ML 450–AAIS HOME-BASED BUSINESS COVERAGE PART

(May 2024)

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Agreement

Definitions

Principal Property Coverages

Incidental Property Coverages

Perils Insured Against

Exclusions That Apply To Property Coverages

How Much We Pay For Loss Or Claim

Optional Property Coverages

Liability Coverages

Principal Liability Coverages

Incidental Liability Coverages

Exclusions

How Much We Pay

Optional Liability Coverages

Additional Insureds

This coverage part supplements several property programs offered by the American Association of Insurance Services (AAIS) and, like those forms, it is simply and logically structured.

The protection provided by the coverage part is extremely valuable. Insurers typically are careful to apply their policy exclusions regarding business exposures that exist in residences; both property and liability losses connected to business activity are likely to be denied in the absence of such an endorsement.

Note: All references to a declarations page, unless specified otherwise, mean the Home-Based Business Supplemental Declarations Page.

The table of contents that appears in this policy also appears above as this article’s index.

AGREEMENT

The policy's opening language states that the coverage part’s protection is subject to the applicable terms of it as well as the policy to which it is attached. The coverage part will provide property, liability and other insurance coverages that are described in the part. The coverage applies to the business described in the supplemental declarations page WHEN that business is operated on the covered premises by the insured.

Related Court Case: Extended Rental, Not Business Use

Home-Based Business Types

Covering In Home Business

DEFINITIONS

The definitions section appears immediately after the Agreement.

1. You and Your

These words refer to the entity, named as the insured, that appears on the coverage part’s declarations page.

2. Limit

The coverage part refers to the amount of insurance that applies but this term does not apply if the policy that the part is attached to already defines this term.

3. Perishable Stock

The term means property that belongs to the operation that is protected by the coverage part. This property must be kept under controlled conditions which, if the conditions change, could imperil the property.

4. Pollutant

Any solid, liquid, gaseous, thermal, or radioactive irritant or contaminant, including acids, alkalis, chemicals, fumes, smoke, soot, vapor, and waste. Also, electrical, magnetic, or electromagnetic particles or fields, visible or invisible, plus emitted sound. Waste is defined broadly, including all material that is redistributed for disposal, recycling, reconditioning, and reclaiming.

Note: This definition applies only in absence of a definition in the accompanying policy.

POLICY CONDITIONS

1. Conditions under item one are applicable to this form’s Property and Liability sections.

a. Examination of Books and Records

The insurer notifies the insured of its right to review and even audit any records that are relevant to the business that is protected by the coverage part. Such exams or reviews may take place during the policy period and up to three years after the part’s coverage has expired.

Example: Hearty Property Ins. sends a representative to the Johnsons’ home on 4/11/24. He asks for permission to review their 2022 records for the copier repair service they run out of their home. Hearty’s last HO policy that included the Home-Based business coverage part was from July 15, 2022, to July 15, 2023. The insurer is within its rights to make the request.

b. Premium

If the premium amount for the covered Home-Based business appears on that coverage part’s declarations as a deposit premium, the insurer has the right to calculate a final premium at the end of the coverage period. The insurer may either refund an overpayment or bill the named insured for additional premium, depending upon the final premium that is developed.

The named insured has the obligation to maintain all records that may be related to determining a final premium and these records (copies) must be sent to the insurer, either when requested or at the end of a predetermined audit period.

2. The following condition is applicable to this form’s Property section.

No Benefit to Bailee

This policy is not intended to provide protection for the direct or indirect benefit to parties who are paid to take possession or control (custody) of the covered property UNLESS the party is an insured party under this coverage part. Other parties (persons or organizations) should secure their own insurance. Definitions do not guarantee adequate understanding, as is illustrated by the following:

Related Court Case: Bailee Clause Does Not Bar Coverage

PROPERTY COVERAGES

Principal Property Coverages

1. Regarding Coverages A (Residence), B (Related Structures) and C (Personal Property), the coverage part amends the applicable policy so that it provides coverage for signs under its Incidental Property Coverages provision. However, the coverage ONLY applies to a sign related to the described business.

Example: The Smiths operate both a beauty shop and a small copier shop in their home. They have wall signs attached to the front and the rear of their home, next to the spaces where the activities are located. During a storm, both signs are ripped off by winds and are destroyed. The Smith’s Home-Based Business Declarations only describes the beauty shop; therefore, the loss of the copier shop sign is ineligible for coverage.

2. This Coverage B provision amends the policy so that the “business” exclusion is neutralized, but just for the business that is listed in the coverage part declarations. Specifically, the related structures that house the described business property are covered. However, this policy would still exclude these structures IF they were used to store property used in business activity that IS NOT an operation listed on the coverage part declarations.

3. Personal property is expanded by this coverage part. The additional protection applies to property used in business activity when such property is leased to the named insured and that lease is accompanied by a contractual responsibility to insure that property.

Example: Johnson Family Realty runs their business from their home. The Johnsons rent a professional quality printer from PrintPro. Their agreement with PrintPro includes assuming insurance for the printer. This equipment would be eligible for coverage.

4.a. While the applicable policy’s “Special Limits of Liability” on personal property is still in force, an exception is made for valuable papers and records that are related to the coverage part’s covered business activity. This particular property is NOT subject to the special limit that normally applies to that and similar property (bank notes, securities, ticks, manuscripts, tickets, letters of credit, etc.).

Further, under this coverage part, valuable papers and records describe a wide variety of property, such as:

Programs and instructions used in the covered business’ data processing
Media used for storing covered business-related data

4.b. Business Property that is directly related to the coverage part’s described business is provided with an exception from Coverage C, Personal Property’s special limit section. The result is that such property enjoys the maximum protection of:

· The Limitations on Certain Property amount that applies to property located on or away from the covered premises

· The Coverage C Limit that applies to property located on the premises, but ONLY if no other special limit applies

· $5,000 coverage while located away from the insured premises, but ONLY if no other special limit applies. However, higher coverage applies according to any higher limit appearing on the Home-Based Business Declarations Page

Note: Provision 4. does NOT increase the amended policy’s Coverage C limit.

5. This item adds items to the policy’s Personal Property Not Covered provision.

a. No coverage is provided for illegal property (contraband) or property that is used in transportation or trade that involves criminal activity.

Example: Gary and Mindy’s home includes a home-based business coverage part. A fire destroys half of their home, including a converted bedroom which contains business property. Their insurer disallows a third of their claim which involved the destruction of illegally cloned phones for sale.

b. No protection is provided to property that belongs to customers of the covered business when that business involves a Bed and Breakfast.

6. This provision exists ONLY when the policy to which the Home-Based coverage is attached settles losses to personal property on a replacement cost basis.

Under Coverage C, Personal Property, the coverage part terms regarding replacement cost settlement are inapplicable to business property that:

a. Is leased to an insured

b. Belongs to other entities but, due to business activity, it is in an insured’s possession.

Note: This additional exclusion replaces any other term found in an amended policy that applies to replacement cost settlement on business property.

7. Under this provision, the coverage part does NOT benefit from any protection that the accompanying policy contains for Refrigerated Food Spoilage. That is due to the intent to have any such coverage be handled under the coverage part’s “perishable stock” coverage. However, this coverage must be listed on the supplemental declarations.

8. This item excludes coverage for loss due to business interruption. No protection is provided to an insured for costs related to getting a described operation up and running after it has been stopped by a loss that damages the premises where the business is located (insured premises).

Example: Franklin’s home is badly damaged when a storm sends the largest tree on their property crashing onto its rear portion. He turns in the following claim:
Repairing living room & kitchen	$7,300
Replacing salon equipment	$3,200
Reimbursement for renting salon chair and cost of having a rush installment of a replacement chair	$1,450
His insurer pays for the repairs and for the new chair but denies the extra expenses to resume his salon business.

Incidental Property Coverages

1. The policy states that, except regarding refrigerated food spoilage, the protection listed under this section applies to the insured’s covered business property.

2. The Home-Based business coverage part includes the following, additional features:

a. Valuable Papers and Records Research Cost

Unless a different amount appears on the Home-Based business declarations, a maximum of $2,500 is available to assist with the expense of recovering business data on paper or electronic formats. But the policy’s deductible applies and the coverage does not respond when duplicate information is available.

b. Signs

Unless a different amount appears on the Home-Based business declarations, a maximum of $500 is available to assist with replacing a sign that has been damaged, destroyed or lost. No deductible applies; however, coverage only responds to incidents involving a sign directly related to the covered business.

3. Credit Card, Forgery and Counterfeit Money

The policy provides some limited coverage for fraudulent incidents involving the described business and credit card, forgery, and counterfeit money, UNLESS any loss is due to counterfeit money and checks and promissory notes (invalid ones that are NOT honored) that are received as payment for the insured’s goods and/or services.

Example: The owner of Karl’s Komputer Konsultants files a claim with Integral Insurors for:

$700 fraudulent check he received for installing a PC network for an out-of-town client – no coverage

$700 credit card fee he attempted to process for installing a PC network for an out-of-town client. However, it was not honored because it was discovered to be a stolen, expired card – covered

4. Trees, Plants, Shrubs, or Lawns

There is coverage loss to trees, plants, shrubs, or lawns that are grown as part of the operations that is the described business. In other words, it covers such property that exists as business product NOT for such property that exists merely as landscape on the business location. This is an extension of the Trees, Plants, Shrubs or Lawn Incidental Coverage in the basic policy so is very limited as to causes of loss and limit of insurance.

