When it comes to interpreting coverage for homeowners insurance policies, the courts unanimously agree on certain things—for example, sexual molestation of a minor by an adult, no matter what the motive, reason, or expressed intent, is not covered as a matter of public policy. But there are still many areas of dispute regarding what is covered and what is not.

Where You Reside

The recent uptick in the number of foreclosures has brought this particular issue to the forefront of discussion in the insurance community. Because of the number of vacant properties for sale, people who might not have thought about buying a new home are jumping into the “joys” of homeownership.

Wherein lies the problem? In many instances the insureds bring a new homeowners policy to closing with the effective date being the same date as the closing, as the mortgagee demands. Then they decide that a fresh coat of paint, new countertops, and ceiling fans should be in place before they actually move in (it should be noted that the author pleads guilty as charged—closing on July 14 and actually moving in on August 1). They estimate that this work should take no more than 15 days at the outset.

So, again, what is the problem? A week into the 15 days, a severe thunderstorm occurs. Lightning hits the home's chimney, causing a fire which burns a substantial portion of the dwelling before being contained.

Now here is the problem. What action is the insurer to take? Unquestioningly pay the claim, or deny the loss? After all, the insureds do not actually reside in the dwelling, nor do painting, installing countertops and ceiling fans constitute the dwelling being under construction. The situation can be compounded by the fact that in some instances the sellers are allowed to remain in the dwelling after the closing for a period of time, perhaps because their own new home's not being yet ready for occupancy. Does this then make the home a rental property, and not an owner-occupied residence?

The insurer covers “the dwelling on the ‘residence premises’ shown in the Declarations….” The homeowners policy explicitly defines the “residence premises” as “the one-family dwelling where you reside; the two-, three-, or four-family dwelling where you reside in at least one of the family units … and which is shown as the 'residence premises' in the Declarations.”

According to Webster's New World College Dictionary, “residence” means “the place in which a person or thing resides; dwelling place; abode, esp. a house.” And “reside” means “to dwell in for a long time; have one's residence; live (in or at).”

Clearly, our new homeowners do not reside in the home. They intend to reside there, but intentions are not covered under the policy.

At present, there are three solutions, none of which appears entirely satisfactory. The first is to write a dwelling fire policy for the closing, which should satisfy the mortgagee's demands. The policy would then need to be cancelled and rewritten as a homeowners policy when the new owners moved in.

This solution would give coverage whether the sellers were allowed to stay in the dwelling for a period of time or not. The new homeowners could also take a bit longer in moving into the residence, if, for example, the painting did not go as planned. Of course, writing a dwelling fire under these circumstances can mean that the insurer is issuing a policy on a (temporarily) vacant dwelling, which is certainly not an underwriting delight.

The next option is to look to the homeowners policy conditions (ISO Sections I and II condition B., AAIS Policy Conditions 3). This is the waiver or change of policy provisions (AAIS uses policy terms), which states that only the insurer can waive or change policy provisions, and that such waiver must be in writing to be valid. The insurer, upon being advised that the insureds will not actually be in their new home until a date after the closing, can then write an addendum to the effect that “it is agreed that we cover the premises shown in the declarations as the named insured’s residence premises even though the named insured will not take up residence therein until (X) days following the policy’s inception date.”

Of course, the named insured would then be responsible for making sure he or she actually resided in the residence premises on the scheduled date.

The third option would be for ISO and AAIS to develop an endorsement with wording that would also convey the same meaning as the change of policy provisions above. It would be the agent’s (or the insurer’s) responsibility to discuss the endorsement with the prospective insured who phones to request a homeowners policy “because I'm going to close on a new home.” At that point the closing and the prospective moving date could be ascertained.

The endorsement could then add language to the effect that “It is agreed that if you do not reside in the residence premises by such-and-such a date, then in event of loss following that date we may have the right to deny coverage for that loss.” Having the insured sign and date the endorsement might drive home the point.

Alcohol, Controlled Substances, and the Homeowners Exclusion

It is becoming common these days for parents to host prom-night parties—the theory being that if the kids are drinking at someone's home, they are not on the road driving while drunk. Along with this, we must consider the increased use of drugs—both illegal and prescription. What are the consequences of alcohol or drug use by others for the homeowner? Is there any coverage? And, with states jumping on the “medical marijuana” bandwagon, what are the implications for a homeowner who grows his or her own?

First, the alcohol question. Unfortunately, this usually arises in connection with use of a motor vehicle, as when an intoxicated person (often a minor) consumes alcohol given to him or her by a family member or a friend, gets into a car, and crashes. In these instances the insurer is often on safe ground denying the claim on the basis of the motor vehicle liability exclusion (a vehicle registered for use on public roads or property, for example).

Now, giving alcohol to a minor might seem to be unconnected with the actual use of a motor vehicle—at least as far as the insured is concerned—but many courts have ruled the exclusion applies. And, if the link appears tenuous, we might look at a Hawaii case to see where the courts find the connection.

