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The Rough Notes Company Inc.



February 25
09:40 2020

Dig a Little Deeper

By Bruce Hicks, CPCU, CLU


Changes in residency require assessment and possible changes in coverage

“Court Decisions” is a popular Rough Notes magazine feature, in part because the courtroom is where the promises made in an insurance contract often become real. Insurance professionals can develop “what if” scenarios, but until they are tested with an actual loss and a court decision, they remain mere mental exercises. In this column, editors of The Rough Notes Company’s Policy Forms & Manual Analysis (PF&M) knowledge base “dig a little deeper” into a published court decision to identify a coverage problem, provide possible solutions, and/or offer broader perspectives.

This installment addresses a case involving a couple who owned a residence on which coverage was switched back and forth between homeowners and dwelling fire policies. These changes were due to occupancy alternating between the property’s owners and tenants. A serious coverage situation arose when one of the renters was injured after part of the dwelling’s porch collapsed. At this time the residence was insured by a homeowners policy because the owners had previously occupied the premises and were planning to move back after the current renters’ lease expired.

When the tenants sued the property’s owners and a claim was filed under the homeowners policy, the insurer denied coverage. The insurer argued that the claim involved damages that were directly connected to the tenant/landlord situation. Eventually a higher court agreed that the homeowners policy was not required to respond to the rented property claim.

This was a situation in which some level of coverage should have been available. The fact that it didn’t was entirely avoidable.

Insurers use inspections to confirm the condition of new properties they write and to obtain current information on renewal business.

A long-term rental occupancy cannot be covered by a homeowners policy, which is designed to protect residence owners from property and liability losses related to home ownership. The language of the homeowners policy is out of alignment with a full-time rental situation. The definition of covered persons is not met, insurable interest in the structures and much of the contents does not exist, and the legal liability interests do not match up.

The solution is simple: Different policies should be used according to actual occupancy. Coverage problems often arise when individuals are unable to secure or afford appropriate insurance. The problem in this case was caused by poor communication and negligence on the part of the property owners. Steps taken by the agent or the insurer might have identified issues before the loss took place.

Keep in mind that before the accident, the house had been occupied by renters for years. Further, the loss involved long-term deterioration of the property that resulted in structural damage and injury.

Insurers use inspections to confirm the condition of new properties they write and to obtain current information on renewal business. Poor maintenance is routinely discovered during inspections, and this leads to contact with property owners. First, the insurer should notify the insured of an unacceptable under-writing situation. Next, the insurer should follow up to see if the sub-par condition has been corrected.

In the case in question, a physical inspection could have discovered the rental situation and a change in the kind of insurance could have been made. Initial and follow-up notices about the residence’s poor condition could have spurred the renters to contact the property owners. The notices could have created a concern on the part of the property owners that would have led them to address the maintenance situation and to arrange for appropriate insurance coverage.

The author

Bruce D. Hicks, CPCU, CLU, is senior vice president, Technical & Educational Products Division, at The Rough Notes Company. He has more than 30 years of property/casualty insurance experience, including personal and small business underwriting as well as compliance duties for several national and regional insurers. Active in the CPCU Society, Bruce served as a governor of the organization from 2007 through 2010 and currently serves on the International Interest Group Committee.

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