Perils Insured Against

1. The Home-Based business coverage part adds this exclusion but only if the business covered is a Bed and Breakfast operation and coverage includes protection against theft. There is NO coverage for theft that involves any of the following:

a. Money, bullion, bank notes, precious metals (including plated utensils) and collectible coins and similar property

b. Securities, stamps, letters of credit, notes, records, tickets, debt-related documents, passports, accounts, deeds, and any form of manuscript

c. Jewelry, watches, precious stones, gems, and furs

This exclusion applies only when items in a., b., or c. are located in a part of the described premises normally used by an insured but, at the time of theft, had been rented to another party.

2. This second exclusion applies when the policy includes protection against damage caused by artificial electricity. In such cases, this item blocks coverage for loss to a described operation’s perishable stock (as defined by the policy) that is caused by electricity that is artificially created (as opposed to lightning damage).

Note: The result is that loss involving such property that is used by the residence would still be eligible for coverage.

Exclusions That Apply To Property Coverages

This section of the Home-Based Coverage Part lists the sources of property loss that ARE NOT covered. Unless an exception appears, the exclusions listed here also apply to any optional coverage selected by an insured. In this case, exception language would need to appear in the optional form wording.

1. Criminal, Fraudulent or Dishonest Acts

No coverage is provided for loss due to criminal, fraudulent, dishonest, or similar acts when it is committed by an insured, other parties that hold a financial interest in the described business operation, persons an insured permits to take possession/control of the property or an insured’s partners, business officers, directors, trustees, joint ventures, or associated persons when the covered operation is in the form of a limited liability company. The exclusion extends to employees or agents of the parties mentioned above.

While this exclusion does NOT apply to loss involving property destruction committed by either employees or agents, it STILL applies to property stolen by such parties.

Example: Benny’s Mod Style Salon is run out of his home and is covered by a Home-Based business coverage part. Benny turns in the following claim:
Damage to walls, sinks in salon’s space	$5,300
Theft of computer register	$440
Theft of seats/hairdryers	$2,130
Total	$7,870
When Benny and his insurer received word from the police that the damage and theft was committed by Benny’s employee and an accomplice, the theft portion ($2,570) of the loss is denied.

2. Voluntary Parting

No coverage is allowed for loss that is related to an insured agreeing to give property up to another party when it is caused by a trick, false pretense, or similar, fraudulent maneuvers. The exclusion is broad. It applies to situations where an insured suffered a loss because counterfeit money, invalid checks or stolen/unauthorized credit cards were accepted in a transaction, but it is not limited to only those situations.

3. Calendar Date or Time Failure

This exclusion renders the coverage parts protection moot when loss or damage involves errors of date and/or time calculation that are made by any computer or other, similar electronic processes.

How Much We Pay For Loss Or Claim

1. The provisions under this section apply only to the business protected by the applicable coverage part.

a. Finished Merchandise

This refers to goods made by the insured. Its value is determined at the time of any loss and is based on a fair market price, net of any discounts and expenses that have not been incurred.

Example: Jane’s Pet Playthings loses an order of toys in a fire. When her loss is settled, there’s a deduction in their value since, at the time of loss, the toys had not been put into their final packaging and the packaging materials were unharmed.

b. Merchandise Sold

This term applies to the value of goods sold by an insured, but not yet delivered. Again, the value is net of any expenses not realized by the insured’s operations and also net of discounts.

c. Valuable Papers and Records

This refers to the cost of restoring business data (such as client lists, orders, inventory lists, etc.) to blank materials/media when a duplicate source of information exists. But it does not refer to the cost of prepackaged software.

2. Loss Settlement Terms

Regarding settling losses under the Home-Based business coverage part, loss or damage involving customer property entrusted to the applicable business or property leased by the business is eligible for coverage. However, the possession of such property must be accompanied by it being directly related to the business operation or by a contractual obligation to protect such property, respectively.

Examples:

Fire damage to lawn equipment on the property because the items were awaiting work by the insured lawn equipment repair service – covered

Fire damage to lawn equipment on the property because the items were borrowed from a friend and was to be examined for consideration of purchasing similar equipment for insured’s lawn maintenance service – not covered

When a loss involves such property, settlement is paid according to the property’s ACV (including cost of labor/supplies) and any amount the insured is obligated (under agreement) to pay for the property, whichever is the higher amount.

3. Insurance under More Than One Policy

This provision addresses losses involving property an insured holds under a contract of sale. Under this circumstance, an insurer has the right to determine its liability to the insured by considering other sources of coverage. When another source exists, payment will be based on the share of coverage owed by each party.

Examples: Benny’s home includes coverage for his music studio and instrument repair shop that is run from his home. His home is burglarized. Besides repaired instruments that were awaiting pick-up, the thieves also stole a custom drum set that was held under a formal consignment agreement. Benny’s insurer settles the loss but splits coverage with the insurance policy carried by the drum set’s owner.

Mortgage Provisions

When a mortgage interest appears on the Home-Based business coverage part declarations, loss settlements will be arranged with both that interest and the policy’s named insured. The payments will be made with proper consideration of each party’s financial interest. Similar payment procedures will take place in the event that a policy includes more than one mortgage (including trustee) interest.

If there IS more than one mortgage interest, payment is done according to their precedence. In other words, a first mortgagee’s interest is honored before a second, which in turn is handled before a third, etc.

A mortgage’s protection (up to its financial interest) may stay intact when it is cancelled for an insured. This may occur when an insured forfeits coverage by a given improper/illegal act or omission. However, such is the case only when the mortgage is either unaware of such acts or, if aware, shares material information with the insurer.

A mortgage interest, which is listed on the declarations, has rights and obligations under the policy, which, as far as loss payment goes, are comparable to an insured’s rights.

If the insurer terminates (cancel or non-renew) the coverage, it has the obligation to give any mortgagee 10-day advance notice of a decision to cancel of non-renew the applicable policy.

The mortgagee must pay the policy premium once it becomes aware of the insured’s failure to pay and, again if the insured fails, the mortgagee can preserve possible coverage if it sends a valid, timely proof of loss statement.

If a mortgagee is paid for a claim that involves a denial to the named insured, it is likely that the insurer will secure the mortgagee’s subrogation rights and, in turn, go after the named insured for reimbursement. Further, when payment is made to a mortgagee, the insurer may decide to buyout the mortgagee’s complete financial interest and, if applicable; secure rights to the mortgage debt and/or collateral.

Loss Payable Options

If the form includes a loss payee with an insurable interest in the business that is protected by the coverage part the following option (whichever is listed on the declarations) applies:

Loss Payable – Option 1

This option merely advises that settlements will be made to the insured and the applicable additional financial interests, according to their actual interest. Both the parties and their interest must be shown on the declarations.

Lender’s Loss Payable – Option 2

Besides the obligation indicated in option one, this provision also states that such interests are paid in whatever order exists. Further, the lender is subject to the same policy and coverage part provisions as the named insured.

In order to qualify as a covered lender, the named insured has to provide information on the legitimacy of the creditor’s status and what business property is involved. The property must be protected by the Home-Based business coverage part.

Note: The creditor status must be documented in writing.

The lender who owns a financial interest in the business property can maintain its insurance coverage even when the protection is voided or terminated for the named insured. If the named insured forfeits his or her right to coverage because of acts or omission, the loss payee can still claim coverage or payment if that party pays premium in the place of the insured, complies with sending a complete proof of loss statement within 60 days that the named insured did not do so or when the lender tells the insurer about any substantial changes of risk that it becomes aware of.

If a lender is paid for a claim that involves a denial to the named insured, it is likely that the insurer will secure the lender’s subrogation rights and, in turn, go after the named insured for reimbursement. Further, when payment is made to a lender, the insurer may decide to buy out the lender’s complete financial interest and, if applicable, secure rights to the loan debt and/or collateral.

If the insurer terminates (cancel or non-renew) the coverage, it has the obligation to give any lender 10-day advance notice of a decision to cancel for nonpayment or to non-renew and 30 days notice for other reasons of cancellation.

The lender’s right to a loss payment is NOT affected if that party has begun foreclosure proceedings against the insured.

Contract of Sale – Option 3

This option merely advises that settlements will be made to the named insured and the applicable loss payee, according to their actual interest. Both the parties and their interest must be shown on the declarations. In order to qualify as an insured interest, the declaration page must list the party that the named insured contracted with for the sale of property protected by the coverage part.

Optional Property Coverages

The Home-Based Business Coverage Part includes some additional property coverages which apply only when indicated on its accompanying declarations page.

Related Private Structures

Under this option, the coverage part extends the base policy’s coverage to apply to any described business that is operated from a related structure (usually a detached garage or other separate building). All of the policy’s and the coverage part’s provisions regarding Coverage B are then applied to the applicable structure.

Example: Neesha’s dance studio had grown so much that she had to make a change. For years she operated out of her home’s finished basement. However, the space became cramped. Her location included a well-kept pole barn that had been used by the previous owners. Neesha got a small business loan and renovated the barn as a modern studio. Her insurance agent told her that she would have to revise the description on her home-based business endorsement to show the change in business location.

