Insurance Community University Business In The Home The webinar will begin shortly. There is no audio at this time

Insurance Community University www.InsuranceCommunityUniversity.com

Business In The Home

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DOI Requirements

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Your Instructor Today

Casey Roberts, CIC, AFIS, ACSRPresident, Laurus Insurance Consulting, LLC


Learning Objectives• Background on Home Based Businesses in

the United States• Exposures and Issues for the Home Based

Business• Insurance exposures and insurance

solutions for the home based business• Business Endorsements to be added to

the Homeowners Policy AND BOP Approach


Learning Objectives• This course will be based on ISO

Homeowner language as of the most current edition date 5/11.

• Endorsement cited will be the most current edition date filed

• Individual states have amendatory endorsements

• Always check the specific insurance company forms


Learning Objective #1

Background on Home Based Businesses in the

United States


Background

• What do Apple Computer, Hershey's, Mary Kay Cosmetics, and the Ford Motor Company have in common?

• All started out as home based businesses


Background

• Over two-thirds of all sole proprietorships, partnerships, and “s” corporations are home-based.

• Over 90 percent of home-based businesses are sole proprietorships.

http://www.sba.gov/sites/default/files/Home%20Based%20Business%20and%20Government%20Regulation.pdf


Background• Home-based businesses are concentrated

in relatively few industries• Over 60 percent of home-based

businesses are in the service and construction sectors

• Over 80 percent are in fifteen 2-digit SIC industries; and one quarter are in just six 3-digit SIC industries.

• http://www.sba.gov/sites/default/files/Home%20Based%20Business%20and%20Government%20Regulation.pdf


Background--Employment• 6.9 percent of these home-based

businesses had $250,000 or more in receipts

• 57.1 percent of home-based businesses brought in less than $25,000.

• Over 90 percent of home-based businesses had no employees

• Reference 2011 Census figures


Regulations for Home Based Business


Taxes


Home Occupation Tax

• Home occupation taxes are the exception

• They can be a significant revenue source.

• This has provided a beneficial incentive for local jurisdictions to draft ordinances that legalize home-based businesses, so that they can collect the taxes.


Building Codes

• Apply principally to new construction or to renovations

• Regulate design, materials, quality of construction and systems


Zoning Authority

• Local jurisdictions enact zoning codes to separate land uses and maintain the distinctive character of each type of neighborhood.

• Over the last decade or so, there has been a very broad movement to adopt provisions that would allow home-based businesses in residential zones.


Zoning Authority• The authority to enact zoning codes is

an authority delegated to local governments by states.

• States can enact home occupation legislation that is supportive of home-based businesses.


Zoning Restrictions

• Physical Changes and Visibility. Zoning codes often:– Prohibit exterior physical changes,– Prohibit outside business activities,

storage, or displays, and/or– Restrict or prohibit signage or

commercial vehicles


Zoning Traffic

• Most zoning codes:– Restrict the numbers of visitors to a

business– Restrict the number of employees or

prohibit employees altogether, and/or– Restrict business parking or require

that additional parking be provided


Zoning—External Effects

• Most zoning codes:– Restrict or prohibit nuisance impacts

(e.g., noise, odors, glare), and/or– Prohibit use or storage of hazardous

materials


Child Care• Child care is the most consistently and

extensively regulated type of home-based business.

• State regulations typically cover most aspects of operations and facilities.

• States, however, have multiple classes of licenses, at least one of which is designed specifically for a single care-giver providing care in his/her residence.



Exposures and Issues for the Home Based

Business


Exposures and Issues

• Location of business in a home• Industry concentrations of home-based

businesses• Type of business organization• The presence of employees; and• Size of the business


General Business Categories



• Business is incidental to the home as a residence

• Business is a majority of the space of the home residence

• Home is converted solely to a business (lawyers office)



• Business is conducted out of the main residence

• Business is conducted out of a detached structure (garage; pool; guest house; other building)

Insurance Community University www.InsuranceCommunityUniversity.com31

Exposures and Issues• Issue of who is the “insured”• The Homeowners Policy is written for

an owner/occupant wherein the owner/occupant is using their homes “principally” for dwelling purposes.


