(July, 2014)
There are millions of in-home businesses in this country and
many of these situations represent significant, legitimate business
opportunities. They also represent a greater exposure to errors and omissions
claims if their coverage needs are not addressed.
Insureds who run businesses out of
their homes often face substantial gaps in coverage. Helping clients to close
these gaps can be an important step in improving retention and rounding out
insurance accounts. Premium volumes for agents and carriers may expand by
meeting the coverage needs of growing, maturing businesses.
There are a number of challenges to properly insuring an
in-home business, specifically:
·
What coverage exists under a typical homeowners
program?
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How do you determine whether an activity is a
business?
·
How do various courts deal with losses involving
businesses operated from a residence?
·
What types of coverage are typically available
in the insurance marketplace?
·
How do commercial and private auto policies
respond to in-home business related auto exposures?
Coverage Under A Typical Homeowners Policy
Defining Business
Base (unendorsed) homeowner forms are not designed to cover
business exposures with the exception of a very modest office or rental
(landlord) situation. Many homeowner policies refer to business as “trade,
profession or occupation.” While these terms are not defined in the policy,
Webster’s Third New International Dictionary offers the following:
·
trade: the
business one practices or the work in which one engages regularly; one’s
calling; gainful employment; means of livelihood.
·
profession: a calling requiring specialized knowledge and often long
and intensive preparation including instruction in skills and methods as well
as in the scientific, historical or scholarly principles underlying such skills
and methods.
·
occupation: the principal business of one’s life: a craft, trade,
profession, or other means of earning a living.
All three terms suggest some element of permanence, an
objective to earn an income or achieve a profit and spending substantial time
to accomplish that goal. These elements help to distinguish businesses from
hobbies or other non-business activities. It is important to recognize that a
hobby can (and frequently does) evolve into a profit-making business or
occupation.
Standard HO policy wording provides greater guidance in
clarifying the coverage intent toward business. A standard form may be found to
provide limited coverage for activities that it deems to involve a business. An
exception may exist to allow coverage for certain activities that, essentially,
still represent personal exposures, but which contain a minor level of
financial benefit. Another approach may be to allow the HO to cover situations
that generate less than a specified dollar amount of compensation over a
12-month period. Therefore, any activity that creates other tangible and measurable benefits can convert the activity into an
excluded business operation. Generally, exceptions are made for minor
activities that are traditionally done by children, such as tutoring, lawn
mowing, lawn care, baby-sitting, paper routes and similar tasks. Mutual
exchanges of similar services are also usually granted an exception from a business exclusion.
Employees
Staying true to its purpose of protecting against
residential loss exposures, a basic (unendorsed) homeowners
policy does not cover anyone other than a “residence employee.” One homeowner
policy standard actually defines the term. The term refers to a person who
works for an insured whose duties are directly related to maintaining or making
use of a home.
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Examples:
A butler preparing and serving a
family dinner - residence employee
Your gardener/handyman paints
your home - residence employee
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A “residence employee” can perform
duties at your principal residence, at your summer home, at your time-share
condo, at your hotel suite, or at a picnic in the park. However, covered status
is lost when an employee performs a duty that is beyond her scope and the
policy’s definition of “residence employee.” Increasingly, standard forms make
references to distinguish between employees with domestic duties and all
others.
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Examples:
A nanny is on her way back from
taking your kids to school; she goes to an office building to deliver your
important business proposal - not a residence employee
Your personal driver spends the
evening chauffeuring a business client’s wife around town to shop while you
meet with the husband - not a residence employee
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Another consideration is the
coverage available to residence employees who are injured. A homeowner policy
may extend medical payments coverage to “residence employees” but the
protection amount is very modest. While a few states require coverage for
domestic employees, no coverage is required for “business” employees. Insurance
professionals have to exercise special vigilance when aware of any insureds who travel out of state with their residence employees.
State workers compensation laws vary so much that coverage can only be
determined by being familiar with the applicable state. The safest course of
action may be to recommend that your insureds buy workers compensation for any
residence, domestic, or business employee. This would involve:
·
Possible use of your
state’s pool or assigned risk plan.
·
Needing to determine
whether baby-sitters come under the act.
·
Listing regular out of
state destinations on a worker’s comp application if travel plans include
residence employees.
