RISK MANAGEMENT

PROTECTING DO-IT-YOURSELFERS FROM PERSONAL LIABILITY

How does the homeowners policy address
losses from defects in workmanship?

By Donald S. Malecki, CPCU

Across the country, the "do-it-yourself" trend has really caught hold. Many homeowners are opting to tackle the jobs of remodeling, repairing, making additions, or installing fixtures, instead of hiring contractors to do the work. Witness the growth of home improvements stores around the United States and the popularity of shows like PBS's "This Old House." Some people simply like the challenge of doing their own work and take pride in what they can accomplish. For others the motivation is economic: the only way they can afford to make home improvements is by becoming do-it-yourselfers.

Many people who enjoy making home repairs and additions themselves also profit by their "apprenticeships" as carpenters, electricians, plumbers, or jacks-of-all-trades. After making improvements, this brand of do-it-yourselfer sells the renovated house and purchases and moves into another house in need of repair, where there are additional opportunities for eventual sale and profit.

In this article we will consider two kinds of exposures: those that arise while a renovated house is in the do-it-yourselfer's possession, and those that arise after a renovated house has been sold to another party.

Defective workmanship

In do-it-yourself home improvements, the first concern is liability that may arise when defective workmanship is alleged to have resulted in damage or destruction to the property itself or injury to the residents or invitees.

When the do-it-yourselfer's defective workmanship causes injury to persons, damage or destruction to the dwelling/contents, or both, his/her first concern will be whether coverage applies. If the dwelling or structure is considered an insured location and is, for example, damaged by fire, the homeowners policy should cover the loss, subject to policy terms and conditions.

If invitees are injured because of some incident on the premises that allegedly is attributable to the homeowner's defective workmanship, liability insurance under the homeowners policy should respond at least for defense of any suit, and for damages if liability is proved.

Liability from premises sold

The situation gets a little more complicated when the injury or damage occurs after the renovated house has been sold. It undoubtedly comes as a big (and frightening) surprise to be served with a subpoena alleging that the house a do-it-yourselfer sold has burned to ground because of some latent defect attributed to that former owner's workmanship.

The seminal case on a property seller's liability is Pharm v. Lituchy 9 New York Supp. (2nd) 657, where the new owner of the property was injured by a falling ceiling a day after the title was transferred by a bank. It was first learned at the trial that the new owner was unaware of the defective ceiling, but the bank knew of its condition. The court held the bank liable because the defect was known to the bank and the bank had a duty to keep the ceiling in repair.

At the time of this case, in the 1950s, the prevailing rule appeared to be that a vendor was not liable for injury or damage to the purchaser or a third party caused by a defective condition in the premises existing at the time the new owner took possession. Later, however, the courts began to make exceptions to this immunity.

In the wake of the Pharm case and recognition of the potential for liability on the part of sellers, countless requests were made for liability insurance. To meet this need, an insurance product called "Grantors Protective Liability" coverage was created for commercial risks.

Personal liability coverage

Our concern here, however, is not insurance for sellers of commercial property. The subject of this article is personal liability insurance written for individuals and families or in combination with various dwelling package policies.

The first homeowners package policy was introduced in 1951 by the Insurance Company of North America. It is uncertain what this policy provided in terms of liability for vendors of dwellings. We do know that at that time, the coverages of dwelling packages and separate comprehensive personal liability (CPL) policies were broad in scope.

The issue is more important today for at least two reasons: First, there are more exceptions to the rule of non-liability of property vendors. Second, as was mentioned earlier, more homeowners are involved in do-it-yourself projects to make improvements and repairs to their property.

Many different types of dwelling package policies are available today, and they have some similarities. Let's look at Section II - Liability of the Homeowners 3 - Special Form of the Insurance Services Office, Inc. Unlike commercial liability forms, none of the exclusions under HO-3 specifically precludes coverage for liability arising out of premises the insured had once owned and occupied and has since sold. The reason there is no such exclusion is that coverage is meant to apply to liability (for an otherwise covered injury or damage) arising out of premises once occupied and sold. This intention is made clear in a qualifier to exclusion 1.e., which reads:

1. Coverage E - Personal Liability and Coverage F - Medical Payments to Others do not apply to "bodily injury" or "property damage":

e. Arising out of a premises:

(1) Owned by an "insured";

(2) Rented by an "insured"; or

(3) Rented to others by an insured;

that is not an "insured location."

