HOME BASED BUSINESS EXPOSURES Terry L Tadlock CIC

HOME BASED BUSINESS EXPOSURES Terry L. Tadlock, CIC, CPCU, CRIS Coastal Plains Insurance Hilton Head Island, SC terry@coastalplains. com

LEARNING OBJECTIVES 1. Identify and explain the reasons for concern that this coverage exposure is overlooked by company and agency personnel. (Page 2) 2. In coverage situations, explain the policy language that affect the home business exposure. (Pages 3 -4) 1

LEARNING OBJECTIVES 3. Apply the appropriate Homeowner Endorsements that should be used in various coverage situations. (Pages 5 -6) 4. When a Homeowners Endorsement is not sufficient to adequately cover the insured‟s exposure Identify some other alternatives that are available. (Pages 14 -17) 1

THE REASON FOR CONCERN A. B. Size of the market - over 2, 000 home based businesses were started last year. Technology movement in America - As more companies continue to downsize and technology increases, the growth in this area can only continue. There is very little reason to continue paying the expenses associated with downtown offices, when work can be completed at home. 2

THE REASON FOR CONCERN C. Productivity and efficiency – Depending on several factors such as the type of business, type of employee, interaction with customers, interaction with staff, etc. , many feel that an employee is more productive working in a home environment than they are in an office. What do you think? 2

THE REASON FOR CONCERN Would considering any of these factors influence your decision: 1. Commuting time 2. Time the average employee takes for personal business 3. Working at peak performance times (early morning person vs. the night owl) 4. The evaluation process – performance is now the main measurement 5. Cost savings to the company – Independent contractor vs. employee 2

THE REASON FOR CONCERN D. E. Shared space – Many companies today are utilizing shared space to reduce overhead. In a shared space environment, employees work in the office one or two days a week and work at home the remaining time. This allows the company to better utilize work space and ultimately reduce expense. Limited coverage - The Homeowners Policy (even endorsed) is very limited in the protection it provides. Other sources that have addressed this problem such as company forms, Home Business Endorsements, and even the BOP may not adequately handle the exposures presented. 2

Policy Provision - Definitions 3. "Business" means: a. A trade, profession or occupation engaged in on a full-time, part-time or occasional basis; or b. Any other activity engaged in for money or other compensation, except the following: (1) One or more activities, not described in (2) through (4) below, for which no "insured" receives more than $2, 000 in total compensation for the 12 months before the inception date of the policy; (2) Volunteer activities for which no money is received other than payment for expenses incurred to perform the activity; (3) Providing home day care services for which no compensation is received, other than the mutual exchange of such services; or (4) The rendering of home day care services to a relative of an "insured". 3

POLICY LANGUAGE B. Coverage B – Other Structures 1. We cover other structures on the "residence premises" set apart from the dwelling by clear space. This includes structures connected to the dwelling by only a fence, utility line, or similar connection. 3

POLICY LANGUAGE 2. We do not cover: c. Other structures from which any "business" is conducted; or d. 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. 3

Policy Provision - Definitions 4. "Employee" means an employee of an "insured", or an employee leased to an "insured" by a labor leasing firm under an agreement between an "insured" and the labor leasing firm, whose duties are other than those performed by a "residence employee". 3

POLICY LANGUAGE C. Coverage C – Personal Property 3. Special Limits Of Liability h. $2, 500 on property, on the "residence premises", used primarily for "business" purposes. i. $1, 500 on property, away from the "residence premises", used primarily for "business" purposes. However, this limit does not apply to antennas, tapes, wires, records, disks or other media that are: (1) Used with electronic equipment that reproduces, receives or transmits audio, visual or data signals; and (2) In or upon a "motor vehicle". 4

POLICY LANGUAGE C. Coverage C – Personal Property 4. Property Not Covered i. "Business" data, including such data stored in: (1) Books of account, drawings or other paper records; or (2) Computers and related equipment. We do cover the cost of blank recording or storage media and of prerecorded computer programs available on the retail market. 4

POLICY LANGUAGE SECTION II – EXCLUSIONS E. Coverage E – Personal Liability And Coverage F – Medical Payments To Others - Coverages E and F do not apply to the following: 2. "Business“ a. "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". 4

POLICY LANGUAGE SECTION II – EXCLUSIONS 2. "Business“ b. This Exclusion E. 2. does not apply to: (1) The rental or holding for rental of an "insured location"; (a) On an occasional basis if used only as a residence; (b) In part for use only as a residence, unless a single-family unit is intended for use by the occupying family to lodge more than two roomers or boarders; or (c) In part, as an office, school, studio or private garage; and (2) An "insured" under the age of 21 years involved in a part-time or occasional, self-employed "business" with no employees; 4

POLICY LANGUAGE SECTION II – EXCLUSIONS 3. Professional Services "Bodily injury" or "property damage" arising out of the rendering of or failure to render professional services; 4

COVERAGE LIMITATIONS 1. 2. Other Structures used to conduct business are specifically excluded. (HO O 4 42 may be a solution for the property and liability exposure if it meets with underwriting approval) Other Structures rented or held for rental are specifically excluded. (HO 04 40 may be a solution for the property and liability exposure) 2

RECAP COVERAGE LIMITATIONS 1. 2. $2, 500 limitation on personal property on the residence premises used at any time, in any manner, for any business purpose. (HO 04 42 may be a solution for the property used in the business) $1, 500 limitation on personal property off the residence premises used at any time, in any manner, for any business purpose. No coverage for data. The cost to research and replace lost information is not covered. EX

COVERAGE LIMITATIONS 1. Blanket exclusion for Liability and Medical Payments To Others involving a business related activity. 2. Professional liability is also excluded. EX

