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Personal Lines Insurance

Insuring the Home-Based Business (Part 2)

Robin Olson | June 1, 2006

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Woman sitting by a window preparing food for her small home-based business

Part 1 of this series examined homeowners policy restrictions regarding home-based businesses. In cases where the homeowners insurer denies coverage, and the case goes to trial, the issue often hinges on the definition of "business." In many cases, courts uphold the business exclusion, leaving the businessowner without coverage. Part 3 of this series, looks at the proper endorsements and policies needed to adequately protect home-based businesses.

Courts have dealt with the issue of whether business property and business-related activities are covered by the homeowners policy for many years. Often the first step is for the court to ascertain what is meant by the term "business." A seminal case concerning this topic is Home Ins. Co. v. Aurigemma, 45 Misc. 2d 875 (N.Y. Sup. 1965), in which the New York Supreme Court ruled that the term "business pursuits" encompassed two elements: continuity and profit motive.

Concerning the first element, there must be a customary engagement or a stated occupation. Concerning the second element, there must be proven a means of livelihood, gainful employment, or procuring subsistence or profit. In a later New York appellate court decision, the court ruled that "for purposes of the 'business pursuits' exclusion, the 'business' engaged in by the insured need not necessarily be limited to his sole occupation." See Shapiro v. Glen Falls Ins. Co., 365 N.Y.S.2d 892, 47 A.D.2d 856 (1975), aff'd, 347 N.E.2d 624, 383 N.Y.S.2d 263 (1976).

Court decisions concerning property limitations and liability limitations on business-related losses are important to review to fully understand the relevant loss exposures and the gaps that may be created when conducting business or quasi-business activities from the home.

Business Property Limitation/Exclusion

There are two key business property restrictions in the homeowners form to address from a case law perspective—one pertaining to other structures and one pertaining to business personal property. Smith v. State Farm Fire & Cas. Co., 656 N.W.2d 432 (Minn. App. 2003), concerned the preclusion of coverage for other structures used in business. The insured's homeowners policy excluded any nondwelling structure "used in whole or in part for business purposes" or "rented or held for rental to a person not a tenant of the dwelling, unless used solely as a private garage." In this case, the insured rented both of her barns to a commercial marina to store boats. The insured listed property rental as a business or profession on her federal tax return and reported $4,000 gross receipts for three consecutive years.

One of the barns collapsed due to snow accumulation on the roof. This loss was unrelated to the presence of the boats inside. The insurer denied the claim because the policy's business and rental exclusions precluded coverage since Smith was renting the barn for business purposes. The insured brought suit. The district court ruled that the rental conduct was governed by the policy's rental exclusion and not the general business exclusion. The court ruled that the insured was entitled to coverage because the marina was "functionally using the barn as a private garage."

The Minnesota Appellate court reversed, ruling that the insurance contract should be "construed so as to harmonize all of its parts," including the business activities exclusion. The court defined business pursuits as an activity "intended to generate profits or financial gain."

The court rejected the insured's contention that since she is a financial analyst, the property rental is not her "trade, occupation, or profession." The court ruled that the policy excludes coverage for "business purposes," not the singular "business purpose," implying that the exclusion is not restricted solely to the insured's primary occupation. The court agreed with the insurer's position that the boat storage rental created business risks and liability not contemplated by the insured's homeowners coverage.

The various restrictions on business personal property have also been challenged in court. In Asbury v. Indiana Union Mut. Ins. Co., 441 N.E.2d 232, (Ind. App. 1982), this limitation was struck down by the court. The insured, a mill operator, was also a hunter for sport and had received money from the sale of skins in the past. The insured stored over 100 pelts in his deep freezer, valued at approximately $3,500. When stolen from his home, he filed a claim with his homeowners insurer, which denied the claim, citing the business property exclusion. The insured filed suit, contending that he never relied on the sale of animal skins to make a living. The district court upheld the business exclusion, and the case was appealed. The Indiana appellate court reversed, ruling that the hunting and skinning of animals was more closely related to a hobby than a business. It found that "each case is fact-sensitive for determining whether a particular activity is 'business' or involves 'business property.'"