The case is Allstate Insurance Company v. Miller, F. Supp. 2d 1128 (2010). Here, two minors consumed alcohol at the insured’s home. Following this, the minor driver had an accident and his passenger died.

The court agreed that the insurer had no duty to defend the wrongful death suit, citing the exclusion for bodily injury arising out of the use of a motor vehicle. The court saw no “independent act breaking the causal link” between the accident and the death. Further, said the court, the exclusion for bodily injury intended by, or which could reasonably be expected to result from, the intentional or criminal acts or omissions of any insured person also applied. Hawaii statute made it illegal to serve alcohol to a minor. Even though the insured was not charged criminally, nonetheless the alcohol was consumed on the insured's premises, which were in his control.

A slightly different approach was taken in the case of American Modern Home Insurance Company v. Corra, 671 S.E.2d 802 (WVA, 2008). The insured’s daughter invited several friends to a party at her father's home. He was present at the time, although not actually in the house. One of the guests helped herself to a beer from the refrigerator, and then went with a fake ID to purchase more. After consuming several cans of beer, she drove off in a car with three friends. She was involved in an auto accident resulting in one friend seriously injured, and two dead.

The claim against the insured was denied by his insurer on the grounds that giving alcohol (or at least turning a blind eye to its consumption) to minors was not an occurrence as defined by the policy. That is, the occurrence was not “an accident.” The homeowner knowingly permitted underage adults to consume alcohol on his premises; the court, therefore, did not need to go further to evaluate the motor vehicle or intentional act exclusions.

Sounds simple and straightforward enough, but is it? We turn to the case of Salem Group v. Oliver, 607 A.2d 138 (NJ 1992) (We should note at the outset that this case represents the New Jersey jurisdiction; the outcome is markedly different from the similar case in Hawaii, Allstate Insurance Company v. Miller, discussed previously).

The insured supplied alcohol to his minor nephew, who then, with the insured’s permission, operated the insured’s ATV. He took the vehicle off the insured’s property, fell off several times, and then crashed the vehicle. He sued his uncle for his injuries. In this case, the court held that the reasonable expectations of the insured were that “insurers are generally obligated to defend their insureds on social host claims. The critical question is whether the insurer can avoid that obligation because a separate excluded risk—the operation of an all-terrain vehicle (ATV)—constitutes an additional cause of the injury.

“We find that the insurer remains obligated to defend the covered risk. It may not avoid that obligation simply because the operation of an ATV constitutes an additional cause of the injury.”

The court also pointed out that had the nephew remained on the insured’s property, the injury would have been covered regardless of the alcohol. In differentiating other cases where the motor vehicle exclusion had applied to eliminate coverage, the court said that serving alcohol did not depend on the ownership of a motor vehicle.

Further, one count of the complaint alleged serving alcohol, which was not excluded. (Again, note the difference between the Allstate case: Hawaii making it illegal to serve alcohol to minors. The Salem Group case does not reference any such statute.)

In reaching its decision, the court said it did not go to the extreme of the California supreme court in State Farm Mutual Automobile Insurance Co. v. Partridge, 514 P. 2d 123 (Cal. 1973), which essentially applied concurrent causation to liability coverage—that is, where two risks constituted concurrent proximate causes of an accident, the insurer is liable so long as one of the causes is covered by the policy. The policy was, however, silent about concurrent causation and that made the motor vehicle exclusion ambiguous.

However, lest one is left with the impression that the Salem Group court was essentially finding coverage for the insured, that is not the case. The court said, “We hold not that the insurer may ultimately be liable under the policy, but only that it must honor its duty to defend.” We should add that, in this case, the exclusion for intentional acts reasonably seen to result in bodily injury or property damage was not brought into this case.

Next, we move on to drugs and the homeowners exclusion for controlled substances. Bodily injury and property damage “arising out of the use, sale, manufacture, delivery, transfer or possession by any person of a Controlled Substance as defined by the Federal Food and Drug Law at 21 U.S.C.A. Section 811 and 812 are excluded. Controlled Substances include but are not limited to cocaine, LSD, marijuana and all narcotic drugs.”

The exclusion provides an exception for “the legitimate use of prescription drugs by a person following the lawful orders of a licensed health care professional” (ISO HO 00 03 05 11, exclusion 8).

It appears that the exclusion’s exception must be read to apply only to an insured’s use of prescription drugs. For example, if an insured's use of a prescription drug causes him or her to have a reaction, step completely out of character, and throw rocks through the neighbor’s windows that action would be covered. With the number of states legalizing medical marijuana for personal use, this exclusion’s exception is one that bears watching.