Exposures and Issues• As an owner/occupant the definition of “named

insured” is “you” as it appears on the declarations including a spouse in residence even if they are not named on the declarations. An “insured” also includes relatives and other persons under 21 in the care of the insured if in residence.

• Often time the “business” is being conducted in a name other than the insured as it appears on the declarations.


Business Definition• Prior to 2000 series (5/91)“Business” includes

trade, profession or occupation (Definitions of HO form)


Current “Business” DefinitionHO 00 03 05 11"Business" means:a. A trade, profession or occupation engaged in on a full-time, part-time or occasional basis; orb. Any other activity engaged in for money or other compensation, except the following:


Current “Business” DefinitionHO 00 03 05 11(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 beginning of the policy period;


Current “Business” DefinitionHO 00 03 05 11(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".


Business Definition from a “court perspective”

• Most courts who have examined the issue of defining “business” and “business pursuits” agree that two criteria must be satisfied for a business to exist:– a) Expectation of gain– (b) At least some degree of continuity


Business Definition from a “court perspective”

• The test of “continuity” or customary engagement in any business coupled with a “profit motive” of sufficient a means of livelihood has been adopted as standard by most courts.


Home Insurance Company V. Aurigemma

• The insured had a Homeowner’s policy and he was not an electrician by trade

• However, he installed some outdoor electric lights and wiring for a friend’s private residential swimming pool

• The insured received reimbursement from his friend for only the cost of material and the labor for one man the insured hired


Home Insurance Company V. Aurigemma

• Sometime later a swimmer was electrocuted

• The cause of the death was alleged to be due to the negligent installation of the lights

• Suit was filed against the neighbor who installed the lights who submitted it to his Homeowner’s carrier


Home Insurance Company V. Aurigemma• Need Results



Insurance exposures and insurance solutions for the

home based business


Unique property and liability exposures and insurance solutions for the home based

business

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This could happen to you• A Client is injured in your home• Your “business” laptop is stolen in the airport• Your home office is destroyed by a fire leaving

you without records to collect accounts receivable

• All of your samples are stolen from your garage

• Your safe is broken into and all cash earned from the business is stolen


Property Issues

• Dwelling• Other Structures• Business Personal Property• Equipment/Machinery• Valuable Records• Money


Dwelling• Underwriting guidelines of the

insurance companies are specific in their eligibility section that homes do not qualify for Homeowners Coverage if the home is actually a business occupancy such as a converted home used as a law office.


Dwelling• Implicit in the definition of the word

“dwelling” is the intent of the home to be used “principally” as a “residence”.

• While the word “principally” is not defined since the l984 forms it did appear in the previous form series and the intent remains the same.


Other Structures

We do not cover: 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


As Relates Other Structures• Example 1: You have a detached garage onto

which you have added an office for your business. Under this form, there is NO COVERAGE for your garage.

• Example 2: You run a small retail operation, or a beauty salon, or a repair service, or ANY business out of a structure that is not attached to your home. Under this form, you will NOT have any coverage for losses that occur to the structure.


Personal Property

• We cover personal property owned or used by an "insured"

• Refer to Definition of “insured”


Special Limits

• $2500 on property on the “residence premises” used primarily for “business” purposes

• $1500 on property away from the “residence premises” used primarily for “business purposes”. However this limit does not apply to antennas, tapes, wires, records, discs or other media …in or upon a motor vehicle


Property Not Covered

• Business data including such data stored. Books of accounts, drawings, or other paper records

• Computers or related equipment• Property in an apartment regularily

rented or held for rental to others by an “insured”


Property Not Covered• Property of roomers, boarders and

other tenants; except property of roomers and boarders related to an “insured”

• Property in an apartment regularly rented or held for rental to others by an “insured”

• Property rented or held for rental to others off the “residence premises”


Loss of Use

• Additional Living Expense• Fair Rental Value• Civil Authority Prohibits Use• NOTE: No Business Income/Extra

Expense


Fair Rental Value

• If a loss covered under Section I makes that part of the "residence premises" rented to others or held for rental by you not fit to live in, we cover the fair rental value of such premises less any expenses that do not continue while it is not fit to live in.

