How Homeowner's policies affect your business
Virtually all homeowners policies contain a liability exclusion for business activities. This exclusion reinforces the policy's intention to cover only personal-related exposures and not business-related ones. It encourages individuals to cover their business exposures with commercial or professional liability policies or home business endorsements. For the Insurance Services Office, Inc., homeowners policy, the exclusion applies to a business the insured owns or to any work-related activities for a business in which the insured is an employee or an independent contractor.
There have been numerous court cases involving the exact meaning of business use. The courts have generally held that a business must contain two elements: (a) a continuity of the business activity and (b) a profitability goal. The court in United Servs. Auto. Ass'n v. Pennington stated that "the profit need not be realized -- the issue is the expectation or anticipation for the profit in the future -- since often business ventures result in a loss."
Most courts broadly interpret the business exclusion. The Texas Supreme Court upheld the exclusion in Allstate Ins. Co. v. Hallman. In this case, the insured home owner (Hallman) leased property she owned in a rural part of the state to a company that engaged in limestone mining. Later, neighboring land owners sued Hallman and the company, alleging that the blasting from the mining damaged their property and their health. The homeowners insurer denied coverage, citing the business pursuits exclusion.
The appellate court concluded that the underlying petition did not allege continuity of activity because the insured entered into only one lease agreement, executed nearly 10 years prior to this legal action. But the Texas Supreme Court reversed the appellate court's conclusion in this matter, ruling that although the insured executed only one lease, until that lease expires, she was perpetually engaged in the continuous act of leasing her property to the mining company. Thus, the limestone mining lease met the continuity requirement of the business pursuits exclusion.
Business exposures in general are rife with complexity. For example, when does a hobby turn into a business? Many people collect coins, stamps, baseball cards, and other types of collectibles. But when a home owner starts trading and selling these collectibles on eBay, for example, when does this activity turn into a "business"?
This issue is becoming increasingly important due to the growing number of home-based businesses. Thus, it would be wise to inquire about potential business use for new and renewal homeowners accounts. Optional coverage such as the home business endorsements or even a business owners policy should be explored in such cases.
For more on how your home business is affected by your homeowner's policy, contact us.