Not Every House is a Home

In 1992 Robert Zises bought a home in Lake Katrine, NY and purchased homeowners insurance. In 1998 he rented the house to two tenants and moved to another home in Tivoli, NY. In 2006 the homeowners policy covering the Lake Katrine house was placed with New York Central Mutual. On April 10, 2010 the house was severely damage by fire. I bet you saw that coming. New York Central denied coverage because the insured did not reside in the house. In the ensuing lawsuit, the court ruled in favor of New York Central1. Larry Rogak reported on this case in January 30, 2012 issue of the Insurance Advocate. While we might have some questions about who completed the application for the 2006 homeowners policy, on its face this looks like a reasonable decision. However, let’s consider some homeowners coverage situations that are not as clear cut:

Mary, an elderly widow, suffers from a number of chronic ailments and has signs of dementia. Her family decides that she can no longer live on her own and they must move her to a nursing home. They realize that Mary will never recover sufficiently to return home and plan to sell her home.
Susan takes a job in another city and her family moves there with her. Not sure that the job will work out, she leaves the home furnished, but unoccupied. • Same as above, but the house is rented on a month-to-month basis to a tenant.
Fred and Betty move to an assisted living facility. Their son and his family, who have been living in a rented apartment at another location, move into the home on a permanent basis.
Ed and Yvonne divorce. As part of the divorce settlement, Yvonne receives title to the home and lives there with their children. Ed is the only named insured on the homeowners policy; no change is made in the name of the insured
Having signed a contract to sell their house and having purchased a condominium unit in Florida, Stan and Selma move out before title closes on their old home.

Let’s assume a windstorm destroys these houses after the events shown above. Is there coverage under a homeowners policy? There are decisions both ways in situations like these, but in all these cases there’s a strong body of opinion holding that the homeowners policy does not provide coverage2.

How can that be? The answer lies with the definition of covered locations in the homeowners policy.

Homeowners policies are intended to provide coverage for premises occupied by the homeowner. The ISO wording is: A. Coverage A – Dwelling

We cover: a. The dwelling on the “residence premises” shown in the Declarations …

“Residence premises” is defined as: a. The one family dwelling where you reside;

The two, three or four family dwelling where you reside in at least one of the family units; or
That part of any other building where you reside; and which is shown as the “residence premises” in the Declarations.

(“We” means the insurance company and “You” means the named insured shown in the policy declarations and his or her spouse if a resident of the same household.)

What does “where you reside” mean? Insurers contend in situations like this that the house is not a covered premises because the insured did not reside there. Some courts have ruled in favor of the insured on the basis that “where you reside” is ambiguous, for example, Dean v Tower3. However, we all know that a lawsuit is no way to get coverage. Not only is there the sturm und drang of a lawsuit, but the expenses and fees are like a huge deductible even if the insured is successful. And the insured won’t always be successful. In the Zises case, the court ruled that the meaning was clear and not ambiguous. The Zises court specifically referred to the Dean case in making its ruling.

Personal Liability Insurance

Camille Kahn purchased a two-family house in Queens and purchased a homeowners policy from Tower Insurance in February, 2006. Before moving into the house, she hired Aerco Construction to convert the building to commercial space on the first floor and a residential apartment on the second floor. In April, 2006 one of Aerco’s employees, Jose Reyes, fell from a ladder and was injured. That generated a lawsuit by Reyes against Kahn based on Labor Law section 240(1)4. (That’s the “elevated work site” provision that gives insureds and insurers so many problems.) Tower moved for declaratory judgment saying that the claim was not covered by the policy it had issued.

Kahn testified that “My insurance agent was informed that I needed coverage so that I could buy the property… When this [the renovation] was done it was my intention to move into the property with my family and for it to be my primary residence.” Tower argued that Kahn had never resided at the covered premises and the court agreed. Again the case turned on the question of “what does reside” mean. The liability coverage in the homeowners has separate wording dealing with this issue. The ISO form reads:

Coverage E – Personal Liability And Coverage
Medical Payments To Others Coverages E and F do not apply (emphasis added) to the following:

…4. Insured’s Premises [which is not] Not An “Insured Location” DEFINITIONS

… “Insured location” means: a. The “residence premises”;

The part of other premises, other structures and grounds used by you as a residence; and

(1)Which is shown in the Declarations; or

(2) Which is acquired by you during the policy period for your use as a residence… The definition of “residence premises” is the same on that applied to the property coverages in the homeowners policy. In short, the homeowners policy does not provide liability coverage for any residence premises other than the one shown in the policy except for one acquired during the policy period. The definition of residence premises is keyed to “where you reside.”