Note: The policy exclusion regarding business use of a private structure is eliminated by the coverage part wording. Further, the applicable policy’s Coverage B limit is REPLACED by the limit indicated in the coverage part’s declarations.

Guests’ Personal Property Coverage

This item protects personal property that belongs to guests WHEN the covered business is a bed and breakfast. However, the business must be described as a bed and breakfast in the declarations.

Coverage is provided by extending the underlying policy’s Coverage C limits and provisions to guest property. The Coverage C exclusion regarding theft from parts of the premises occupied by the insured but rented to others is eliminated when this option is selected. However, this may be moot as, in the case of a bed and breakfast, the insured would NOT normally occupy the rental area.

The special limitations of coverage for certain property classes that apply under Coverage C also apply here, except that the coverage part option contains a special limit for money belonging to guests. The maximum amount available for money is 10% of the limit that appears for Guest Property and the amount that applies to money is a sub-limit; it does NOT increase the amount of coverage available to all guest property.

Example: Jerry’s Homey Hideaway loses a long-time client after a loss. His client reported that his room was broken into and most of his luggage and other property were stolen. His stay at Jerry’s was the beginning of a month-long trip across the country and he was carrying a lot of money. He lost nearly $3,000 in the break-in. Since Jerry’s Home-Based Coverage amount for Guests’ Property Limit was $15,000, the client was only reimbursed for $1,500 of his loss.

Accounts Receivable Coverage

This is a part onto itself, but the detail is necessary since it involves the core issue of a business generating income.

1. Property Covered

This option protects the insured’s sums that are owed from the described business but can’t be collected because of a loss. It also provides coverage for loan charges for money borrowed to tide the business over until the accounts are paid. Other categories of covered property are extraordinary collection costs related to pursuing unpaid accounts and costs to create replacement account records.

Related Article: AAIS Accounts Receivable Coverage

2. Property Not Covered

There is no coverage for either illegal property (contraband) or any property used in criminal activity.

3. Additional Coverages

a. Property Away From Premises

This provides coverage to account records located away from the described business location. However, a loss is covered only when caused by a source of loss listed in the coverage part. The limit of coverage applying to such property is 10% of the Accounts Receivable limit.

Example:

Mel’s Catering Home-Based Business Declarations

Accounts Receivable Limit - $12,000

In this case, the property away from premises amount is $1,200 (10%)

b. Removal

Coverage exists to handle a loss that occurs while an insured moves account records because they are threatened by a source of loss that is eligible for protection under this optional coverage. The protection is for any tangible loss and lasts a maximum of 10 days after the move date.

4. Perils Covered

Account records are protected against any source of tangible loss that is NOT listed in the option’s exclusion section.

5. Perils Excluded

There is no protection under this additional coverage for:

a. Loss due to improper (criminal, fraudulent and dishonest) acts, voluntary parting, calendar/time processing errors. In addition, Civil Authority, Nuclear Hazard and War described in the base coverage part apply.

b. These exclusions are specific to this coverage.

1) Concealment – no loss is paid for records that are lost or destroyed in order to hide criminal activity involving the theft or illegal movement of money, securities, or other property

2) Damage, Disturbance, or Erasure or Electronic Data – no coverage exists for electronic data that is lost due to program errors, insufficient or improper data handling/maintenance or electrical power irregularities. However, the power exclusion only applies when the irregularity or loss of power occurs more than 100 feet away from the described operation’s premises.

3) Discrepancy – coverage is excluded for loss that is discovered and documented ONLY via bookkeeping records. However, such records may be used to support other forms of evidence of a loss.

4) Errors and Omissions – no coverage is provided for any loss caused by errors or omissions in billing, accounting, or bookkeeping activity

5) Loss of Use – no coverage is provided for indirect loss created by the destruction or loss of tangible property or by another source of indirect loss.

Example: Zoe runs a successful photography studio out of her home. Part of the house, including her studio, is destroyed during a violent windstorm. The loss included records of photo sessions for a local school’s prom and graduation pictures. Because of the time she spends in recovering the information, several clients cancel their appointments. This lost income is not covered.

6. How Much We Pay

This option has its own settlement provision. Under its provision, the insurer is obligated to pay the following:

a. All accounts receivable due to the insured, but net of the following amounts:

· Due under intact records

· Due from other means of documentation

· Paid by clients among the lost account records

· Considered unearned interest and service charges

· Considered part of normal bad debt allowance. In other words, lost records will not be permitted as a way to enrich an insured that, in absence of destroyed records, would still lose some funds due to normal, bad accounts.

b. The amount needed to reconstruct the insured’s account records

c. The limit shown in the declarations for account receivable

Note: The insurer is obligated to pay the LEAST expensive among options a., b., or c.

The provision also includes a contingency to handle a loss of accounts receivable that can’t be reliably calculated by other means. In such instances, the insurer can determine payment as a monthly average of accounts receivable for the 12-month period prior to a loss. However, the average is also subject to any monthly variances that can be attributed to the month in which the loss occurs.

Example: Paula’s Paint Pals suffers a fire in November and her company’s records are lost. She is unable to document her account receivables for that month. The insurer takes reviews account activity and determines an average of $2,300 but reduces the average to adjust for the fact that November is typically Paula’s slowest month for paint jobs.

Note: No deductible applies to such losses!

7. Conditions

This optional coverage has its own condition regarding recovered property.

Recoveries – the insured is obligated to forward any receivables to the insurer until any collected amounts exceed the amount paid by the insurer. Excess amounts may be kept by the insured.

Loss of Income Coverage

The Home-Based Business coverage part will provide coverage for loss of income due to an eligible peril that created a business disruption. However, the peril must be one that is covered either under the underlying policy’s Coverage A or, if the triggering loss only involves personal property, under Coverage C. The maximum that may be paid is the limit that appears in the declarations for Loss of Income. This coverage is not subject to a deductible.

1. Definition

This provision uses the defined term, “Restoration Period.” It is a period of time with a definite starting and ending point:

a. The period begins on the date of loss to structural or personal property, but only when caused by an eligible source of loss.

b. The period ends on the earliest of:

· The date the property should be back in use (due to replacement or repair). This is based on assumption of a normal repair/replacement time, using similar quality materials/equipment

· When business operations start up again

· 12 months after the tangible, triggering loss occurred

However, the restoration period does not count added time caused by delays from complying with construction-related ordinances, debris removal, dealing with pollution (monitoring, testing, evaluation, etc.) and corrective action taking place to address actual pollution activity (including removal, containment, detoxification, etc.)

Example: Lisa operates a law office from her home. Her home and office were demolished during a storm. Her home is rebuilt but the job took 5 weeks longer than anticipated. The builder had to report that gallons of various types of cleaner, pesticides, pool maintenance and other products that had been stored in the attached garage burst apart and seeped into soil. Since the entire neighborhood depended upon wells, delays were caused by testing and monitoring requirements. Lisa’s additional loss of income caused by this delay is not eligible for coverage as it was not part of a normal restoration period.

2. Earnings

The coverage part obligates the insurer to pay the covered business’ loss of net income as well as payroll expense and operating expenses that continue even after an interruption of business. It also covers interest income that continues to be earned after a loss-triggered interruption. Net income, as is traditional, refers to a business’ profit or loss prior to payment of income taxes.

All operating expenses during an interruption are eligible for coverage. The coverage part responds only to those that are necessary, related to getting the covered business back into normal operation, and at a similar level of service. However, any amount of loss that can be attributed to an insured’s actions that unnecessarily delay resumption of operations (such as failing to make use of other business property at the premises) is not covered.

Example: Paula’s catering service business was interrupted by a kitchen fire. While repairs were being made, she realizes that it would be a perfect opportunity to move a wall and make some other adjustments to the kitchen and adjoining room space. The changes results in the work taking an additional three weeks. The additional loss of earnings due to those three weeks is not eligible for coverage.

In instances where an insured business does not resume operations in a timely manner or decides not to resume operations, payment of loss is determined according to the insurer’s determination of how long it SHOULD take such a business to resume operations at a normal level. Consideration includes studying the business’ experience prior to an interruption and the likely experience in the absence of a loss.

Coverage under this section is different from payment for direct, tangible loss since many assumptions must be made about the business’ performance, income flow and what constitutes resumption normal or regular operations. However, in the end, it is the insurer’s decision to make a determination in a manner that it believes fulfills its payment obligation, under different circumstances (prompt resumption, delayed resumption, non-resumption).

Related Court Case: , Business Interruption Loss Justified

3. Extra Expenses

The insurer agrees to pay a covered business’ extra expenses that are necessary and which take place during the defined restoration period.

Extra expenses that repair, replace or restore property are paid only if for as much as they act to reduce the length of interruption (and subsequent amount of loss).

Payment for labor involved in recouping business data is included for as much as they act to reduce the length of interruption (and subsequent amount of loss).

As is the case with Earnings coverage, any amount of additional expenses that can be attributed to an insured’s actions that unnecessarily delay resumption of operations (such as failing to make use of other business property at the premises) is not covered.

