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

Where You Reside

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

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

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

Now here is the problem. What action is theinsurer to take? Unquestioningly pay the claim, or deny the loss?After all, the insureds do not actually reside in the dwelling, nordo painting, installing countertops and ceiling fans constitute thedwelling being under construction. The situation can be compoundedby the fact that in some instances the sellers are allowed toremain in the dwelling after the closing for a period of time,perhaps because their own new home's not being yet ready foroccupancy. Does this then make the home a rental property, and notan owner-occupied residence?

The insurer covers “the dwelling on the ‘residence premises’shown in the Declarations….” The homeowners policy explicitlydefines the “residence premises” as “the one-family dwelling whereyou reside; the two-, three-, or four-family dwelling where youreside in at least one of the family units … and which is shown asthe '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 dwellin for a long time; have one's residence; live (in orat).”

Clearly, our new homeowners do not reside in the home. Theyintend to reside there, but intentions are not covered under thepolicy.

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

This solution would give coverage whether the sellers wereallowed to stay in the dwelling for a period of time or not. Thenew homeowners could also take a bit longer in moving into theresidence, if, for example, the painting did not go as planned. Ofcourse, writing a dwelling fire under these circumstances can meanthat the insurer is issuing a policy on a (temporarily) vacantdwelling, 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 policyterms), which states that only the insurer can waive or changepolicy provisions, and that such waiver must be in writing to bevalid. The insurer, upon being advised that the insureds will notactually be in their new home until a date after the closing, canthen write an addendum to the effect that “it is agreed that wecover the premises shown in the declarations as the named insured’sresidence premises even though the named insured will not take upresidence therein until (X) days following the policy’s inceptiondate.”

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

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

The endorsement could then add language to the effect that “Itis agreed that if you do not reside in the residence premises bysuch-and-such a date, then in event of loss following that date wemay have the right to deny coverage for that loss.” Having theinsured sign and date the endorsement might drive home thepoint.

Alcohol, Controlled Substances, andthe Homeowners Exclusion

It is becoming common these days for parents to host prom-nightparties—the theory being that if the kids are drinking at someone'shome, they are not on the road driving while drunk. Along withthis, we must consider the increased use of drugs—both illegal andprescription. What are the consequences of alcohol or drug use byothers for the homeowner? Is there any coverage? And, with statesjumping on the “medical marijuana” bandwagon, what are theimplications for a homeowner who grows his or her own?

First, the alcohol question. Unfortunately, this usually arisesin connection with use of a motor vehicle, as when an intoxicatedperson (often a minor) consumes alcohol given to him or her by afamily member or a friend, gets into a car, and crashes. In theseinstances the insurer is often on safe ground denying the claim onthe basis of the motor vehicle liability exclusion (a vehicleregistered for use on public roads or property, for example).

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

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

The court agreed that the insurer had no duty to defend thewrongful death suit, citing the exclusion for bodily injury arisingout of the use of a motor vehicle. The court saw no “independentact breaking the causal link” between the accident and the death.Further, said the court, the exclusion for bodily injury intendedby, or which could reasonably be expected to result from, theintentional or criminal acts or omissions of any insured personalso applied. Hawaii statute made it illegal to serve alcohol to aminor. 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 ofAmerican Modern Home Insurance Company v. Corra, 671S.E.2d 802 (WVA, 2008). The insured’s daughter invited severalfriends to a party at her father's home. He was present at thetime, although not actually in the house. One of the guests helpedherself to a beer from the refrigerator, and then went with a fakeID to purchase more. After consuming several cans of beer, shedrove off in a car with three friends. She was involved in an autoaccident resulting in one friend seriously injured, and twodead.

The claim against the insured was denied by his insurer on thegrounds that giving alcohol (or at least turning a blind eye to itsconsumption) to minors was not an occurrence as defined by thepolicy. That is, the occurrence was not “an accident.” Thehomeowner knowingly permitted underage adults to consume alcohol onhis premises; the court, therefore, did not need to go further toevaluate the motor vehicle or intentional actexclusions.