Insureds who
experience a worker-related claim in another state typically have up to thirty
days from the accident date to notify their insurance company. Insureds should
make it a practice to obtain certificates of insurance (Workers Compensation,
General Liability and Auto) from any contractor they hire to work for their
residence or for their home-based business.
Treatment of
Different Classes of Business Property
Note: The limits
mentioned below are illustrative as types and amounts of coverage vary by forms
and the companies that provide HO coverage.
·
Inventory, goods, equipment, furniture, and fixtures
associated with the business: You will
find limited coverage such as $2,500 on residence premises and $250 off
premises protection for most business equipment. These limits can be increased
up to $10,000 on premises and $1,000 off premises.
·
Electronic equipment (including accessories, antennas,
tapes and disks): Whether on or off
premises, electronic equipment equipped to operate from the electrical system
of a vehicle has a special sub-limit of $1,000. Car phones, laptop computers,
tape recorders, fax machines, etc., that can be plugged into the cigarette
lighter via any built-in adapter or connectable devices are subject to this
limitation.
·
Landlord furnishings: Protection
for furnishings in an apartment located on the “residence premises” is
restricted to a set of specified causes of loss and recovery is limited to
$2,500. Of special note is the absence of coverage for theft; property rented
or held for rental to others for use away from the “residence premises” is not
covered at all.
·
Business data:
Business data includes accounts, disks, drawings, files, CD-ROM, etc. These are
covered for the cost of blank replacements only. There is no coverage for the
cost of research to replace the lost information. Software that is readily
available in the retail market (Microsoft Word, Excel, Photoshop, etc.) is
covered for their actual cash value or if optional coverage is purchased, for
their full replacement value.
·
Credit Card/Funds Access Cards/Check Forgery and Fraudulent
(Unauthorized Use): Any business related
loss is excluded. Policies may vary on addressing claims involving checking
accounts, credit cards and funds access cards, you may find that claims are
denied on cards used for both business and personal use.
·
Business Income/Extra Expense: Other than fair rental value, when forced to relocate due
to a covered cause of loss, there is typically no significant amount of
coverage under the homeowners form.
·
Other Structures: If
an “other” structure is used wholly or in part for “business,” do not expect a homeowners policy to cover any loss since the business use
of garages, sheds and other buildings related to a home is excluded. Usually an
exception is granted when a structure is rented out as a private garage.
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Examples:
An insured uses a garage to store antiques taken to flea
markets on the weekends and the garage burns down. No coverage is available
for the items stored or for the garage!
An insured runs a daycare and has activities for the
children in a corner of the converted barn out back. No coverage applies if
the barn is struck by lightning and burns to the ground.
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Coverage Available Under Property
Endorsements
There are a growing number of property endorsements that can
be added to a base policy to help with business exposures, but most are
designed to handle operations that have no exposure to customer traffic,
professional employees or permanent tenant situations. However, some
endorsements are available that handle a large variety of home-based
businesses. Such endorsements may be more accurately called coverage parts
since they may include their own definitions, conditions, insuring agreements
and exclusions, while still relying on provisions found in the policy to which
it is attached.
Available property endorsements which address business
exposure to a limited degree tend to involve:
Increasing limits on business property - provides only
limited coverage such as modestly increasing a policy’s special limits of
liability. A larger consideration which may reduce the usefulness of such
endorsements is that the coverage typically does not apply to business
property:
·
kept in storage
·
held as a sample or
for sale or delivery after sale, or
·
related to a business operating on the residence premises.
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Examples:
An insured is a cosmetic sales rep and keeps inventory in
storage - there is no coverage.
An insured is a day care provider - no coverage provided
for cribs, high chairs, walkers, toys, etc., since the business is conducted
on the premises.
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There are endorsements that allow insureds to increase or
modify a policy’s personal property coverage to cover certain types of business
property or equipment. Some others lift restrictions such as allowing coverage
against theft or reimbursing loss on a replacement cost basis, but again such
coverage tends to be minimal, encouraging a home-based businessowner to
purchase more extensive coverage.
Modifying Use of
Residence Premises – some
endorsements are available which adjust the coverage under a homeowner policy
to respond to:
·
losses involving
damage to business property for businesses operated from a home or from a
related structure, or
·
theft or damage to property located in parts of a residence an
insured usually rents out to others.
