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AAIS Perspective Business exposures and HO insurance Revised homeowners forms clarify By Joseph S. Harrington, CPCU One of the enduring challenges in developing a homeowners insurance product is to maintain the distinction between personal and business exposures. There is a general expectation that a homeowners policy will provide liability coverage for all of a household’s personal activities except for those traditionally excluded and covered under separate policies or coverage parts (auto, aircraft, etc.). For the most part, business-related activities are among those activities traditionally excluded from basic homeowners liability coverage. Similarly, homeowners policies have not been written or rated to cover business property exposures. There are, however, activities that individuals engage in at home for some form of compensation—or that are related to business or employment—that can be considered to be personal activities appropriately insured under a homeowners policy. One of the roles of advisory organizations such as AAIS is to fine-tune policy language to maintain homeowners coverage for such activities while avoiding commercial exposures. Some examples of this fine-tuning are found in the latest revision of the AAIS Homeowners forms, now being filed countrywide with effective dates starting July 1, 2007. Property Standardized homeowners policies have long excluded first-party property coverage for related private structures, such as garages and storage buildings when they are used for business purposes. That’s not to say, however, that insurers intend to automatically exclude coverage for a structure once it is used for any purpose related to business, however incidental. Following industry practice, the 2007 AAIS Homeowners revision modifies this exclusion to be more specific than the previous version. It now applies to structures used for the direction or operation of a business, or for the storage of business property. (The exclusion also applies to structures rented or held for rental to others, as did the previous version.) While the application of the exclusion to a given risk will depend on particular facts, the revised exclusion puts more emphasis on the conscious, considered use of a structure for business purposes. With the exclusion written more specifically, the exceptions to the exclusion, which preserve coverage, are also written more specifically. For example, the exclusion makes an exception for related private structures that are used to store private passenger autos, pickups, vans, and motorized vehicles designed for activities such as lawn mowing or snow plowing. That exception extends to fuel in portable containers designed for such vehicles, provided the containers have a capacity of no more than five U.S. gallons. The significance of this exception is that the presence of a company car or a riding mower used in a minor’s summer business would not, in and of themselves, automatically exclude coverage for a structure. Liability Just as the business exclusion for related private structures was made more specific, so, too, has the exclusion for bodily injury and property damage arising from business activities. Where the previous version of the exclusion referred to “activities related to the business of an insured,” the 2007 version explicitly excludes coverage for BI/PD arising out of or related to a business conducted from the insured premises or undertaken by an insured, regardless of location. The provision states that the exclusion applies whether the insured owns and operates the business or is an employee. The definition of a business (which determines, in part, the scope of a homeowners business liability exclusion) is expanded in the 2007 forms to include occasional activities related to a trade, profession, or occupation (including farming), in addition to full- and part-time work. Beyond that, the definition of a business also includes any other activity undertaken for money or other compensation, with limited exceptions. Those exceptions to the definition, which maintain liability coverage, include: • Caring for an insured’s relative in return for compensation • Caring for non-relatives in exchange for similar services only (e.g., a baby-sitting cooperative) • Volunteer activity for which the insured is compensated only for expenses, or not compensated at all • Other activities (e.g., garage sales) for which no insured’s compensation exceeded $2,500 in the 12 months before the start of the policy period Thus, the 2007 AAIS Homeowners revision seeks to preserve liability coverage for certain exposures deemed to be personal in nature, even if an insured receives some compensation. Along that line, the program revision extends incidental BI/PD coverage to certain business activities of an insured under age 21. To be covered under the provision, the insured minor must be self-employed in part-time or occasional activities and not employ others. Thus, even though the minor’s business is an enterprise operated from the home, the restrictions written into the incidental coverage limit the exposure to a scope deemed appropriately insurable under a homeowners policy. Rental Several of the revised provisions in the 2007 AAIS Homeowners forms address the rental of property, another area where the distinction between personal and commercial use is not always easy to determine. For example, an exception to the property exclusion for related private structures preserves coverage for a structure rented to a tenant of the residence insured under Coverage A-Residence. The structure must not be used for the direction or operation of a business, or for storage of business property. (The exception for private vehicles and fuel discussed above also applies to structures rented to tenants.) The effect of this provision is that coverage is not automatically excluded for a garage rented to a tenant of the residence insured under Coverage A. Another exception allows insureds to rent garage space to neighbors for private passenger vehicles without automatically excluding coverage. Regarding liability coverage, the definition of a business includes the rental of property to others. Therefore, such rentals would generally fall under the liability exclusion for business activities. However, the program extends incidental coverage for bodily injury and property damage arising from the rental or holding for rental of insured premises to the following circumstances: • On an occasional basis for use as a residence (as when a family rents a home to out-of-towners during a special event, like the Olympic Games) • In part for regular use as a residence (up to two boarders) • In part for regular use as a school, studio, office, or private garage In all, the revised AAIS Homeowners forms seek to exclude exposures arising from the operation or support of a commercial enterprise, while not necessarily excluding uses that may produce monetary gain but fall appropriately within a personal lines exposure. Note: This article is general in nature and is not intended to provide definitive information regarding use of AAIS products and services, which is restricted by copyright and license agreements. This article in no way alters, supplants, or supersedes what is written in AAIS policy forms, manuals, bulletins, or other communications, and does not indicate any official AAIS position on the matters discussed in the article. * The author |
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