Permitted Incidental Occupancy Endorsement HO 04 42 and the HO Policy -- What Does it Do For You?
By Irene Morrill, CPCU, CIC, ARM, CRM, LIA, CRIS, CPIW
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Someone asked if I had written a Tech Talk on the HO 04 42 Permitted Incidental Occupancy Endorsement and the answer was no, but why no?
Business and the HO Policy ...
No matter WHAT the ISO HO edition there are coverage restrictions for business activity. All ISO HO policies define “business”. The definition under the HO-2000 and HO-2011 is more comprehensive and wordy than the ISO HO-91, but regardless the HO policy considers a trade, profession, or occupation to be a business. The 2000/2011 versions state whether performed “part-time, full-time or occasionally” it IS a “business”. There is NO requirement for profit. The HO-91 doesn’t mention how often it must be performed to be a business, but merely states “business INCLUDES trade, profession or occupation.” The word includes can mean part-time. The ISO HO-91 does not require the generation of profit either. Litigation under the HO-91 and prior editions hinged on continuity or chance for profit. There was/is NO requirement for the activity to be full-time or the insured’s means of livelihood.
If you do it more than once and ain’t doin it for free, then you could potentially be a business. I would ask the insured what they do to generate ANY income and/or fun money and then hope I get a legal response.
Section I - Restrictions for Business
Coverage A - Dwelling
There is no discussion of “business” under Coverage A – Dwelling. The only way a company could deny a claim for loss to the dwelling is due to “concealment, misrepresentation and fraud”. If the question was asked and the insured didn’t give the complete or true answer AND the question was relevant to policy issuance and eligibility, then the claims department could deny based on this policy condition for “truth, justice and the American way”. If the insured starts a business activity AFTER the policy inception date and/or application, then this provision cannot be invoked. So, for the most part there is no exclusion and/or restriction for business activity and damage TO the house/ dwelling.
Coverage B - Other Structures Located on the “Residence Premises”
The “business” rubber hits the road in THIS coverage. There is little to NO tolerance of business activity in a separate structure. Regardless of the ISO HO edition - 91/2000/2011, damage to a separate structure used by ANYONE for a business activity will most probably be excluded. The only business activity that will not invoke a claim denial for damage TO the separate structure is the rental of the structure as a private garage.
There is no direct physical damage coverage if the insured uses it for a business activity of ANY type including a “mere” office occupancy. Damage to a barn where the insured rents stalls to another horse owner could be excluded. Renting a section of the garage or shed to others to store furniture or other types of property would allow the company to deny a property claim to the other structure. The ISO HO-2000/2011 allows the structure to be used by the insured to store his/her non-flammable business property but once this insured ceases to be a sole proprietor and opts for LLC or corporation status the coverage is lost.
If there is business activity in another structure on the “residence premises,” the insured needs an endorsement or separate policy to cover loss to it.
Coverage C – Personal Property
All ISO HO editions restrict business personal property both on the “residence premises” and off the “residence premises’. The special limit for business personal property on the “residence premises” is $2500 for all the editions. If the contents or stock used by the insured, sold by the insured, or used in the insured’s “business” is valued at more than $2500 then an endorsement or separate policy is necessary to increase this “business” contents limitation.
The coverage limit for loss/damage to “business” personal property located OFF the “residence premises” varies by the ISO HO edition. The ISO HO-91 only provides $250 of coverage; the ISO HO-2000 provides $500 of coverage; and the ISO HO-2011 provides $1500. If a higher limit is necessary than an endorsement or separate policy would be necessary.
Coverage D – Loss of Use
The HO policy is a personal lines policy. The ONLY loss of business income that is found under Coverage D would be loss of rental income. Any damage to real or personal property that results in the inability of the insured to conduct his/her business activity and generate income is NOT covered. If there is a loss to the house and it becomes unfit to live in and portion rented to tenants is untenable, this one type of loss of business income is covered.
If the insured wants to guarantee that a loss to property causing an inability to conduct their business activity resulting in a loss of income is covered, then they need an endorsement or a separate policy.
Section II – Personal Liability
Coverage E - Personal Liability (bodily injury and property damage) and Coverage F - Medical Payments to Others
Injury resulting from a business activity conducted by the insured or from the insured’s premises is excluded other than a few limited situations.
The business of renting the home as a residence IS allowed if rented to family units to use as a residence. The business of renting more like a “hotel” or “lodging house” and not as a long-term residence to a family unit can only be conducted occasionally and not to more than two roomers or boarders. This will be a potential problem for those advertising on AirBnB or VRBO (vacation rental by owner) or Flipkey or any other website that allows the renting of the home or a portion of the home to others.
Renting the “residence premises” TO OTHERS who use a portion of it to conduct their business of office, school, or studio use as a private garage IS allowed. This is the insured acting as a landlord. If the insured rents out the garage to someone to store their 1957 Ford T-Bird, then both the other structure as well as landlord liability is provided by the ISO HO policy. If the insured rents out a portion of their garage to others to put an office in, the good news is that the insured has landlord liability. The bad news is that other structure is NOT covered.