Coverage Available Under Liability/Medical
Payment Endorsements
Liability for bodily injury or property damage that is
related to any “business” conducted by any “insured,” including consequential
or professional service loss, is excluded from coverage.
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Examples:
An insured throws a party at her
home to entertain business clients and the insured intends to take the
expenses as a business deduction. A client falls and is injured. There would
be no defense coverage, medical payments, or bodily injury protection
available to reimburse the insured.
An insured’s client stops by to
fill out a form and slips on a child’s toy wagon, injuring his back. There is
no coverage for this loss.
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Modifying Use of
Residence Premises – typical endorsements used to add
“business” liability coverage are as limited as their property coverage peers.
The amendments usually involve expanded liability coverage to handle low-risk
business exposures such as extending liability coverage for:
·
an insured’s business pursuits. In other words, covering
business related activity that occurs at a residence, but which is an
incidental liability from an off-premises occupation.
·
for losses involving corporal punishment for an “insured” who
is a teacher at any school or college.
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Example: Your
insured is a local high school teacher who has a tendency to apply a ruler to
the hands of errant students; this endorsement would apply. When that same
teacher comes home and applies that same ruler to the hand of her private
piano student, the endorsement would not apply.
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·
Medical payments for a
minor on-premises business operation
·
Liability related to a
portion of a covered premises that is rented out to
other persons.
Coverage Available Under In-Home or Home-Based
Business Endorsements
Recently, standard homeowner
programs have been offering a higher level of coverage for business exposures
that exist in a residence or in related, residential property. These longer,
more complicated forms typically modify a base HO policy to offer both property
and liability coverage for certain, in-home, business exposures.
Related Articles:
HO 07 01–Home Business
Insurance Coverage
Home Business
Questionnaire
Business or Personal Liability?
Nearly any type of business can be operated out of the home.
The liability exposure for the welder working out of his garage may rival if
not surpass that of a welder working for a major automotive giant. The retired
grandmother who caters wedding and graduation receptions can subject a crowd to
food poisoning just as easily as a national food chain. The woman who cleans a
few houses a week for money to make ends meet can be accused of damaging a
valuable portrait at a client’s home. Following are additional sources of information
on how various homeowner situations with business liability played out in the
courts:
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Example: Bev
has a salon chair off the kitchen in her home. She takes money for styling
hair but her only clients are her friends or people who have become friends
over the years. Often after a haircut, Bev and her clients will sit on the
front porch and drink tea. When a client falls on a crumbling step and
injures her back, was she there as a friend or as a client? What about the
friend turned foe who sues Bev when the friend’s hair falls out after a
permanent? If Bev has a salon business in her home, she has both a business
property and a professional liability exposure that need to be covered.
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Example: Steve
worked his way through college as an auto mechanic. While he no longer works
as a mechanic, he often repairs his own cars and will sometimes come to the
rescue of his friends when they need minor work done. Once in a while, his
friends will slip him some cash. After the engine of a car that he has worked
on burns up, his friend accuses him of failing to refill the oil. Steve knows
that he refilled it but, when he actually has to defend himself in a lawsuit,
will his homeowner’s policy respond? If his insurer determines that this is a
“business,” clearly his homeowner’s policy will exclude the exposure. Steve
needs to look for business coverage or decline working on anyone’s car except
his own.
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Example: A
retired couple becomes attached to a little neighbor girl who lives a few
homes away from them. At Christmas they give her a gift that, in the past,
they have given to all of their grandchildren...a homemade rocking horse.
They have also sold a few rocking horses to persons who admired them while in
the homes of their grandchildren. They don’t charge much more than the cost
of the supplies. When the rocking horse collapses and the little girl’s
mother files a lawsuit, what happens then? The pertinent issue is whether the
insurance company considers the pursuit a hobby or business.
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Related Article: Hobbies – Hazards and Opportunities
Related Court Cases:
Hotel Property Damage
Held Covered Only Outside Room Occupied By Insured
Deficiency of Coverage
Charged To Agency When Client Made Need Clear
Baby-Sitter's Activity
That Caused Injury Held to Be "In Furtherance of The
Insured's Business Pursuit"
Business Pursuits
Exclusion Held Applicable to Wedding Reception Services
