COVERAGE CONCERNS
In-home day care and vacant land
exposures require special attention
By Roy C. McCormick
Just when we think we have a handle on the protection provided by an insurance form, a new question stirs up additional uncertainty. All persons who provide protection for insurance buyers probably have "enjoyed" this experience. One "enjoyable" experience involves personal liability coverage in homeowners policies. Because Coverage C is such an important coverage, a review of its highlights can serve as a timely refresher.
* Where does coverage apply? Section II, personal liability coverage of a homeowners policy does not have territorial limits. The pertinent insuring agreement in most policies, including those drafted by the Insurance Services Office (ISO) and the American Association of Insurance Services (AAIS), provides coverage for a bodily injury claim or suit caused by a covered "occurrence."
There are no exclusions or qualifying provisions that limit the protection territorially. Section II coverage applies at the location described in the policy declarations and follows insureds when, for example, they are temporarily in another place in the United States or anywhere in the world. Regardless of the place of an "occurrence," it is important that claim details be communicated to the insurer as soon as possible in order to comply with policy notice requirements.
* What does Section II liability insurance cover? An "occurrence" for which coverage is provided is defined, with minor language variations, as an accident resulting in bodily injury or property damage, during the policy period.
The scope of coverage is extremely broad but is qualified by reasonable exclusions and limitations that are clearly stated and generally recognized as necessary, and which have been validated by the courts and have become well established over time. Notable among these are business activities and use of motor vehicles and large or high-powered watercraft. Coverage is available by endorsement or separately for these and other excluded exposures.
Certain policy exclusions recently have become a source of uncertainty--as well as disputes. Two exposures involve the acquisition of vacant land and the burgeoning home day care industry.
Personal liability coverage extends to vacant land acquired, inherited or rented by an insured. It may be held for construction of a residence, investment, or for other personal reasons such as hunting or fishing; but farm land or land associated with business use are not included. "Vacant" is a key word. In order for coverage to apply, the land must be free of buildings or structures of any kind. Court decisions underscore that the word "vacant" must be taken literally, precisely as defined in dictionaries and as commonly understood.
Day care liability risk requires special attention. Personal liability coverage in homeowners forms does not apply to bodily injury or property damage arising out of a "business" conducted by an insured. "Business" is defined as a trade, profession or occupation.
In a succession of "babysitting" lawsuits, courts drew a line between when such activity in the home is covered under the basic provisions of a homeowners policy and when it is not. When an insured receives compensation for home day care services for persons other than insureds, coverage does not apply. However, coverage applies if there is mutual exchange of home day care services or if such services are done for an insured's relative.
Coverage for excluded day care risks is available from some insurers by endorsement. Otherwise, separate insurance should be arranged. In any event, a full-fledged day care center providing service to the public, on or off the residential premises, requires commercial liability insurance.
* Who is insured under personal liability coverage? A check of representative policies in current use makes clear that the following persons are insureds:
The named insured, as specified in the policy Declarations. When husband and wife are residents of the same household and only one is named in the Declarations, the other is a "named insured" by definition. Relatives who are members of the same household--children, brothers and sisters are examples.
Other persons under the age of 21 in the care of the named insured, or a resident relative who is a resident of the household. A foster child or a ward of the named insured are examples.
Uncertainties continue to surface regarding the status of adult children who return to the family home. Current economic conditions have forced some young families to temporarily return to a parental home. The same is true of individual adult children who have returned because of job loss or a difficult job market. If a young person is to be considered an "insured" under the parental policy, it must be determined whether or not he or she is a "resident." The intent of the parties and the circumstances of the living arrangements govern that decision. Questions about whether or not there is a common household are moot if parents and children maintain their own insurance.
Reasonable homeowners liability protection usually is readily available. Insurers have coped with new situations by periodically modifying coverage. Nevertheless, there are boundaries with which those who arrange insurance must be familiar.
Although an application might include a question about ownership of vacant land, an agent or broker can avoid problems by inquiring if there are buildings or structures on it. Discussion of "business" activity should recognize that the applicant might not think of babysitting as such. *