Now …back to the question …what does the HO 04 42 Permitted Incidental Occupancy endorsement do?
Whether it’s the 4/91 edition used with the HO-91 program or the 10/00 edition used with both the ISO HO-2000 or 2011, the coverage provided is the same.
The endorsement requires that the “business” be described.
The ISO HO manual doesn’t specify when to use the endorsement or what types of businesses are allowed, it merely suggests “examples” of businesses that would benefit from the endorsement. Examples that could be covered are: offices for business or professional purposes and private schools or studios for music, dance, photography and other incidental purposes”. In reality whatever the insurance company lets you identify/describe is allowed.
Where is business located on the “residence premises?”
The endorsement then asks WHERE this “described” business is conducted. If it is in the dwelling, then nothing further needs to be done. If the business is conducted in a separate structure, then one needs to identify this and the endorsement language REMINDS us that business in a separate structure is NOT covered. However, the endorsement provides the opportunity to purchase coverage for this excluded separate structure. One must ascertain the ENTIRE value of this other structure and pay a rate per $1,000 of value.
Coverage C – Business Personal Property on the “Residence Premises”
The endorsement then deletes and replaces the special limitation of coverage for business personal property located on the “residence premises”. The $2500 special limit for business personal property located on the residence premises NO LONGER applies to the DESCRIBED business. It now will apply to any OTHER business.
If I have an insurance office in my house and it is described on this endorsement, then the complete Coverage C limit could apply to my insurance office contents. If I also sell Mary Kay products on the side, then the HO policy $2500 business personal property limitation for business property located on the “residence premises” would apply to this business personal property.
Coverage C - Off the Residence Premises
The ISO HO special limitation of coverage for business personal property OFF the residence premises is NOT modified by the endorsement. So, depending on the HO edition the off premises limitation of business personal property will remain at $250, $500 or $1500. If the business routinely has a need for a higher limit of business personal property off the residence premises, then this endorsement is not sufficient.
Coverage D – Loss of Use
IS NOT affected by this endorsement so there is NO loss of business income provided.
Coverage E – Personal Liability (bodily Injury and property damage) and Coverage F- Medical Payments to Others
The endorsement states the business exclusion no longer applies to the use of the “residence premises” to conduct the DESCRIBED business. This endorsement provides PREMISES coverage. IF a business package is delivered by FEDEX and the FEDEX employee is injured on the premises, the Section II exclusion will not apply.
If the insured goes OFF the “residence premises” and is doing something business-related where bodily injury or property damage to others arises, the endorsement does NOT provide coverage.
Personal Injury Arising Out of the Business Exposure
This endorsement does NOT provide personal injury or advertising injury coverage. And, even if the HO 24 82 Personal Injury endorsement IS added to the HO policy, the Personal Injury endorsement reminds us that it does NOT apply to business-related situations.
My question to you is …
Is there really ANY business that is entirely conducted on ONE premises? Does one NEVER go “off premises?” As I say in class … ”never” is a long, long time and we’ll all be dead before it happens!
There is no “operations” coverage … which generally is considered to happen OFF the business premises.
There is no “products” coverage because, again, bodily injury or property damage would occur OFF the premises.
What is the use of this endorsement?
In today’s world of “tele-commuting” by employees, this endorsement could be useful. All the insured’s personal property such as office furniture, computer, printer, etc., used primarily for business would now be covered up to the HO Coverage C limit.
Injury to others occurring on the premises could be defended and, if the insured is negligent, result in a liability settlement.
If the insured is a sole proprietor, then he or she needs “real” business coverage that provides liability coverage for BI or PD occurring on/off premises and due to products or completed operations.
ISO Home Business Endorsement HO 07 01
ISO did create a “home business” endorsement which is similar to the ISO BOP. I call it the “bopette”. It provides BOP/CGL like liability coverage for premises, operations, products and completed operations exposures complete with aggregate limits for the identified business. Personal injury and advertising injury coverage arising out of the described business is provided.
It provides loss of business income on an actual loss sustained basis for 12 months similar to the ISO BOP. It allows complete Coverage C applicable to the described business personal property located on the residence premises. It also allows a higher limit of coverage for business personal property located off the residence premises. If the business is conducted in an other structure then the endorsement allows the insured to cover that structure.
I think this is a horribly confusing endorsement weaving in and out of the homeowner’s policy to which it is attached. It also ties the business exposure to the personal lines exposure which can be dangerous to the insured’s potential coverage renewal, if a claim arises.
A separate policy, such as the RLI Home Business policy or a BOP (businessowners policy) with one of your voluntary carriers, would be the better solution.
Personal lines should identify the business exposure and then hand it over to the commercial lines department to analyze and provide the proper coverage.
As usual, if I can be of service to you, please call me, Irene Morrill, Vice President of Technical Affairs at 800.870.7091 or … BETTER YET … email me at firstname.lastname@example.org.