The insurer is permitted to take any property salvage value in consideration when making extra expense payments. In instances where an insured business does not resume operations in a timely manner or decides not to resume operations, payment for additional expenses is determined according to the insurer’s determination of how long it SHOULD take such a business to resume operations at a normal level.

Related Article: Time Element Coverage Forms Analysis

4. Exclusions and Limitations

Coverage is either limited or unavailable under the loss of income optional coverage for the following:

a. Electronic Information

Limited protection exists for an insured that experiences an income loss due to the loss or destruction of its electronic information. E-information includes media, programs, or records related to a business’ electronic data processing. The term also applies to media for storing such information.

Coverage applies for 60 days after a loss date or when the time reasonably needed to restore operations at the location, whichever is GREATER.

b. Fire Extinguishment

Fire fighting expenses are not eligible for coverage under the Loss of Income protection.

c. Leases, License Contracts or Orders

Loss of income or additional expenses created by interruption or termination of written agreements and orders are not covered UNLESS such is caused by an interruption of normal business that results from tangible loss or damage to the business premises. However, payment only may be made for loss that takes place within the restoration period. Coverage ends once business operations are resumed.

d. Strikes, Protest and Other Interference

No coverage exists for loss related disruption in available workers due to labor unrest or protest of strikers or other parties demonstrating at the covered premises. The exclusion applies to both workers involved with construction activity at the covered premises and to those otherwise involved in the process of resuming operations.

5. Supplemental Loss of Income Coverage

The Home-Based Business Coverage Part has several loss of income extensions which DO NOT increase the limit of coverage.

a. Interruption by Civil Authority

This extension provides coverage when an authorized civil (as opposed to military) authority blocks access to the insured premises because of damage that occurs at an unrelated location. However, since the coverage part’s intent is to provide coverage for the same scope of loss, the loss that results in order to block access has to involve a source that is covered by the underlying policy.

Coverage is available for a maximum of two weeks from the date of the loss that creates the order. The base policy’s Civil Authority exclusion does not apply to this extension.

b. Period of Loss Extension

This provides a maximum of 30 days additional time to handle loss of income related to a business interruption created by a tangible loss to the business premises. The coverage begins at the date that a damaged premises has been repaired, rebuilt, or replaced but has not reached its former level of revenue. Coverage will cease in either 30 days or whenever the operations reach their prior normal level, whichever occurs first.

c. Utility Interruption

This extension applies only when it appears as a selection on the coverage part declarations page. Loss of Income protection is provided for income loss and extra expense when a covered peril damages tangible off premises utility (electricity, gas, water, etc.) property causes an interruption at the insured business premises. There is a 12-hour waiting period that acts as a deductible.

Spoilage Coverage

1. Property Covered

Coverage applies to perishable stock (as defined by the coverage part) that is damaged by a source of loss listed in this coverage provision. The protection also applies to perishable stock that belongs to other parties, but which is damaged while on the insured’s premises. However, coverage for the latter applies only to the extent of the insured’s interest in that property.

When the insured activity is for a bed and breakfast, spoilage coverage applies to similar property of guests, while that property is in the care of the insured AND while on the covered premises.

2. Perils Covered

Perishable stock is protected when damage is caused by:

a. Breakdown. This refers to a change in temperature or humidity due to mechanical breakdown, malfunction or failure of refrigeration system or a system control, but only when it occurs on the insured premises.

b. Contamination. This refers to perishable stock that is exposed to refrigerant. This term does NOT refer to other forms of contamination.

c. Power Disruption.–This refers to temperature or humidity change cause by electrical power, full failure, partial failure, or fluctuating supply. However, this applies ONLY when the disruption is not under the insured’s control.

3. Perils Excluded

The only perils that apply to this coverage are:

a. Calendar date/time failure in this coverage form and civil authority, earth movement, nuclear hazard, war, and water damage in the basic coverage form.

b. The following exclusions that apply strictly to this coverage:

1) Disconnection

This is loss to perishable stock due to power being unplugged/disconnected to a refrigeration, cooling, or humidity control system.

2) Deactivation

This is loss created by deactivating ANY switch or device designed to regulate/control refrigeration, cooling, or humidity control system’s power source.

Example: Leslie filed a spoilage claim because her entire inventory of meat spoiled when the refrigerator had no power. The claim is denied when the insurer discovers that the refrigerator was not working correctly so Leslie had taken the meat out of the refrigerator and flipped off the circuit breaker in order to find and repair the problem. Once the repair was complete, she returned the meat to the refrigerator but forgot to flip the circuit breaker back on.

3) Glass Breakage

No coverage is available when spoilage occurs because glass that is part of a refrigeration, cooling, or humidity control system breaks.

4) Inability to Provide Sufficient Power

Spoilage because of the failure of a utility, generator, or other equipment to provide enough power for a cooling, refrigeration or humidity control system is ineligible for coverage.

Example: Let’s look at Lisa’s situation again. This time she turns in a claim because all of her meat supply spoiled. Again, her insurer denies the claim. Why? Lisa had installed a new, commercial-sized freezer. However, the circuit she used to power the fridge had insufficient amperage and it failed to reach a proper, cooling temperature.

5) Loss of Use

This optional coverage does NOT protect the insured against loss involving loss of use, interrupted business, delay, or loss of market.

4. How Much We Pay

This optional coverage has its very own loss settlement provision.

Loss Settlement Terms

The insurer’s maximum obligation under spoilage is the limit that appears on the coverage part’s declarations for spoilage, subject to a deductible of $250 (unless a higher amount is selected and appears).

LIABILITY COVERAGES

Definitions

The Home-Based Business Coverage Part’s liability section has terms with special meaning.

1. Insured

This term replaces the one in the basic policy. It is broad and depends totally upon circumstances of the type of business ownership. Insured is:

a. The party listed on the declarations page as well as that person’s spouse when the insured appears as a sole owner of the covered business.

b. The party listed on the declarations page and all of his or her partners, members, and their spouses when the party on the declarations appears as a partnership

c. The party listed on the declarations page and all that party’s members and managers when the party appears on the declarations page as a limited liability company

d. The party listed on the declarations page and all that party’s executive officers and directors if that party appears as any organization that is NOT a partnership, Limited Liability Corporation, or a joint venture. Stockholders are also classified as insureds with respect to their liability related to the covered business.

Note: Under items a. through d., insured status applies only to activities and responsibilities related directly to the covered business.

e. The listed party’s legal representative who is performing his or her permitted duties because of the death of that party. Insured status applies only while the representative has possession or control of the covered property and liability is related to that property. Under this circumstance, the legal representative enjoys all of the policy’s rights and also must comply with all of its duties.

f. Residents of the household who are also relatives of the named insured

g. Persons living in the named insured’s household if they are younger than 21 and are cared for by the named insured or his or her relatives

h. Any party acting as the named insured’s real estate manager (EXCEPT employees)

i. The listed party’s employees. Insured status is granted ONLY when they are performing authorized duties and those duties are related to the covered business. However, employees do not qualify as insureds for any of the following:

1) Incidents of bodily injury, personal injury, or advertising injury (ALL DEFINED TERMS) that occur to the listed party (sole owner, various partner arrangement, limited liability corp. or other type organization) or other operation employees (including voluntary workers).

2) Claims of consequential injury by other persons close to the injured employee or volunteer (spouse, child, parent, or sibling)

3) Any agreement to reimburse a third party for damage related to acts mentioned in 1) and 2) above

4) Property damage to property owned or held (including rentals) by the named insured, that party’s employees, volunteer workers, partners (under respective business types) or any of these party’s spouses.

Note: Employees, as used in this part of the definition, does NOT apply to:

· Managers when the listed party is a limited liability company

· Executive officers when the listed party is an organization other than a limited liability company.

j. The named insured’s volunteer workers. Insured status is granted ONLY when they are performing authorized duties and those duties are related to the covered business. However, volunteer workers do not qualify as insureds for any of the following:

1) Incidents of bodily injury, personal injury, or advertising injury (ALL DEFINED TERMS) that occur to the listed party (sole owner, various partner arrangement, limited liability corp. or other type organization), other operation employees (including co-voluntary workers).

Example: Louis runs a custom tailor shop out of his home. One day, Pete is helping him iron some costumes to be used in their church’s Medieval Feast fundraiser. Pete is a volunteer from the church. With time running out to get the job done, Pete keeps speeding up. He is in such a hurry that he places the iron down on Louis’s hand. This injury is not eligible for coverage.

2) Claims of consequential injury by other persons close to the injured employee or volunteer (spouse, child, parent, or sibling)

3) Any agreement to reimburse a third party for damage related to acts mentioned in 1) and 2) above

4) Property damage to property owned or held (including rentals) by the listed insured, that party’s employees, volunteer workers, partners (under respective business types) or any of these party’s spouses.

The policy treats every party that meets the definition of insured as a separate insured, but that does not increase the applicable limits that apply to a given loss under the coverage part.

Unless the operation is listed on the declarations, no incidents arising out of any activity by ANY party concerning current or past business operations qualify for insured status.