A recent case involving a prescription drug is enlightening as to how broadly the exclusion might be applied. In Massachusetts Property Insurance Underwriting Association v. Gallagher, 911 N.E.2d 808 (Mass. App. 2009), a suit was filed against the insured alleging that he negligently left a prescription drug in a place accessible to a guest, and the guest died from an overdose.

The 18-year old and his mother were spending the night at the insured’s (apparently a fairly regular occurrence, since the mother argued that they were members of the insured’s household, and therefore her son’s suicide should be covered). The argument presented by the mother was that her son’s death “arose out of” the insured's legitimate prescription use of the drug (propoxyphene, included on the list of controlled substances) that caused her son’s death, in the sense that the drug would not have been available to the boy without the insured’s use.

The court admitted “the argument is not without persuasive force,” but said the argument was flawed in that “it overlooks the separate and independent application of the exclusion to McMaster’s [the homeowner] own use of the [drug]…. [T]he fact remains that McMaster's own use of the [drug] clearly does not fall within the exception.”

The immediate cause of the boy's death was his excluded use of the drug, and “whatever causal contribution [the insured’s] use may have furnished was decidedly more remote.”

We next turn to the case of Flomerfelt v. Cardiello, 997 A.2d 991 (NJ 2010). Here, the plaintiff brought action against the insured, alleging that she was injured when she overdosed on alcohol and drugs provided by the insured at a party at his parents’ home (they were out of town), and that he failed to get prompt help for her. This case illustrates the necessity of considering all the facts in a case before reaching a verdict.

At first blush, a denial of coverage would appear to be appropriate, since it became clear that illegal drugs were involved. The insured, age 20, hosted a party at his parents’ house while they were out of town. One of the party guests overdosed on alcohol and drugs. The next afternoon, when the host awoke, he found her passed out on the porch. He admitted he called her sister to pick her up and take her to the hospital since he did not want his parents to find out about the party. When the sister did not come, he called a rescue service. The insurer denied coverage for her injuries, citing the exclusion for bodily injury arising out of the use, transfer (the host provided beer and Ultracet, a prescription medication, to his guests).

The trial court agreed that the exclusion did not apply, since the plaintiff had no recollection of what she might have drunk or ingested either before or during the party. And, because her injuries might have resulted from her own actions prior to the party, the exclusion did not apply. Further, failing to summon help is not an excluded action.

The insurer appealed, holding that the injuries were tied at least in part to the illegal drugs at the party (as confirmed by a toxicology report), and the trial verdict was overturned.

The insured appealed, and the case was then heard by the New Jersey Supreme Court. The court carefully reviewed all evidence and arguments. The court reiterated the oft-stated principle that exclusions are to be narrowly construed, and the burden is on the insurer to bring the case within the exclusion. The court also noted that “courts are often required to evaluate whether the insurer owes its insured a duty to defend in advance of a conclusive decision about coverage.” The court must then compare the allegations set forth with the language of the insurance policy (remember, the duty to defend is broader than the duty to indemnify).

The court noted that it had rejected, with regard to property coverage cases, that a loss would be covered if one cause was covered even though another cause was excluded—particularly if it was impossible to separate the covered from the non-covered cause. The court also noted that it had addressed a concurrent causation third-party claim in the case of Salem Group, discussed previously.

The court stated, though, that in the Salem Group decision, it did not necessarily represent concurrent causation, but rather a sequence of causes. And when one cause was covered and the other not, a duty to defend was owed. The duty to defend continued so long as there was a potentially covered claim.

The court said, “In evaluating the duty to defend, we can lay the complaint and the policy side by side and see that in this dispute some theories of liability would be covered and others would not. If, for example, the finder of fact were to conclude that alcohol ingestion, either in the context of the social host serving plaintiff when she was visibly intoxicated…or in combination with a delay in summoning aid, was the cause for the injuries, or set the chain of events in motion, and that there was not a substantial nexus between drugs at the party and the injuries, the claim would fall within the coverage of the policy and would not be barred by the exclusion.

“If the finder of fact were to conclude that plaintiff's injuries were caused by use of drugs before she arrived at the party, by genetic predisposition, or by long-term drug use such that the injuries did not ‘originate in,’ ‘grow out of’ or have a ‘substantial nexus to’ [all terms used to describe ‘arising out of’] her use of drugs at the party, the claim would also be covered. Whether any of those possibilities is the likeliest outcome is of no consequence, because our traditional analysis of the duty to defend requires that Pennsylvania General provide a defense.”

The court was not saying that the allegations should be covered, but rather that the insurer owed a defense. The court was not unsympathetic to the insurer in this case, since it noted that the insurer had several options: it could defend under a reservation or rights, decline to defend but reimburse the insured if the finder of fact found the injury did not arise out of drug use at the party, or litigate the coverage issue in advance of a trial on the plaintiff's claim.

Special Reports /

Alcohol, Drugs & the Meaning of 'Reside': Homeowners Coverage Disputes in the Courts

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