• NOTE: in “residence premises”


Additional Coverages

• Credit Card, Electronic Fund Transfer Card Or Access Device, Forgery And Counterfeit Money – We will pay up to $500

• We do not cover– Loss arising out of "business" use or

dishonesty of an "insured".


Additional Coverages

Landlords Furnishings•We will pay up to $2,500 for your appliances, carpeting and other household furnishings, in each apartment on the "residence premises" regularly rented or held for rental to others by an "insured", for loss caused by a Peril Insured Against in Coverage C, other than Theft.


Causes of Loss

We insure against direct physical loss to property described in Coverages A and BB. Coverage C – Personal Property •We insure for direct physical loss to the property described in Coverage C caused by any of the following perils unless the loss is excluded in Section I – Exclusions


Liability

Coverage E: Personal LiabilityCoverage F: Medical Payments


Premises Liability “ingress/egress”• There appears to be little judicial consistency

on the issue of individual sustaining bodily injury upon entering or leaving an insured’s premises for purposes of conducting any type of business transaction with the insured.


Premises Liability• In the eyes of the law, a person

entering a home as a social guest is different from a business person.

– Excerpt from The Business Pursuits Exclusion by James Werterstone


Premises Liability “ingress/egress”• New York Central Mutual Fire Insurance Co.

v. Basch– This case concerned an individual who was

injured upon entering a private residence to get a piano lesson from the owner of the home.

– The court ruled that “…the piano lessons may have been business, but arriving at and leaving the premises were ordinarily incidental to a non-business pursuit….”


Premises Liability “ingress/egress”• Callahan v. American Motorists Insurance Company

– The insured is a real estate agent who conducted his business from his home.

– Another real estate agent came to the insured’s home to pick up the key to a house that was listed for sale.

– The visiting real estate agent was injured in a fall on the insured’s porch.

– The Court held that the injury was due to a business pursuit of the insured and no coverage applied under the insured’s Homeowners policy.


When A Hobby Becomes A “Business”

• Many insureds have hobbies that gradually evolve into a business liability exposure.

• These hobbies could include photography, music, painting, ceramics, woodworking, or other activities.

• The insured may sell hobby items on a regular basis with the expectation of earning a profit or may receive income or fees for paid instruction on a regular basis.

• Once again, the two tests of profit and continuity can be applied. If both tests are met, the “business pursuits exclusion” applies.


Overview of Liability Issues• Any suit brought must be in the insured’s name• Liability arising out of a “business” is excluded• Rental of any premises is excluded unless

defined as an “insured location”• Liability arising out of professional services is

excluded.


Liability Issues• Employment related practices are not

covered unless due to a covered peril (Bodily Injury or Personal Injury)

• No liability or medical payments coverage for “Bodily Injury” to anyone eligible to receive any type of workers compensation benefits provided under the law.


Liability

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


“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".


Workers Compensation

4. "Bodily injury" to any person eligible to receive any benefits voluntarily provided or required to be provided by an "insured" under any: a. Workers' compensation law; b. Non-occupational disability law; or c. Occupational disease law;


“Business”

• 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".


Liability Issues• The liability section of the policy only addresses

Bodily Injury and Property Damage. • Personal Injury Coverage is not included

automatically which addresses Libel, slander or defamation of character.

• There is a Personal Injury endorsement available (HO 2482) however it excludes injury arising out of the business pursuits of an insured.


Liability IssuesProfessional Exclusion

• You rewire a client's computer in your home-based computer repair shop.

• The computer later overheats and burns your client's home down.

• The cause: you wired it improperly. – No coverage.


Liability IssuesProfessional Exclusion

• As a home-based CPA, you advise your client to take some deductions on his taxes. A lot of them.

• The IRS later audits your client, disallows the deductions, assigns penalties and interest, and puts your client out of business.

• This would be a professional liability claim, so no coverage under the homeowners.