2. The following terms also have special meaning under this portion of the Home-Based Business Coverage Part:

a. Advertising Injury

Refers to harm (not bodily injury, property damage or personal injury) that arises from any of the following:

· Publishing activity in either oral or written form. That activity must result in some party claiming that the activity slanders or libels another party, that it is derogatory toward another party’s services or products, or ignores another’s privacy rights

· An allegation that another party’s promotional ideas or ways of conducting business have been taken and used as its own

· Not honoring another party’s legal, intellectual property rights toward its company or product/service identity with regard to copyrights, titles, slogans, trademarks, or trade names.

b. Basic Territory

Refers to the USA, its territories and possessions, Canada, and Puerto Rico

c. Coverage Territory

Includes the area defined by basic territory above and any areas traveled to by either air or sea, to or from the basic territory. The term also applies to anyplace in the world when the physical harm is related to the named insured’s products that are made or sold in the basic territory. It also applies universally regarding actions of a resident of the basic territory while at another locale performing duties related to the covered business. However, the worldwide expansion applies only when an insured is found to be responsible for harm by either a valid lawsuit within the basic territory or via an insurer’s decision to settle a claim.

d. Employee

While the term extends to leased workers, it DOES not apply to temporary workers.

Note: Both leased and temporary workers are also defined terms.

e. Impaired property

This term describes tangible property with a diminished value caused by its containing an insured’s product or the result of the named insured’s work. Either the product or the work must qualify as defective or dangerous. Such property may also be considered impaired due to an allegation that the insured has not met the requirements of a contract. Further, impaired property must be capable of having its value restored by either removing or correcting the insured’s impact on that property or by complying with the contract.

Example: Terri’s Timely Tailoring is sued by a customer who complains that the fur trim she paid to have added to her full-length leather raincoat is of grossly inferior quality. Her claim is withdrawn after Terri’s senior tailor replaces the trim with a higher quality material. The original tailored coat qualifies as impaired property.

f. Leased Worker

This is a person an insured acquires from a firm that supplies workers according to a written agreement WHEN that person’s labor is directly related to the covered business. Persons defined as temporary workers are excluded from this definition.

g. Loading or unloading

This refers to the activity of picking up, transporting, and removing property at its intended drop-off point. The transportation may involve a vehicle (as defined by the policy), aircraft, watercraft, mechanical devices attached to the mode of transport, and hand trucks.

h. Products

This refers to items that the named insured (or parties on the named insured’s behalf) makes, sells, handles, and distributes or disposes of. Statements and guarantees concerning products and their use, containers, and related materials (except vehicles), related to such items, warnings and instructions concerning such items also qualify as products.

Note: The term does NOT refer to real property nor to vending machines or other property rented to or put in place for (but does not sell to) another party.

i. Products/completed work hazard

1) Products Hazard. This refers, essentially, to harm (bodily injury or property damage) related to the named insured’s products. C consumable products sold, made, or handled by the named insured products hazard can occur on or off premises after the products are in the hands of others. All other products harm must occur off premises. Qualifying premises are only those that are owned or rented by the named insured to conduct a covered business.

2) Completed Works Hazard. This refers, essentially, to harm related to work that a named insured performs in its entirety and that occurs away from the operation location that is owned or rented by an insured. The coverage part clarifies the term since what is meant by completed can be subjective. The coverage part states that completion occurs when all work required by a contract is done, all work the named insured is obligated to do at a given work site is finished (when more than one site is involved), or when work at a given site is being used as intended by ANY other entity at a given work site, whichever occurs first.

Note: Work is still considered complete if, at a later date, it’s determined that the work has to be corrected, repaired, replaced or is subject to maintenance or additional service.

3) Harm related to transporting property or to the presence of tools, uninstalled equipment or abandoned/unused materials does NOT quality as EITHER products or completed work hazards.

Note: Harm related to a vehicle condition while transporting property or to loading/unloading may, under certain circumstances, qualifies as EITHER hazard.

j. Temporary Worker

Refers to a worker performing duties for the named insured as a non-permanent replacement for an employee.

k. Your work

Refers is any of the following:

1) Activity done by the named insured or which another party does on behalf of the insured

2) Materials, parts, and equipment related to such activity

3) Written representations of features, performance condition of the named insured’s work

4) Errors or omissions concerning warnings or instructions related to the named insured’s work

3. Personal Injury

Injury created by any of the following offenses:

Publication of either oral or written form that results in some party claiming that the activity slanders or libels another party, that it is derogatory toward another party’s services or products or ignores another’s privacy rights
Interfering with another’s physical freedom via arrest, detention, or imprisonment
Malicious prosecution
Violating another’s right to their legal access, occupation and use of living space by unjustifiably entering, invading, or evicting another party out of his or her living space.

Note: This offense is one that must involve the property owner, landlord, lessor, or someone acting on behalf of such parties.

Note: The coverage part’s definition supplants any definition that may exist in the policy it amends.

Principal Liability Coverages

1. Coverage L – Liability

The Home-Based Business Coverage Part amends the policy to which it’s attached by making its Coverage L provisions applicable to accidental bodily injury or property damage related to the business described in the declarations. The bodily injury or property damage must take place during the applicable policy (AND coverage part) period. The occurrence must take place the covered territory (as defined in the coverage part) and on or after the Home-based Business coverage date on the declarations.

2. Coverage M – Medical Payments

The coverage part has its own provision regarding Medical Payments. It replaces any other policy provisions when bodily injury related to the covered business (operation described in declarations) occurs.

a. The insurer assumes the obligation for medical expenses resulting from accidental bodily injury when it is related to the covered business operation. Also eligible are expenses related to an accident that occurs on premises owned or rented by the named insured or on an area that is next (or adjacent) to such premises.

b. Medical expenses are eligible for payment and don’t take fault into consideration. However, the expense must be related to an accident that takes place during the policy period, in the coverage territory, and the injured party has to experience the cost (or be diagnosed of an injury) within three years of the accident date.

c. The form states that medical expenses refer to a wide array of costs, including medical, surgical, x-rays, dental service, cost of prosthetic devices (fittings would be included) eyeglasses, hearing aids, prescription drugs, contact lenses, and treatment at scene (first aid). Other eligible costs are those involved with ambulance transport and professional services (nursing, hospital, and funeral).

Incidental Liability Coverages

The coverages appearing in this section replace any other provisions in the coverage part that make reference to incidental liability. The incidental coverages supplement the part’s coverage breadth, but do NOT increase the applicable limits except for the Claims and Defense. In other words, for a given loss, any payment under the incidental liability section (except for Claims and Defense) reduces the total available limits.

1. Fire Legal Liability Coverage

a. The insurer is obligated to respond to loss to structures the named insured rents or borrows for operating the described business. However, the obligation to cover such property exists only when the damage is due to a fire for which the named insured is legally liable.

Example: After thirteen years of running “Kimmie’s Kitchen” from her home, Kimmie sells her small home and rents a large, two-family home with an agreement that she can use the spacious ground floor for her business. One day, after a stove malfunction, the first floor is heavily damaged by smoke and fire. Her Home-Based business policy responds to the loss under the Fire Legal Liability section.

With regards to coverage, protection extends to permanent fixtures.

b. The maximum possible amount of coverage is $50,000, but that is only if it’s available via the use of the policy’s per loss and general aggregate limits for the policy period. However, as an option, higher limits are available for an increased premium but will still be subject to the other policy limits.

c. For purpose of this coverage part, its property damage exclusions regarding fire damage to non-owned property are nullified; but exclusions still exist for the following:

· Loss liability that exists solely via contract or agreement – in other words, no coverage would apply to fire loss to rented or borrowed premises where the insured had no responsibility for the loss EXCEPT via a contract

· Loss caused by intentional or criminal acts by an insured; included are such acts committed on behalf of or with knowledge/involvement of an insured. If the actual loss that occurs is of a different nature or affects different parties than was intended by an insured, it is still not covered.

The intentional action exclusion DOES NOT apply to instances of damage that are related to an insured’s acting to protect other persons or property belonging to others IF the insured’s actions were, under the particular circumstances, reasonable.

2. Claims and Defense Cost

Under this coverage part, the insured will handle the following expenses related to defending against a lawsuit:

a. Various court costs the court determines the insured is obligated to pay

b. Defense-related expenses the insurer incurs

c. The insured’s lost earnings, but that amount is subject to $50 a day and the lost income has to be due to the insurer requiring the insured to spend time away form his or her job.

d. Other expenses experienced by the insured due to demands of the insurance company

e. The portion of prejudgment interest levied against the insured up to the insurers limits. Once a full limits offer is made, the insurer will no longer pay this type of interest.

f. The interest accruing on the entire judgment amount following its award. Once the insurance company deposits its policy limits with the courts, it stops paying such interest even if the limits did not satisfy the entire judgment.

g. The premiums on attachment and appeal bonds but only on the amount of the bond that is within the limits in the policy. The insured is responsible for the premium of the bond limits in excess of the policy limits. The insurer has no obligation to make arrangements for the bonds.

h. The insurer will pay a maximum of $500 for bonds related to vehicular accident or traffic violation, but ONLY when the vehicle involved qualifies for protection under the coverage part. The insurer, again, has no duty to make arrangements for any such bond.