The term "insured location" is defined to mean in part:

a. The "residence premises";

b. The part of other premises, other structures and grounds used by you as a residence and: (1) Which is shown in the Declarations; or (2) Which is acquired by you during the policy period for your use as a residence;

c. Any premises used by you in connection with a premises in 4.a. and

4.b. above;

d. Any part of a premises (1) Not owned by the "insured" and (2) Where an insured is temporarily residing. ...

Note that exclusion 1.e. is in the present tense. If the insured had owned a home that was an insured location and injury or damage arose out of the home (including damage to the home itself) for which the former owner now is liable, coverage should apply. It also does not matter that the insurer covering the insured at the time of injury or damage is different from the insurer that issued the policy at the time the insured occupied the house where the alleged injury or damage occurred.

The purpose of exclusion 1.e. is to preclude coverage for uninsured locations. Premises once owned and occupied and later sold are not considered to fall within this exclusion.

Homeowners might be more comfortable, however, with a specific reference to coverage for damage to premises sold, so they would not have to "infer" coverage from exclusion 1.e. If cases alleging damage to premises sold become frequent, an insurer someday may argue that exclusions do not afford coverage (which is true), and no one would expect coverage for liability arising out of bodily injury or property damage to the premises sold long before the current policy was ever issued (which is not true).

A coverage dispute

In fact, a recent case concerned an injury that occurred on property sold where the dispute was over the homeowners policies of two insurers. Bush v. State Farm Fire and Casualty Company, 124 F.Supp. 2d 1203 (U.S. Dist. Ct. Dist. Oregon 2000) involved an individual (Bush) who owned a house and sold it but did not cancel the homeowners policy.

One of the new occupants was injured because of a latent defect allegedly caused by Bush's electrical work. The insurer on the property that was sold provided defense, paid damages, and then sought contribution from the insurer that had written a homeowners policy covering the property where Bush was residing at the time of the injury.

The exclusion under dispute in the homeowners policy that covered the property where Bush was residing is similar to the one in the ISO homeowners policy. Excluded from the liability coverage was "bodily injury or property damage arising out of any premises owned or rented to any insured which is not an insured location."

For the purposes of this article, it is important to note what the judge in Bush had to say about this exclusion. The exclusion, the judge said, "excludes coverage for liability arising out of the ownership, past or present, of property that is 'not an insured location.'" [Emphasis added.] This conclusion is difficult to understand, given that the exclusion applies in the present tense.

This ruling reinforces the point that, if coverage is meant to apply, the policy should state it straightforwardly, rather than leaving the matter to inferences and interpretation, which can be particularly harmful to individuals.

Further, it could be argued that a former property owner should not be covered because he/she no longer has an insurable interest in the property. Although insurable interest is commonly associated with property (first party) coverage, it is possible to have an insurable interest in relation to liability insurance. In fact, liability emanating from property sold is a perfect example of a situation where an insurable interest still exists until the expiration of any applicable statute.

If any obstacle might thwart coverage of an individual or family confronted with an action seeking damages for injury or damage arising from premises once occupied and since sold, that obstacle is knowledge and concealment of a defect.

In a number of cases, property owners have maintained they forgot to point out defects to prospective purchasers. These cases, however, all appear to deal with commercial property and policies, a subject that is not addressed here. Concealment nonetheless seems to be a viable defense of insurers whether the insureds are individuals, families, or commercial entities.

As time goes on, we may see more cases involving dwellings sold by do-it-yourselfers where injury or damage to new owners or others is claimed to have resulted from defects in repairs and improvements made by the seller. Rulings as to insurers' responsibility under current homeowners policy language may help bring about a clarification of that language. *

The author

Donald S. Malecki, CPCU, is chairman and CEO of Donald S. Malecki & Associates, Inc. He is a committee member of the International Insurance Section of the Society of CPCU, serves on the examination committee of the American Institute for CPCU, and is an active member of the Society of Risk Management Consultants.