ENDORSEMENTS AVAILABLE INCREASED LIMITS ON BUSINESS PROPERTY Allows the insured to increase the $2500 on premises and the $1, 500 off premises limitations on property used in business to a maximum of $10, 000 on premises and $2, 500 off premises. Caution: This increase does not apply to: “Business” property in storage or held as a sample or for sale or delivery after sale; or “business” property pertaining to a “business” actually conducted on the “residence premises. ” 5

ENDORSEMENTS AVAILABLE PERMITTED INCIDENTAL OCCUPANCIES This is an excellent endorsement, when the company will let you use it. It’s only problem is its name: Permitted (meaning when the company allows) Incidental (meaning not much exposure). Find out the types of risks your company will write. 5

ENDORSEMENTS AVAILABLE PERMITTED INCIDENTAL OCCUPANCIES Section I – Other Structures that are used in whole or in part may be scheduled and specifically insured. Personal Property used in the business named on the endorsement will have 100% of the coverage C limit. 5

ENDORSEMENTS AVAILABLE PERMITTED INCIDENTAL OCCUPANCIES Section II – Liability and Medical Payments (on premises only) for the business named in the endorsement will be added back. 5

ENDORSEMENTS AVAILABLE PERMITTED INCIDENTAL OCCUPANCIES This endorsement fails to address three exposures still not covered in the Homeowners Policy. $1, 500 limitation on personal property off-premises. No data coverage. No off- premises liability coverage. 5

ENDORSEMENTS AVAILABLE Most underwriters look for two characteristics to eliminate the use of this endorsement: 1. Walk in traffic; and/or Products and completed operations exposure. 2. Most underwriters will allow this endorsement to be used for the small office, studio type risks. 5

ENDORSEMENTS AVAILABLE STRUCTURES RENTED TO OTHERS This endorsement adds back Section I – property coverage to an Other Structure located on the “residence premises” that is rented or held for rental. In addition, it also adds back Section II – Liability coverage. Keep in mind that personal property located in the Other Structure rented or held for rental is limited to $2, 500. This coverage is found in the Additional Coverages – Landlords Furnishings. 5

ENDORSEMENTS AVAILABLE BUSINESS PURSUITS This is a Section II – Liability endorsement only. It does nothing to correct any property exposures. Caution: Specifically excluded in this endorsement is: “…”bodily injury” or “property damage” arising out of the “business” pursuits of the “insured” in connection with a ‘business” owned or financially controlled by the “insured” or by a partnership of which the “insured” is a partner or member. ” 6

ENDORSEMENTS AVAILABLE BUSINESS PURSUITS This endorsement will only work when you are the employee of a company that you do not own or financially control and are allowed to work out of the home. Commonly used for teachers. When used for a teacher, corporal punishment may be added. 6

ENDORSEMENTS AVAILABLE HOME DAY CARE COVERAGE This endorsement is very similar to the Permitted Incidental Occupancies endorsement we discussed earlier. It is specific to one type of business…Home day care. It allows the insured to cover any Other Structures used in the business, 100% of the Coverage C limit may be applied to the business property, on premises liability coverage is added. 6

ENDORSEMENTS AVAILABLE NO HOME DAYCARE COVERAGE The actual name of the endorsement is No Section II – Liability Coverage For Home Day Care Business – Limited Section I – Property Coverage For Home Day Care Business. The name says it all! This endorsement is used to clarify the intent that the company does not cover home day care business. 6

ENDORSEMENTS AVAILABLE HOME BUSINESS COVERAGE This is a 14 page endorsement that is added to the Homeowners policy. See the chart of coverages on page 15. 6

CASE STUDIES 1. Kathy’s Computer World 2. Larry’s Lock and Security Service 3. Zack’s Custom Woodworking 7 -13

POSSIBLE SOLUTIONS HOME BUSINESS INSURANCE COVERAGE 14

POSSIBLE SOLUTIONS RLI IN-HOME BUSINESS POLICY 1. Retail or Service Business operated from the insureds residence. 2. Operated by the insured or resident family member. 3. May have no more than 3 employees. 15

POSSIBLE SOLUTIONS RLI IN-HOME BUSINESS POLICY, Cont. 4. Annual revenues may not exceed: A. B. Sales of Merchandise - $200, 000. Service Risks - $500, 000 5. May occupy no more than 50% or the residence. 6. Business may not have any other locations. 15

POSSIBLE SOLUTIONS RLI IN-HOME BUSINESS POLICY, Cont. 7. Maximum square feet - 7, 500. 8. May not be located in a mobile home. 9. Insured must occupy the residence where the business is located as a primary residence. No seasonal dwellings allowed. 15

POSSIBLE SOLUTIONS RLI IN-HOME BUSINESS POLICY, Cont. 10. Businesses operated out of a separate garage if located within 100 feet of the residence. 11. Insured must insure 100% of the business personal property. Note: There is no real property coverage and none is available. Therefore, a HO 3 is still needed for the Dwelling and Other Structures. 15

POSSIBLE SOLUTIONS RLI IN-HOME BUSINESS POLICY, Cont. 16

POSSIBLE SOLUTIONS BUSINESSOWNERS POLICY 17

COURT CASES Court Case Summaries In The Exhibits Pages 31 -34

FURTHER RESEARCH Business In The Home…A Legal Discussion: THE BUSINESS PURSUITS EXCLUSION In The Exhibits

HOME BASED BUSINESS EXPOSURES Terry L. Tadlock, CIC, CPCU, CRIS Coastal Plains Insurance Hilton Head Island, SC terry@coastalplains. com