3. Incidental Contractual Liability Coverage

a. In some instances, the insurer will respond to costs involving incidental (minor) agreements made by the insured that result in BI or PD. Coverage applies to only for contracts regarding any of the following:

1) Premises leased by an insured

2) Easement or license agreements, but NOT agreements related to construction or demolition activity near a railroad (50 feet or closer)

3) Compliance with an ordinance, an agreement to handle the cost faced by a municipality for a loss, but NOT regarding work done FOR that municipality

4) The owning, maintaining or usage of an insured premises

b. The coverage part does not protect against incidental contract-related loss involving either of the following:

1) Any part of an agreement concerning indemnifying another party for loss the would fall under Fire Legal Liability

2) Any post-loss contract

4. Incidental Watercraft and Vehicle Liability Coverage

The insurer owes an obligation to pay for either BI or PD related to the following:

a. Watercraft located on the shore of premises the named insured owns, rents or controls

b. The parking of non-owned vehicles (including borrowed vehicles) on the named insured’s premises (owned, rented or controlled). It also applies to the parking of such vehicles in areas immediately neighboring the premises

c. The use of a motorized vehicle to service the described business. The coverage part still excludes loss involving a business that provides maintenance service to other parties or to loss arising from using an owned, non-registered vehicle for recreation purpose….at ANY location.

Example: Intimate Accountants, owned and operated by mother-son team Jane and Joe Jr., has the following losses:
Scenario 1: A neighbor child is injured when he is hit by Joe Jr. while Joe is using their riding mower to mow the lawn right outside the part of their home used as their office – Covered	Scenario 2: A person who is cross-country skiing is injured when struck by Jane while she was operating her snowmobile in the same park – Not Covered.

5. Damage to Property of Others

a. The insurer obligates itself to pay for the replacement of personal property that belongs to third parties when it is damaged by an insured AND it is related to the described business. There is NO consideration of whether an insured is at fault.

b. The maximum amount available for this coverage is $2,500 for a given loss. However, this amount is subject to the policy’s Coverage L and Aggregate Limits. The insured has the option to purchase a higher limit and that amount applies if it appears on the declarations.

Example: Aaron operates “Laptop Doc” out of a converted master bedroom in his home. A customer’s laptop is one of the items destroyed by a fire that starts in Aaron’s kitchen. The laptop is worth $1,250. Its loss is eligible for coverage.

c. The coverage part’s exclusions regarding business are inapplicable with respect to this incidental coverage BUT exclusions under this part apply to PD involving any of the following:

1) The insured’s property (which appears self-evident concerning the title of the coverage)

2) Property owned by or rented/leased to any resident (including tenant) of the insured’s household

3) Damages that an insured deliberately inflicts (when that person is 13 or older)

4) Either of the following:

a) Business activity that is related to any operation that is NOT listed and protected by the Coverage Part

Example: Intimate Accountants, again owned and operated by mother-son team Jane and Joe Jr., share space in the home for another business, Joe’s Copier Repair. One day, while handing over a repaired copier to a client, the client fumbles it and it lands on the floor of Joe’s office area. None of the damage is eligible for coverage as Joe’s copier business did not appear on the policy declarations.

b) All incidences of use of motorized vehicles, aircraft, or watercraft; whether an insured owns such property or not. An exception exists for damage involving non-owned, non-registered motorized vehicles used to service the covered business BUT the exception does NOT exist for business operations involving providing maintenance services to other parties.

5) Property protected by the coverage part’s Property Coverages section, unless the amounts available there are exhausted; then this coverage responds on an excess basis.

Exclusions

The liability exclusions found here act as a total replacement for the liability exclusions that apply to the policy to which the coverage part is endorsed.

Note: These exclusions apply only to the applicable business insured under the coverage part. Any references to either personal or advertising injury apply when the coverage part lists these coverages on the declarations.

1. No coverage is available for BI, PD, PI or AI for any activity or situation that is specifically excluded in this section, regardless of that event’s occurrence either with, before or after other activities that contribute or trigger the excluded event.

Note: This language is an attempt to handle concurrent causation situations. The insurance company logic is that, as long as an excluded situation is involved, then the existence of other contributors to a given loss should make NO difference.

Related Court Case: “Anti-Concurrent Causation Clause in Insurance Contract Barred Recovery” – though not a home business case, it does show the confusion over the concept of concurrent causation.

a. BI, PD, PI, and AI Exclusions

1) No coverage is available for losses created merely by obligations under a written agreement or contract – the exclusion does not apply to losses the insured would be responsible for even without an agreement; nor does it apply to the extent that coverage is provided by the incidental contractual liability coverage IF such loss occurs after an agreement’s effective date.

2) No coverage exists for loss related to providing or failing to provide professional service

3) Protection is not available for any type of loss involving a motorized vehicle in any type of competition or similar activity (including preparations)

Example: Jim was interested in drumming up more work for his handyman business that he operates from his home. He decides, during a neighborhood party, to sponsor a cart race (since he owned two, gas-engine powered carts). During the very last race of the day, one pre-teen operator loses control of a cart and slams into several race spectators. They all sue for damages. The losses are not covered.

4) The insurer has no obligation for loss related to any incident of use surrounding an aircraft, motorized vehicle, or watercraft. The only exception is the modest coverage available under the coverage part’s Incidental Watercraft and Vehicle Coverage or Optional Watercraft Coverage.

5) No coverage exists for a loss where an insured is responsible due to its contributing to another party’s loss of sobriety, providing alcohol to a minor or to a person who is already intoxicated. There is also no coverage if an insured has responsibility of a loss assigned because of any law or regulation concerning the use, distribution, or sales of alcoholic drinks.

Note: Item 5) above applies only when the covered business involves alcoholic drink production, serving, sales or distribution.

Note: IF the covered business is a Bed and Breakfast, this exclusion applies if that operation makes, sells, distributes, serves, or furnishes alcoholic drinks and charges money for any of these activities. There is an exception. Coverage is available in instances when drinks are furnished for free, but only if this can be done without the requirement of a license.

Example: Polly’s Perfect Sleep-Inn is a Bed and Breakfast and, each year, she holds a huge Halloween Party for her guests. Polly prepares generous portions of her famous Super-Spiced and Spiked Punch. This event would be eligible for coverage as she throws the party for free and no local law requires a license for the situation.

6) The policy does not pay for any loss connected to war or any similar activity. Discharging a nuclear device is deemed to be a similar incident, even if it occurs accidentally.

7) No coverage applies for BI or PD involving an insured’s deliberate act or such acts that occur at an insured’s direction. The exclusion also extends to criminal acts as well as to deliberate, malicious acts by the insured or that occur on orders of an insured. The use of reasonable force as a means to protect people or property is an exception.

Note: When loss from intentional acts occur, IT DOES NOT matter if the loss or injury is either different than what the performer expected nor does it matter if the person or property affected was not the intended target. The key item that triggers the exclusion was the fact that causing some loss or damage was deliberate.

Related Court Case: Extended Rental, Not Business Use

8) Coverage is excluded for BI or PI when the injured person is an employee of an insured. The exclusion extends to consequential injury to the injured employee’s spouse, child, parent, or sibling. The exclusion applies regardless of whether the injured party was involved in work related to the described business. It also applies to losses when the insured’s liability is created by an obligation to reimburse a third party.

Related Court Case: “Worker’s Injury Arose Out of Business"

Note: An exception applies to coverage available under the coverage part’s Incidental Contractual Liability or Expanded Contractual Liability Coverages.

9) BI and PI losses are disqualified from coverage when they involve payments that must be provided due to workers compensation, occupational disability/disease, unemployment compensation or similar law

10) No coverage is provided for BI or PD that is connected to any incidences of employment practices such as rejecting job applicants, firings, job transfers, demotions, discipline, improper acts (humiliation, discrimination, harassment, defamation, misconduct (sexual or non-sexual), regardless of whether performed within policies or resulting from omissions. Consequential injury or damage stemming from such activity is also excluded. The exclusion replies regardless of whether the insured acted as an employer or whether an obligation to a third party exists.

11) No coverage is provided for BI, PD, PI, or AI involving a loss from a business that is not described/listed on the coverage part declarations

12) No coverage exists for BI or PD for a loss in which the insured is also covered under a nuclear energy liability policy (issued by American Nuclear Insurers, Mutual Atomic Energy Liability Underwriters, Nuclear Insurance Association of Canada, or the companies that succeed them). The exclusion is NOT affected by whether such a policy has been exhausted.

13) BI or PI to an insured is not covered.

14) No BI or PD is eligible for coverage when it’s related to business activity at any permanent location other than the premises for the business activity that is described on the declarations.

15) Assessments or liability levied against an insured by any type of association of property or resident owners are ineligible for coverage

16) The insurer has no obligation to pay for any PI, PD or AI related to the failure of electronic data processing equipment, compute program, software, media, or data to properly deal with any date or time issue related to abbreviation (i.e., Y2K), encoding or encryption.

17) No coverage exists for BI, PD, PI, or AI that involves incidences of pollution on land, water, or the air. An important exception exists and it is for the release of smoke or fumes from a hostile fire that occurs on the insured premises.

Note: Smoke from a friendly fire that damages other property would not qualify for coverage.

Example: Kerry’s Cookery’s neighbor is no longer fond of the home business. Not long ago, Kerry left some pies unattended in her stove. Cherry and blueberry filling bubbled up and overflowed. Thick smoke plumes found their way to the neighbor’s home. That home’s contents, walls, drapes, and carpeting are covered with greasy residue. The insurer denies the loss stating that it was not a hostile fire. Kerry argues that the filling was not intended to fall onto a cooking surface, creating the smoke. This loss is headed for a lawsuit.