Business Endorsements to be added to the Homeowners

Policy


Property Endorsements• Increased Limits on

Business Property (HO 04 12 05 11)

• Permitted Incidental Occupancies (HO 04 42 10 00)

• Structures Rented to Others (HO 04 40 10 00)

• Home Day Care Coverage (HO 04 97 05 11)

• Special Computer Coverage (HO 04 14 05 11)

• Landlords Furnishings (HO05 46 10 00)

• Home Business Insurance (HO 05 90 03 97)



Permitted Incidental Occupancy

• Property Coverages– Other Structure

• Allows business conducted as described• Sets a limit of liability for the structure

– Personal Property• Deletes special limit of $2500 on the premises• Does NOT change off premises limit• Increase does not apply to furnishing, supplies,

and equipment• Coverage “C” limit applies


Structures Rented to Others HO 04 40 10 00• Covers structures described in the

schedule for the limit indicated• Structures on the “residence premises”• Used as a private residence• Rented to any person not a tenant of

the dwelling


Home Day CareHO 04 97

• Provide liability and property coverages for a home day care business. Business must be conducted by an “insured”

• Allows coverage in Dwelling and Other structure is scheduled

• This endorsement gives you up to $2,500 of your personal property other than furnishings, supplies and equipment

• This coverage is on-premises only.


Special Computer CoverageHO 04 14 05 11

• In the absence of this endorsement, the HO0003 covers a computer on premises, bought for business, for up to $2500.00.

• The HO 0003 does not increase the limit of liability under coverage C and does not modify the “special limits of liability” or the provisions of property not covered under coverage C.

• This endorsement modifies the perils to All Risk


Liability Endorsements• Personal Injury (HO

24 10 05 11)• Permitted Incidental

Occupancies (HO 04 42 10 00

• Business Pursuits (HO 24 71 10 00)

• Structures Rented to Others (HO 04 40 10 00

• Home Day Care Coverage Endorsement (HO 04 97 05 11)

• Home Business Insurance (HO 05 90 03 97)


Permitted Incidental Occupancy

• Liability Section– Removes business exclusion for described

business in “residence premises”• Note: did not extend to Other Structures

– NOTE: All coverage goes back to “insured” by definition


Personal Injury• Insurance does not apply to:• 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 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".


Personal InjuryThis exclusion 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;


Business Pursuits H0 24 71 10 00

• Indicates name and business of insured• Excludes coverage for:

– To "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;


Business Pursuits H0 24 71 10 00

• Excludes coverage for:– Professional Liability other than “teaching”– “Bodily Injury” to a fellow employee– When the “insured” is a member of the

faculty or teaching staff of any school or college

– Vehicles


Structures Rented to Others HO 04 40 10 00• Removes “business” exclusion when the

“residence premises” is rented for dwelling purposes


Home Day CareHO 04 97 05 11

• Provide liability and property coverages for a home day care business. Business must be conducted by an “insured”

• Removes exclusion for “business” as applies to a Home Day Care

• Note: that the number of persons cared for must be stated on this endorsement, and most companies will only allow up to 3 persons cared for.


Home Business Insurance HO 05 90 03 97• Broadest endorsement available for

Home Based Business like a BOP• Provides both Property and Liability

changes• The “business name” is on the schedule• Form of business can be an individual;

joint venture; partnership; or other organization


Property Modifications

• Special limits deleted• Limited coverage provided for

– Accounts Receivable– Valuable Papers– Money– Business Income– Extra Expense


Liability Modifications

• Products and Completed Operations is provided for Coverage E limit

• All other Business Liability is up to twice the combined limits of Coverage E & F

• “Business” as defined is HO 00 03 is deleted and replaced by:



• "Business" means the trade, profession or occupation described in the Schedule of this endorsement that is conducted at or from the "residence premises" and is owned by:– a. You; or– b. A partnership, joint venture or other

organization of which you and your resident relatives are the only partners, members or stockholders



• Adds in coverage for – Personal Injury– Advertising Liability


Separate BOP

• A separate BOP can be written separately for a home based business

• These sometimes are referred to as cottage industry policies

• These policies can be broader is scope and written as a “business” policy


Businessowners Package Policy (BOP)

• A BOP, like the in-home business policy, covers business property and equipment, loss of income and extra expenses, and liability.

• However, these coverages are on a much broader scale than the in-home business policy.

Documents

Insurance Community University Business In The Home The webinar will begin shortly. There is no audio at this time