A similar issue came up with an unusual twist in a case involving an accident at a beach club. On 9/10/05, Patricia Dolan asked her friend Susan Raner to help her do the end-of-summer cleanout of a cabana in Atlantic Beach. She had rented the cabana every year for 20 years. Raner tripped over an umbrella which had been placed on the ground outside the cabana a short time earlier, and fractured her hip. The insurance company responded that the claim was not covered because the cabana was not an insured premises. The definition of insured premises concludes with this sentence: “Any part of a premises occasionally rented to an insured for other than business use.” The court ruled against the insured, holding that “the term ‘premises occasionally rented to an insured’ is not ambiguous, and its plain and ordinary meaning refers to episodic, non-systematic rentals…” Larry Rogak is the source of this report also. His firm represented Security Mutual , the insurance company involved5.

While this is an extreme situation, it raises the question of when a rental is no longer “occasional.” Is it the second time, the third time or when? Only a court can answer that question. And we can only hope that it’s not our client who’s waiting for the answer.

What Can We Do?

A producer can’t catch all these problems, but there are steps that producers can take to lessen the chance that their insureds will be the ones left without coverage. 1. The first opportunity to get it right is the application process. That won’t find every problem, but it will catch some. When an applicant wants insurance for a home, ask who will live there, when the applicant will be moving in and if there’s work to be done before the applicant moves in. Ask if the insured rents other locations during the year. Ask the same questions when moving coverage from one company to another. Don’t just rely on the information you received years before when you originally wrote the insurance.

If any of the answers fall in the areas we’ve explored or other areas that make you wonder whether HO coverage will apply, let the underwriter know about it. These questions could have helped Robert Zises, Camille Kahn, and Patricia Dolan. For Zises and Kahn, it should have been obvious that a HO policy was not the right one. A DP policy and personal liability would have closed the gap. For Patricia Dolan, the location could have been added as an additional insured location for a nominal charge.

Insureds don’t always let you know about changes in occupancy and in most of the hypothetical situations above, our hypothetical producer might not have known what happened. But sometimes you do find out about such situations. You want to be alert to these situations and either confirm with the insurer that coverage will apply or offer your client straight property and liability coverage instead of a homeowners policy.
If you send newsletters or mailings to your insureds, include something about this potential for losing coverage. You won’t reach everyone, but it will create an awareness of the problem.
For the long range, ISO and insurance companies should amend the homeowners policy to clearly provide coverage for some of these situations. For example, if the insureds go on away and leave their homes unoccupied for six-months, as do many of our snowbirds, few would claim that coverage doesn’t apply to a loss while they’re away. Is the risk of loss any greater when a family relocates to another city because of job change or when the insured has entered a nursing home? Policy wording should make clear just where the dividing line is and that insureds with like exposures are treated equally. Pressure your insurers and associations to pursue this issue.

UPDATES: Time Limits on Claims in Insurance Policies and a Broadening of Fiduciary Liability Coverage

Time Limits on Claims in Insurance Policies I wrote about the 2-year time-limit to start suit against an insurance company and other time-limits in insurance policies in the April 18, 2011 issue of the Insurance Advocate. In the January 9, 2012 issue, I mentioned that one of my clients was faced with the two-year time limit problem and that I would let you know how it comes out. Good news and bad news. The bad news is that the insurance company resisted extending the time to start suit; the good news is that they just paid the balance of the claim, 10 days before the deadline. I was disappointed at the insurance company’s slow response and even more disappointed that the claims person at the agency that placed my client’s coverage didn’t know that there is a 2-year time limit. What’s worse, she said the company adjuster she spoke to didn’t know about it either. I see three possibilities for the adjuster’s response. In order of increasing culpability: (1) the claims person didn’t explain the problem correctly to the adjuster, (2) the adjuster really didn’t know about the timelimit, or (3) the adjuster did know, but chose not enlighten the claims person.

In another development, a recent case shows that time limits are not a purely theoretical problem. The New York Supreme Court Appellate Division for the Third Judicial Department just ruled that failure to file a proof of loss within 60-days of the insurance company’s demand for a proof is fatal to the insured’s claim6.

Fiduciary Liability Coverage for Business Acts As Well As Breach of Fiduciary Duties

In the January 24th issue, I wrote about IBM’s loss of coverage in a pension plan dispute. The court held that the issue in the dispute involved a “settlor” duty, that is, ordinary business acts, not a breach of fiduciary duty. Last week, a fellow consultant sent me an article pointing out that Chartis has broadened its fiduciary liability policy to include coverage for claims based on settlor duties7. Other insurers may follow suit. Simultaneously, I saw a report that the New York Court of Appeals, New York’s highest court, upheld Federal Insurance Company’s denial of coverage to IBM8. The court agreed with Federal’s position that its fiduciary liability policy covered only fiduciary acts, not settlor acts

Let’s Get Personal: Homeowners and Personal Liability Insurance Problems

Jerry Trupin