The pollution exclusion exists for any request or requirement (from any source) to monitor, clean up, remediate or in any way deal with pollution incidents or their aftermath, even when the source of the demand is a government unit.

Related Court Case: Insured Challenges Pollution Exclusions

18) This is an absolute lead exclusion. There is absolutely no coverage under BI, PD, PI, or AI with regard to harmful contact with lead, including any aftermath. Even allegations of harm are excluded. Therefore, an insurer would have no obligation to even provide a defense until establishing whether a lead-based claim had any merit. As is the case with pollution incidents, even the request from a government unit with regard to monitoring, remediating, testing, or other acts is ineligible for coverage.

b. The following exclusions only apply to Personal Injury (PI) and Advertising Injury (AI)

1) When an insured violates any law, statute, regulation, or ordinance knowing that the action is in violation and PI or AI results, no coverage applies.

2) When an insured KNOWS that the information is NOT TRUE, then no coverage is available for harm (or allegations of harm) when an insured distributes either oral or written information. The exclusion stands even when a party distributes the information under the insured’s direction.

3) Advertising injury due to breaking a contract does not qualify for coverage. However, when the contract is only implied and that implied contract is alleged to have been broken when an insured uses the other party’s advertising idea in its advertising, there is coverage.

4) Advertising injury related to an insured’s product or service not meeting the standards implied in its advertising.

Example: Hanna’s Dream-Seam advertises that her custom dressmaking is unparalleled. She’s sued by several customers when their daughters’ prom dresses fall apart – No coverage

5) No coverage is available for AI related to an offense by an insured who is in the advertising or broadcasting (radio, TV, web or similar) business.

6) The insurer is not obligated to respond to losses involving AI connected to errors in pricing its goods, products, or services.

c. The following exclusions only apply to Property Damage (PD)

1) While limited coverage for property owned or rented by or occupied by an insured exists under the coverage part’s Fire Legal Liability section, otherwise such property is not eligible for protection when lost or damaged.

2) Property damage to premises the named insured no longer has a viable insurable interest in because the property was sold, given to another party, or abandoned is not covered. If such property represents the named insured’s work, it qualifies for coverage, as long as the named insured never occupied, rented, or held such property for rent.

3) Except for sidetrack agreement related liability, there is no coverage for damage to property the named insured uses or has borrowed.

Example: Elam’s Partityme just received its largest order. It is preparing for an anniversary party for the town’s major employer. In order to handle the job, Elam rents space in a nearby private club for three weeks. If part of the rented area is damaged, it won’t qualify for coverage.

4) The insurer has no obligation to pay for any type or personal property that is damaged. This exclusion applies to such property under the insured’s possession or control. This exclusion does NOT apply to the protection provided by this part’s Incidental Damage to Property of Others Coverage nor to such property related to responsibility under a sidetrack agreement.

5) In certain instances, damage to real (structural) property is excluded. No coverage is available to any area of real property on which the named insured is working. This exclusion also applies to areas upon which a contractor or subcontractor is working (when that work is being done on behalf of the named insured). However, if damage is related to responsibility arising from a sidetrack agreement; the damage is covered.

6) Except for coverage provided under the products/completed works hazard and for liability related to a sidetrack agreement, property damage related to an insured’s faulty work is not covered.

7) Damage to an insured’s products that is related to those products is ineligible for coverage.

8) When the named insured hires a subcontractor and it results in damage to an insured’s work, the damage is eligible for coverage to the extent of what is available under the section’s products/completed works hazard. Otherwise, such losses are NOT covered.

9) Property damage or loss that is created by work delays, defaulting on a contract, or by product defects, deficiencies or dangerous condition is not eligible for coverage. This exclusion applies even when the loss involves a subcontractor or impaired property (as defined).

An exception exists for either the destruction or loss of use of property that belongs to others. It must be due to tangible damage to products or work once they are being used as intended.

10) The home-based coverage part WILL NOT respond to any expenses to accept returns, dispose of property, inspect, repair, replace or other costs IF the insured has knowledge or suspicion of a product deficiency or unsafe condition.

d. The following exclusions only apply to Medical Payments

Besides the coverage part’s other BI exclusions, there is no coverage for any of the following:

1) Injuries suffered by any insured

2) Injuries suffered by persons hired by the insured to do work WHEN that work is related to the covered business

Example: The spring has been so wet; lawns are lush throughout the area where Hank operates his Mower Maintenance and Repair Business. In order to respond to the spike in business, he hires Brian. Hank will focus on repairs while Brian handles sharpening and cleaning mowers. Brian, in a hurry, loses his grip while trying to remove a stubborn mower blade and seriously slices his hand. The treatment for the injury is ineligible for coverage.

3) Injuries that occur on parts of the premises that the named insured either owns or has rented when such persons typically reside in that space

4) Injuries to a person while participating in sports and athletic activities

5) Injuries that are covered under the coverage part’s products/completed work hazard

6) Injuries to persons who are or should be covered under workers compensation, nonoccupational disability or occupational disease laws

2. Punitive Damages Exclusion

While the home-based coverage part will provide a legal defense to a suit that includes punitive/exemplary damage along with an occurrence damages, it DOES NOT provide coverage for any punitive/exemplary damages that may be awarded against and insured. The exclusion extends to any costs and interests that are associated with punitive damages.

How Much We Pay

1. The Coverage L limits apply to BI, PD, PI, and AI related to the covered business activities. The limit that appears on the declarations is the maximum that will be paid for a given loss. This limit works like so many others used in other lines of business. In other words, it is NOT affected by the number of insured persons, the number of parties injured (or financially harmed by property damage) or the number of lawsuits filed under a given loss. Further, the limit is also subordinate to the stated General Aggregates for the policy and for the Products/Completed Work Hazard coverage.

2. The Coverage Part has its own provision regarding Coverage M, medical payments. It replaces any terms found in the form it amends. But the substitution is ONLY for losses connected to the covered business activities. The coverage part’s Coverage M (per person) limit is the maximum (subject to the policy’s General Aggregate Limit) that will be paid for a single person’s expenses suffered under an eligible accident.

3. This item states how the coverage part’s General Aggregate Limit applies. The limit that appears in the declarations is the maximum the insurer is obligated to pay during any given policy period. The limit takes into consideration all amounts the part pays under Coverage L and Coverage M. However, it does not consider payments made under its Products/Completed Work hazard.

Example: - Paynt Pros Home-Based Business Declarations – 1/1/23 to 1/1/24 Coverage L Limit - $300,000 General Aggregate Limit - $500,000 Prod./Completed Work Aggregate Limit - $500,000
Paynt Pros Loss Activity
Date	Amount	Description
2/3/23	$172,000	BI Loss
4/8/23	$139,000	PD Loss
7/12/23	$96,000	Completed Work Lawsuit
9/25/23	$117,000	BI Loss
Total	$524,000
While it may appear that the losses have topped the General Aggregate by $24,000, the aggregate has not been reached. The $96,000 completed work loss is not included in any calculation, just the remaining losses, totaling $428,000.

4. With regard to BI and PD losses, the parts Products/Completed Work Hazard Aggregate limit that appears on the declarations is the most the insurer is obligated to pay for all such losses that occur during a given policy period.

5. Both aggregates referenced in the coverage part apply to the stated 12-month policy period. However, if a policy period is extended, those aggregates become effective over the extended period. Adding to the length of a policy period does not increase the aggregate amounts. Any extension (less than a full 12 months) is treated as part of the preceding, full 12-month period.

6. Insurance under More Than One Policy

This coverage part’s provision replaces any other references in the policy with regard to covered business losses. Concerning such losses, this part acts as primary coverage when other sources exist (that are NOT designed to respond on a primary basis).

When other primary coverage sources exist, this policy will pay either in shares equal with other sources or according to its proportional share. The response depends upon the payment provisions found in the other sources. Payment of equal shares continues subject to:

Reaching the lowest limit that has been written for the insured
Paying the loss in full
The insurer exhausting its own limit

Payment of proportional share is subject to payment of the given loss in full or the insurer reaching its total proportional share amount. In the latter instance, it does not matter whether the applicable loss has been fully paid. The insurer’s obligation ends when it meets its full share.

In certain instances, this coverage responds only on an excess basis. This applies when the other source of coverage provides protection for any of the following:

Fire, extended coverage, builders’ risk, installation risk or similar coverage for the insured’s work
Fire insurance for premises the named insured rents
ELIGIBLE losses involving maintenance or use of aircraft, motorized vehicles, or watercraft

In cases where this coverage part’s obligation is on an excess basis, the insurer will only become involved with handling a legal defense when no other party owes the insured a defense obligation. The insurer, if it does provide defense coverage, may exercise a right to subrogate against other insurers.

The insurer’s excess insurance obligation is above whatever coverage is first due (or should have been due) by other insures, including requirements regarding deductibles and self-insured retention amounts. With regard to other sources of coverage not mentioned under this part, the insurer will pay on an excess basis over such coverage.

Note: This coverage will respond prior to any coverage design to respond AFTER this coverage part’s protection.

