AAIS COVERAGE PERSPECTIVE
By Robert J. Prahl, CPCU
Help your insureds understand what is
and isn't covered as a "business pursuit"
An occasionally troublesome coverage limitation involves the reference to personal property used in whole or part for business purposes. It is fairly common today for a home computer to be used occasionally for business purposes.
Although it appears that the transition to so-called "readable" policies that began a few decades ago brought about some improvement in the clarity of insurance policy language, coverage disputes continue and the courts, which traditionally have tended to find ambiguity with surprising ease, show no signs of changing their views. One area that seems to generate more than its fair share of coverage disputes is the "business pursuits" (or business liability) exclusion.
Interpretation of the business exclusion
It is fairly well established by court decisions that for the business liability exclusion to apply, two elements must be present: (1) the activity must be continuous or regular; and (2) the purpose of the activity must be to earn a profit or livelihood. It is not necessary that the insured actually earn a profit; rather, the pursuit of profit is the determining factor. But not every activity engaged in for profit is necessarily a business activity. If the continuous activity aspect is absent, the activity likely will not be considered a business activity for purposes of the exclusion.
It is also noteworthy that the activity need not be the insured's sole or principal occupation, and the AAIS homeowners policy, for example, makes it clear that part-time activities would be subject to the business exclusion. This is provided, of course, that the two elements described above are present; that is, that the activity be continuous and engaged in to make a profit.
Other homeowners liability exclusions that might apply to a business-related situation are: professional services; injury or damage resulting from premises that are owned, rented, or controlled by an insured that are not insured premises; damage to property rented to or in the care of an insured (except for loss caused by fire, smoke, or explosion); or where the insured has workers compensation coverage that applies to the claim.
There is also a Medical Payments exclusion for a person on the insured premises because a business is conducted or professional services are rendered on the premises.
Keep in mind that in addition to home-based business coverage forms offered by AAIS and ISO, a number of optional endorsements in the homeowners program provide limited liability coverage for business activities. In the AAIS program, they include: ML-40, Related Private Structures Rented to Others; ML-42, Office, Professional, Private School, or Studio Occupancy; ML-70, Additional Residential Premises Rented to Others - Liability Coverage Only; ML-71, Business Activities; and ML-157, Care Provided for Others.
It is not the intent of homeowners coverage, or any personal lines liability policy, for that matter, to provide coverage for the insured's business exposures, unless an appropriate endorsement is obtained for an additional premium charge. Even then, only certain business exposures are eligible for coverage.
In the AAIS standard homeowners and mobile homeowners policies, "business" is specifically defined as follows:
"Business" means a trade, a profession, or an occupation including farming, all whether full or part time. This includes the rental of property to others. It does not include the occasional rental for residential purposes of the part of the insured premises normally occupied solely by "your" household.
"Business" includes services regularly provided by an "insured" for the care of others and for which an "insured" is compensated. A mutual exchange of like services is not considered compensation.
"Business" does not include:
a. part-time or seasonal activities that are performed by minors; or
b. activities that are related to "business," but are usually not viewed as "business" in nature.
There is much to this definition that requires emphasis. First, the definition includes farming, and part-time as well as full-time activity. It also includes the rental of property to others, but not the occasional rental for residential purposes of a part of the premises ordinarily occupied solely by the insured's household.
Services regularly provided by an insured for the care of others and for which an insured is compensated also are considered business activities. A mutual exchange of like services, however, is not considered compensation. An example is a situation where neighbors care for each other's children. An important exception to the definition involves part-time or seasonal activities that are performed by minors, which means that such activities are not considered business. Examples are babysitting, lawn mowing services, or newspaper delivery provided by an insured's minor son or daughter.
