WHEN A "NO" ANSWER RESULTS IN NO COVERAGE

Rough Notes, Dec 2004 by Rezac, Rodney R, Middlekauff, Carol

Uncovering home-based businesses

Sitting in your office, going through a homeowners checklist with a client, you eventually ask, "Do you have a business in your home?" Your client says "no." Answering "no" to this question when the real answer is "yes" means your client could face an uncovered loss.

What that client hears when you say "business" is a full-blown business with people coming and going on a daily basis, something that looks like an office. But many business pursuits are carried out in homes that do not look at all like business enterprises.

The current homeowners form excludes most "business" exposures. The policy says "business" is "a trade, profession or occupation engaged in on a full-time, part-time or occasional basis; or any other activity engaged in for money or other compensation." This is broad. The only exceptions are:

* Volunteer activities for which your client receives reimbursement only for expenses (e.g., serving as a volunteer on a board of directors or as a mentor at a school)

* Home day care services for which no payment is received, other than the mutual exchange of such day care services

* Home day care services for a relative of an insured

* One or more activities (other than those listed above) for which no insured receives more than $2,000 in total compensation-that means the gross amount of compensation-during the 12 months immediately preceding the policy year.

Do any of your personal lines clients receive significant income from cutting grass, removing snow, fixing lawnmowers or other equipment? Build a substantial amount of furniture or crafts for sale? Raise animals for sale? Cut or style hair in the home? Sell mums raised in a backyard greenhouse? These exposures could be a concern to underwriters.

An unattached garage may be considered a business property if, for example, the owner who works for another company brings home files from the office and stores them in the garage. Or if the person uses the garage to store wood that he sells.

If your clients are selling puppies, or if they fix up old boats and re-sell them at a sizeable profit, these activities may not be covered under the homeowners policy. Maybe your client leases a room over that big unattached garage to an artist for use as a studio. It's not covered, and neither is the garage.

For an additional premium, you can attach one or more of the following endorsements (as well as a few others) to the policy (watch for requirements and exclusions):

* Home Business Insurance Coverage (HO 07 01)Adds coverage for home business property (including those other structures) and liability exposures

* Business Pursuits (HO 24 71)-Expands business pursuits liability coverage only

* Home Day Care Coverage Endorsement (HO 04 97)-Adds property and liability coverage for a home day care business operated by the insured on the residence premises

* Permitted Incidental Occupancies (Residence Premises) (HO 04 42)-Expands coverage for other structures, increases coverage for business personal property, and adds liability coverage for described business exposures at the residence premises

* Permitted Incidental Occupancies (Other Residence) (HO 24 43)-Broadens the definition of an insured location for liability coverage for the described business at another residence premises

* Special Computer Coverage (HO 04 14)-Provides coverage for computers on a "broad peril" basis (subject to some exclusions-and there is no business exclusion) instead of a named peril basis

While the Home Business Insurance Coverage endorsement may cost more than the Business Pursuits endorsement, it includes that Amway or Mary Kay inventory-and the garage it's in-as well as the business property of others (such as those files taken home from the office). Keep in mind that the Special Computer coverage changes the perils covered, but nothing else changes.

What about a CPA or architect working at home? Besides the other property and liability coverage gaps, the policy does not cover business data for this client. Business data means books of accounts, drawings, or other computer and paper records, so a fire loss could be devastating.

What about your artist client who paints in her dining room then sells those fabulous paintings for $3,000 each? And what about the supplies and paintings she has packed into a walk-in closet? Those paintings, frames and brushes are covered only up to $2,500, the amount the Special Limits of Liability section gives for personal property used principally for business on the residence premises.

What about those paintings in the back of a Land Cruiser en route to a show? They are not covered by the auto policy. Under the special limits under Coverage C on an unendorsed Homeowners policy, they're covered only up to $500.

As for that laptop computer, the policy offers up to $1,500 for "business" property that consists of electronic apparatus and accessories; but this business-use electronic apparatus, etc., is covered only while away from the premises and not in a vehicle.