7. No restoration of policy limits applies in any situation that is affected by the operation of this coverage parts General or Products/Completed Work Hazard Aggregate limits.

Optional Liability Coverages

The following coverage options apply when they appear on the declarations, according to their stated terms.

Personal Injury Liability Coverage and Advertising Injury Liability Coverage

1. The home-based business Coverage L limit applies to any losses involving PI and AI that are related to the covered business.

2. The insurer is obligated to pay for:

a. PI resulting from offenses that occur because of eligible business activity, EXCEPT for advertising publishing or broadcasting (including telecasts) done either by the named insured or done on its behalf

b. AI connected to offenses involving the promotion of the named insured’s goods, products, or services.

3. This part’s coverage only applies if the PI and AI offense takes place during the policy period and while within the coverage territory.

Expanded Contractual Liability Coverage

1. This coverage amends the policy’s Incidental Contractual Liability Coverage. It pays for BI and PD that occurs because the insured has a written agreement to take on another party’s tort (legally imposed) responsibility for such instances. However, the applicable contract must be related to the operation of the covered business.

2. This option does NOT apply to instances involving Fire Legal Liability coverage.

3. The coverage part’s contractual exclusion does not apply to BI or PD losses but only if the losses happen after the contract described in item 1 of this coverage takes effect.

Non-owned Auto Liability and Hired Auto Liability Coverages

1. This option extends the part’s Coverage L limit to apply to covered business-related BI and PD connected to:

a. Someone other than the named insured using a non-owned auto for the benefit of the business

b. The named insured or its employees or volunteer workers using a hired auto

2. Under this particular option:

a. The term “insured” refers to:

· The named insured

· Persons operating a hired car with the named insured’s permission

· The named insured’s partners, executive officers, or LLC managers, but only for the use of non-owned autos and while using it in the covered business

· Other entities with respect to errors or omissions committed by other insureds identified in this insured definition.

b. The following ARE NOT insureds

1) Any insured’s workers who cause BI to other workers (including volunteers) of the insured while performing covered business activities. Insured status is also denied to persons who are related to an injured co-worker and to instances where reimbursement is owed to a third party.

2) Partners, executive officers, or managers (including members of their households) when the loss involves use of their autos

Note: In such instances, these persons should have their own source of owned auto coverage.

3) Persons involved in any form of auto business (except for an auto business listed as the covered business)

4) Any parties that are the owner or lessee of either the hired or non-owned autos including such parties’ employees or agents

3. Under this particular option, the following are defined terms

a. Auto

Refers to land motor vehicles, trailers or semi-trailers meant for public road operation and also includes machinery and equipment attached to any of these

b. Auto Business

Refers to selling, fixing, serving, storing, or parking autos as an income-producing activity

c. Hired Auto

Refers to autos the named insured occasionally hires, leases, or borrows except when the source is the named insured’s employee, volunteer worker, partner, executive officer, or LLC managers (including any of these parties household members)

d. Non-owned auto

Refers to autos that are used in the covered business and which are not owned, borrowed, or leased by the named insured (or the named insured’s partner)

4. Existence of this particular option nullifies the coverage part’s aircraft, motorized vehicle or watercraft exclusion for BI, PD, PI, or AI, but ONLY with regard to non-owned and hired auto losses.

5. Exclusion 1.a.8) is changed as regards to this optional coverage by the addition of one paragraph at the end of the exclusion. This exception provides coverage when BI or PD is due to domestic employment unless there is other coverage available under workers compensation or similar type products.

6. None of the property damage exclusions under Exclusion 1.c. Additional Exclusion That Apply Only to Property Damage apply to this optional coverage. However, the following property damage-only exclusions operate in their place.

a. No coverage exists for PD to property that is owned, being transported by, is rented, or leased to an insured

b. No PD is available for property in the insured’s care, custody, or control

Cosmetologist’s Liability Coverage

When the covered (described) business involves a cosmetology operation:

1. The coverage part is amended so that BI, PD, PI, and AI are covered with regard to losses involving professional services (acts and omissions).

Example: Linda’s home is insured for “Funny Face Cosmetics” which is operated there. She is sued by Samantha. Linda failed to ask about allergies and Samantha’s face is scarred after Linda applied a custom face regimen to treat dark spots. This suit is eligible for coverage.

2. No coverage for BI or PD applies when the insured knows it is operating out of compliance with regulations regarding cosmetology services.

3. All related acts or omissions involving professional cosmetology services to a single individual are deemed to be a single occurrence.

Watercraft Coverage

1. Under this particular option, Coverage L also applies to BI or PD connected to owning, maintaining, using, loading, or unloading of any of the types of watercraft described below:

a. Not made to be powered by an engine or electric motor

b. Not powered by sources capable of less than 25 hp

c. Sailing vessels shorter than 26 feet and

d. Those described in the coverage part’s declarations

2. Coverage does not apply:

a. To BI or PD created by an insured’s using watercraft in any sort of arranged competition. The bar against coverage extends even to preparing for such events. Accidents must spring out of spontaneous activity. An exception is granted for sailing vessels. The property just can’t be operated at speeds or in a manner that significantly increase their loss exposure.

b. To BI suffered by an insured’s employee while performing his or her main duties that are related to the watercraft.

c. While receiving compensation for transporting persons or when rented to others.

Note: The exclusion doesn’t mention excluding transporting property for a charge.

3. The athletic exclusion under Additional Exclusions that Apply Only to Medical Payments does not apply to any watercraft covered under this optional coverage.

Athletic Activities

When coverage for athletic activities is indicated on the Declarations, the coverage part’s Additional Exclusions that Apply to Medical Payments athletic exclusion is eliminated.

Example: Kinsley operates a boutique sports training business from her home. Under her instruction, Jerome is doing power squats. On the fourth round, which Kinsley calls “The Killer,” Jerome tears his groin. He sues Kinsley. The incident is eligible for coverage.

Additional Insureds

Other parties may have a legitimate business interest on an insured’s premises that needs protection. However, the Home-Based Business Coverage Part’s language establishes the type of interests that qualify for protection.

If the following items appear on the declarations, the coverage part’s definition of the term “insured” is amended accordingly:

Newly Acquired Organizations

1. The term is expanded to include organizations that the named insured acquires (broader term than purchases; could also refer to merger, trade, or gift) or forms. However, the named insured must also have a majority interest in that organization. It does not refer to joint ventures, partnerships, or limited liability companies. The terms also do not apply under any of the following circumstances:

a. The organization is already protected by similar coverage

b. After the named insured has held that organization more than 90 days or after the coverage part’s policy period ends, whichever is the earlier date

c. BI of PD incidents that take place before the acquisition or formation

d. PI or AI offenses committed before the acquisition or formation

2. The definition of products is expanded to include products of the acquired business

3. Exclusion 1.a.11) that excludes all business activity not specifically described on the declarations is eliminated for any organization covered under this section.

Landlords

Under this section, the term insured is expanded to include the entity listed as the landlord in the coverage part declarations. That entity’s status as an insured is only with respect to liability connected to the premises that is insured and used for the covered business. The status as insured does not apply to:

1. Losses that occur after a lease agreement ends

2. Any structural changes (renovations, new construction, demolition) that a landlord either performs or arranges.

Controlling Interests

When a controlling interest is involved, the entity that is listed on the declarations under this title is also considered an insured. That status is only valid:

1. For liability that is directly related to the entity’s financial control which is described in the declarations.

Note: Control must involve the covered business and include a relationship between the entity and the insured.

2. With respect to the premises that appears in the declarations and only for the time that those premises are used and leased by the insured.

Similar to the situation with landlords, controlling interests are not insureds for any structural changes (renovations, new construction, and demolition) that it either performs or arranges.

Lessor of Leased Equipment

Concerning equipment leases, the term insured is expanded to apply to the entity appearing (on the declarations) as a lessor. The insured status is limited since it is only valid when liability is related to the insured’s use or maintenance of the applicable, leased equipment. Further, the status does not apply:

1. To accidents that occur after the equipment lease terminates

2. To BI, PD, PI, or AI that ONLY involves the lessor’s negligence.

Example: Denny’s Dental Shoppe leased a cone beam scanner for Teethtowne. The lease effective date was July 9, though the equipment would be delivered later. On July 11, while delivering the scanner, the deliverymen stumble while unloading their truck and lose control of the packing crate. It falls onto and seriously injures one of Denny’s clients passing by on Denny’s sidewalk. The client sues Teethtowne, who then sends the suit to Denny to handle since they are additional insureds under his policy. Denny’s insurer denies the claim because the injury was due solely to Teethtowne’s negligence.

ML 450–AAIS HOME-BASED BUSINESS COVERAGE PART

TABLE OF CONTENTS

AGREEMENT

DEFINITIONS

POLICY CONDITIONS

PROPERTY COVERAGES

Principal Property Coverages

Incidental Property Coverages

Perils Insured Against

Exclusions That Apply To Property Coverages

How Much We Pay For Loss Or Claim

Mortgage Provisions

Loss Payable Options

Optional Property Coverages

LIABILITY COVERAGES

Definitions

Principal Liability Coverages

Incidental Liability Coverages

Exclusions

How Much We Pay

Optional Liability Coverages

Additional Insureds