Finally, activities that are related to business, but usually viewed as non-business in nature, are also excepted from the definition. Eliminating coverage for non-business activities that are in some way related to business would seemingly constitute an unintended restriction in coverage. A typical example to illustrate this exception involves an insured who accidentally injures a person or property during a business-related golf outing. Another example might be an injury the insured causes during a dinner where a business customer is being entertained. In these instances, coverage would apply in view of this exception.
The significance of the "business" definition comes into play because of the business exclusion in the liability section of the homeowners policy. That exclusion reads:
This policy does not apply to: "bodily injury" or "property damage" resulting from activities related to the "business" of an "insured," except as provided by Incidental Business Coverage.
The Incidental Liability Coverage for business provides the following coverage:
Business -- "We" pay for the "bodily injury" or the "property damage" which results from:
a. the rental of that part of the "insured premises" that is usually occupied by "you" as a residence;
b. the rental of other parts of the "insured premises" for use as a residence (No family unit may include more than two roomers or boarders.); or
c. the rental of part of the "insured premises" for use as a school, studio, office, or private garage.
The incidental business coverage refers to the rental of the insured premises. The insured premises may be rented or held for rental for residential purposes on an occasional basis. Other parts of the insured premises may be rented for use as a residence, but no more than two roomers or boarders may be included in the family unit. Additionally, part of the premises may be rented as a school, studio, office, or private garage. Coverage for these exposures would be picked up through the incidental coverage.
Property coverages--business property limitations
Under Coverage B -- Related Private Structures, of the AAIS homeowners policy, structures used for business purposes are not covered, unless the structure is rented to a tenant and not used for business, or it is used solely for private garage purposes.
Under Coverage C -- Personal Property, limitations apply to certain property, including business property. Loss to personal property, used in whole or in part for business purposes, is limited to $2,500 if the loss takes place while the property is on the insured premises. If the loss occurs while the property is away from the insured premises, coverage is limited to $250. This last limit does not apply to electronic devices, accessories, etc., that can be operated from the electrical system of a motorized vehicle or watercraft and by other sources of power. A higher limit applies for this property.
The limitation also applies to the cost of research or other expenses necessary to reproduce or replace business data.
An occasionally troublesome coverage limitation involves the reference to personal property used in whole or part for business purposes. It is fairly common today for a home computer to be used occasionally for business purposes. A salesperson may complete an expense account over the weekend, for example. Or an insurance marketing rep might type a summary of agency visits he or she completed during the previous week. Does that home computer then become business property?
A strict reading of this provision would indicate that the monetary limit should be applied to the home computer in the above example because it is used in part for business. It is possible that insurers will interpret this provision differently, and it is ultimately up to the individual insurer to interpret such language. It should be emphasized, however, that the limit for personal property used in whole or part for business purposes can be increased by attaching endorsement ML-65, Coverage C -- Higher Limits on Certain Property. Another alternative is for the insured to schedule the computer via endorsement ML-170.
Conclusion
When an insured whose policy provides personal property and liability coverage (i.e., homeowners, farmowners, etc.) has a business exposure, the risk must be carefully reviewed to see if that exposure can be met through any of the optional endorsements associated with the applicable insurance program. Endorsements are available to provide limited business liability coverage and to increase the limits for business personal property. However, if the business exposure cannot be adequately covered by a homeowners or farmowners program, the business exclusion in those policies may preclude coverage for bodily injury or property damage arising out of the insured's business activities. In such cases, it may be necessary for the insured to obtain commercial liability coverage that provides protection for the business (or farming) liability exposure.
Recall, though, that certain business-related activities are specifically not considered "business" by definition (e.g., part-time or seasonal activities performed by minors, a mutual exchange of like services, etc.). There are also exceptions to the business liability exclusion (i.e., incidental business coverage) that will allow for coverage in certain situations. It is also important to keep in mind that for the business exclusion to apply, the business activity typically must involve two elements. The activity must be conducted on a continuous or regular basis, and for the purpose of making a profit. *
The Author
Robert J. Prahl, CPCU, is director of education for the American Association of Insurance Services.