In Mack v. Nationwide Mut. Fire Ins. Co., 2005 Ohio App. LEXIS 2591 (June 3, 2005), the court upheld the business property exclusion. In this case, the insured's musical equipment valued at nearly $27,000 and used to perform for money, was stolen. The insurer offered to pay only $500, the limit for business personal property under the applicable homeowners policy. The insured then filed suit contending that his musical interests were more related to a hobby in that he used them more for pleasure than any business activity. He further argued that the business property exclusion was ambiguous because "business property" was not defined in the policy. The Ohio appellate court disagreed, finding that he did receive remuneration of cash or musical instruments in exchange for his musical services. The court also stipulated that the "mere absence of a definition in an insurance contract does not make the meaning of the term ambiguous." It applied the plain and ordinary meaning to the phrase "business property."

Business Liability Exclusion

The business liability exclusion has been challenged even more frequently than the business property restrictions. In a few cases, the courts have struck down the exclusion. In State Auto Prop. & Cas. Ins. Co. v. Raynolds, 564 S.E.2d 677 (S.C. App. 2002), the insured's dog bit a professional dog handler. The injured party filed a claim against the insured, who turned in the loss notice to his homeowners insurer. The insurer declined coverage, citing the business pursuits liability exclusion. The insurer contended that the insured had facilities in their home to breed and raise Akita show dogs for money, which included a kennel behind their home. The insurer later filed a declaratory judgment action.

The South Carolina Appellate court found that this activity was part-time, particularly since the insured had other business interests. The court struck down the business pursuits liability exclusion, finding that there was no profit motive in this activity since it was more hobby-oriented than business-oriented.

More often, however, the business pursuits exclusion is upheld by the courts. In Wiley v. Travelers Ins. Co., 534 P.2d 1293 (Okla. 1974), the insured's dog bit a guest who responded to an advertisement regarding a St. Bernard puppy for sale. The claim was filed with the homeowners insurer, which denied coverage under the business pursuits exclusion. The insured held a full-time job as a salesman and argued that the dog operations were only part-time and more of a hobby than a business. The insured further argued that any profits he did make were inconsequential.

The Oklahoma Supreme Court upheld the exclusion, ruling that the addition of a "profit motive is all that is necessary to make an activity both a hobby and a business pursuit." It further stated that "whether there is or is not actual profit is immaterial." The court viewed a business in a comprehensive manner, stating that "profit motive, not actual profit, makes a pursuit a business pursuit."

In Pacific Indem. Ins. Co. v. Aetna Cas. & Sur. Co., 688 A.2d 319, (Conn. 1997), the insureds' horse kicked and injured an independent contractor hired to care for their animals. The injured party filed suit against the insureds, who turned the claim over to their homeowners insurer. The insurer refused to defend or indemnify the insureds, arguing that they were engaged in a business pursuit since they boarded many horses at their farm for $480 per month per horse.

The insureds argued that they each had full-time jobs unrelated to the horse boarding business. They contended that this activity was secondary in nature. The Connecticut Supreme Court disagreed with "such a narrow interpretation," finding a profit motive in this activity. It found this to be a business pursuit activity "further bolstered by the fact that, for every year in question, the insureds filed farm business federal income tax returns and claimed substantial annual depreciation of their property under various IRS codes."

Numerous other courts have upheld the business pursuits liability exclusion, including:

  • Hiebert v. Farmers Ins. Co. of Oregon, 18 P.3d 397, (Or. App. 2001)
  • Larson v. Georgia Farm Bureau Mut. Ins. Co., 520 S.E.2d 45 (Ga. App. 1999)
  • Vallas v. Cincinnati Ins. Co., 624 So. 2d 568, (Ala. 1993)

Part 1 of this series examined homeowners policy restrictions regarding home-based businesses. Part 3 looks at the proper endorsements and policies needed to adequately protect home-based businesses.

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