storing at any given time over 2,000 items that retail at eight dollars apiece. Photographers, between their cameras, lenses, lighting equipment and their computer for editing, can own over $10,000 worth of business personal property.
“All those things are our business personal property, and we get [on a homeowners policy] a whopping $2,500 on residence premises and $1,500 on property away from the residence premises” Broch said. “And by the way, if any of those things are in the detached structure, we’ve not only limited the amount of coverage that’s on the business personal property, but we may have just excluded the detached structure if the business personal property isn’t wholly and fully owned by the insured.”
Regarding broad form perils found in Coverage C, “if they’ve got an HO3, and it’s unendorsed, the only coverage they have is the broad form peril,” Broch said. “Now, if they have an HO5, and they have that open peril coverage for Coverage C, at least they’re in a better spot if something were to happen. However, if you have the most common policy sold, which is that HO3 without the open perils for personal property, not only do they potentially have a reduction or a limitation in the amount of coverage they have for their business personal property, but now they might have a peril problem.”
Another thing to note is that business data is excluded from a homeowners policy. Broch shared an example of a client who was a 40-year May Kay consultant, who didn’t own a computer and lost all her composition books of records in a house fire.
“We paid her 98 cents for every single one of those composition books, and she lost 40 years of records of business,” Broch said. “We are going to pay for the flash drive, but not the data inside. We’re going to pay for the software, but not all the records.”
Wow. Isn’t that a happy note to end this installment on? Can I get a “womp womp”? In part three, we’ll look at exclusions on the liability side and endorsements that can be added to the homeowners policy. Until then …