HOME-BASED BUSINESSES (REVISITED)

The most-recent ISO homeowners coverage forms see business-related language changes

While exposures have most

certainly changed in the last seven

              years, … homeowners policy forms are not

 designed to address exposures that

come with home-based businesses.

By Marc McNulty, CIC, CRM

I recently had a personal lines client contact me because he planned on opening a watchmaking business and running it exclusively out of his home. With twenty years’ experience in the industry, he figured it was time to hang his own shingle and see where things would take him.

During the conversation, he asked if he could pose an “ignorant” question; he wanted to know how—if at all—his homeowners policy would apply toward his new business? I informed him that it was a great question, and that the homeowners policy has some built-in exclusions designed to keep the policy from covering business activities (as defined in the policy, of course).

The conversation took me on a trip back in time to August 2016, which was when the first Mind the Gap column was published. A lot has changed in seven years.

The term “home-sharing” wasn’t even found in the 05 11 version of the HO 00 05. Nor were the terms “mineral rights” and “cannabis.” Each of these is now prevalent in the 03 22 edition of the form and all can be tied to the business limitations and exclusions in the form.

The form is also four pages longer.

While this column is traditionally reserved for agents, account managers, and other professionals who are new to the industry, this edition is for everyone, as there are most certainly some industry veterans who aren’t fully aware of the changes in business-related language in the most recent ISO homeowners coverage forms.

What is a “business”?

Let’s start by examining how the definition of “business” has changed. It is still a “trade, profession or occupation engaged in on a full-time, part-time or occasional basis.” However, “home-sharing host activities” and the leasing of the mineral rights of an “insured location” have been added to the definition.

Note there is a give-back for “one or more activities, not described in (2) through (4) below, for which no ‘insured’ receives more than $5,000 in total compensation for the 12 months before the beginning of the policy period.” This $5,000 figure has been increased from the previous threshold of $2,000.

Items (2) through (4) in the definition refer to volunteer activities, home daycare services where the mutual exchange of services is provided, and home daycare services to a relative of the insured.

Since “home-sharing host activities” is a newly defined term, let’s ensure we know what that is. It is a two-part definition, the first being:

1. The:

(1) Rental or holding for rental; or

(2) Mutual exchange of services;

of the “residence premises”, in whole or in part, by an “insured” to a “home-sharing occupant” through the use of a “home-sharing network platform”

We now have even more newly defined terms creeping into the mix. In layperson’s terms, “home-sharing occupant” is someone other than the insured who has entered into an agreement or arranged to pay an insured for the use of their home via a “home-sharing platform,” which is an “online-enabled application, website or digital network” such as Airbnb or VRBO.

The second part of the “home-sharing host activities” is:

1. Any other related property or services made available by an “insured” for use during such:

(1) Rental; or

(2) Mutual exchange of services;

except those property or services provided by another party.

This is key because the policy contains an exclusion for property used primarily for “home-sharing host activities” along with a theft exclusion if the loss stems from “home-sharing host activities.”

Additional exclusions

Let’s circle back to my client who is looking to run a business out of his home. If he wanted to operate the business in his detached garage, would he have a problem? Yes, he would!

The Coverage B – Other Structures section contains the following exclusions:

1. Other structures from which any “business” is conducted; or
2. Other structures used to store “business” property. However, we do cover a structure that contains “business” property solely owned by an “insured” or a tenant of the dwelling, provided that “business” property does not include gaseous or liquid fuel, other than fuel in a permanently installed fuel tank of a vehicle or craft parked or stored in the structure.

If he was only storing his watchmaking business contents in the detached garage, then the other structures exclusion wouldn’t apply. However, it is critical to note that the policy contains a $3,000 special limit of liability on property used primarily for “business” purposes on the residence premises, so the form severely restricts coverage for business contents. (Side note: This is a $500 increase in coverage from the 03 11 edition of the form.)

Then, we have the following straightforward “business” exclusion on page 22 in the Section II – Exclusions portion of the form:

2. Business
3. “Bodily injury” or “property damage” arising out of or in connection with a “business” conducted from an “insured location” or engaged in by an “insured”, whether or not the “business” is owned or operated by an “insured” or employs an “insured”.

This Exclusion E.2. applies but is not limited to an act or omission, regardless of its nature or circumstance, involving a service or duty rendered, promised, owed or implied to be provided because of the nature of the “business”.

There is also a professional services exclusion that could apply in our example.

While there is minimal coverage for business-related property and an other structures carve-back for the storage of business property, it is quite evident that my client’s question was not ignorant at all. The homeowners policy is not designed to address his business exposures, so we need to look to our commercial lines department to properly cover him.

What about cannabis?

We mentioned earlier that “cannabis” wasn’t a term found in the 03 11 edition of the HO 00 05 policy form (or any 05 11 edition date of the ISO homeowners forms for that matter), so let’s circle back to that since this is an evolving landscape that varies from state to state.

“Cannabis” is defined within the policy as:

1. Any good or product that consists of or contains any amount of Tetrahydrocannabinol (THC) or any other cannabinoid, regardless of whether any such THC or cannabinoid is natural or synthetic.
2. Paragraph 4.a. above includes, but is not limited to, any of the following containing such THC or cannabinoid:

(1) Any plant of the genus Cannabis L., or any part thereof, such as seeds, stems, flowers, stalks and roots; or

(2) Any compound, by-product, extract, derivative, mixture or combination, such as:

(a) Resin, oil or wax;

(b) Hash or hemp; or

(c) Infused liquid or edible cannabis;

whether or not derived from any plant or part of any plant set forth in Paragraph 4.b.(1) above.

4. Paragraph 4.a. above includes, but is not limited to, marijuana.

No matter whether we are looking at this through a home-based business lens or a recreational lens, let’s keep it short and sweet. The “business” liability exclusion still applies, and the Property Not Covered section contains the following exclusion:

(2) “Cannabis” regardless of whether such “cannabis” is considered a Controlled Substance.

There is also an exclusion within the Trees, Shrubs And Other Plants section that states the policy will not cover cannabis, “whether or not grown for ‘business’ purposes.”

In other words, the policy isn’t going to provide proper coverage for a home-based cannabis business, either.

While exposures have most certainly changed in the last seven years, including the ability for many of us to work from home (or anywhere we want) like never before, the fact remains that homeowners policy forms are not designed to address exposures that come with home-based businesses.

The good news is that more carriers than ever are writing small business coverage, often via online policy quoting and issuance systems that are similar to what is seen in personal lines. These policies usually contain robust coverage and are chock-full of coverage enhancement options, so check with your carriers to learn more about what they have to offer.

The author

Marc McNulty, CIC, CRM, is a principal at The Uhl Agency in Dayton, Ohio, and has been with the agency since 2001. He divides his time among sales, marketing, technology and operational duties. You can reach Marc at marcmcnulty@uhlagency.com.