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

The insured supplied alcohol to his minor nephew, who then, withthe insured’s permission, operated the insured’s ATV. He took thevehicle off the insured’s property, fell off several times, andthen crashed the vehicle. He sued his uncle for his injuries. Inthis case, the court held that the reasonable expectations of theinsured were that “insurers are generally obligated to defend theirinsureds on social host claims. The critical question is whetherthe insurer can avoid that obligation because a separate excludedrisk—the operation of an all-terrain vehicle (ATV)—constitutes anadditional cause of the injury.

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

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

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

In reaching its decision, the court said it did not go to theextreme of the California supreme court in State Farm MutualAutomobile Insurance Co. v. Partridge, 514 P. 2d 123 (Cal.1973), which essentially applied concurrent causation to liabilitycoverage—that is, where two risks constituted concurrent proximatecauses of an accident, the insurer is liable so long as one of thecauses is covered by the policy. The policy was, however, silentabout concurrent causation and that made the motor vehicleexclusion ambiguous.

However, lest one is left with the impression that the SalemGroup court was essentially finding coverage for the insured,that is not the case. The court said, “We hold not that the insurermay ultimately be liable under the policy, but only that it musthonor its duty to defend.” We should add that, in this case, theexclusion for intentional acts reasonably seen to result in bodilyinjury or property damage was not brought into this case.

Next, we move on to drugs and the homeowners exclusion forcontrolled substances. Bodily injury and property damage “arisingout of the use, sale, manufacture, delivery, transfer or possessionby any person of a Controlled Substance as defined by the FederalFood 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 ofprescription drugs by a person following the lawful orders of alicensed health care professional” (ISO HO 00 03 05 11, exclusion8).

It appears that the exclusion’s exception must be read to applyonly to an insured’s use of prescription drugs. For example, if aninsured's use of a prescription drug causes him or her to have areaction, step completely out of character, and throw rocks throughthe neighbor’s windows that action would be covered. With thenumber 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 asto how broadly the exclusion might be applied. In MassachusettsProperty Insurance Underwriting Association v. Gallagher, 911N.E.2d 808 (Mass. App. 2009), a suit was filed against the insuredalleging that he negligently left a prescription drug in a placeaccessible to a guest, and the guest died from an overdose.

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

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

The immediate cause of the boy's death was his excluded use ofthe drug, and “whatever causal contribution [the insured’s] use mayhave 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 againstthe insured, alleging that she was injured when she overdosed onalcohol and drugs provided by the insured at a party at hisparents’ home (they were out of town), and that he failed to getprompt help for her. This case illustrates the necessity ofconsidering all the facts in a case before reaching a verdict.

At first blush, a denial of coverage would appear to beappropriate, since it became clear that illegal drugs wereinvolved. The insured, age 20, hosted a party at his parents’ housewhile they were out of town. One of the party guests overdosed onalcohol and drugs. The next afternoon, when the host awoke, hefound her passed out on the porch. He admitted he called her sisterto pick her up and take her to the hospital since he did not wanthis parents to find out about the party. When the sister did notcome, he called a rescue service. The insurer denied coverage forher injuries, citing the exclusion for bodily injury arising out ofthe use, transfer (the host provided beer and Ultracet, aprescription medication, to his guests).

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

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

The insured appealed, and the case was then heard by the NewJersey Supreme Court. The court carefully reviewed all evidence andarguments. The court reiterated the oft-stated principle thatexclusions are to be narrowly construed, and the burden is on theinsurer to bring the case within the exclusion. The court alsonoted that “courts are often required to evaluate whether theinsurer owes its insured a duty to defend in advance of aconclusive decision about coverage.” The court must then comparethe allegations set forth with the language of the insurance policy(remember, the duty to defend is broader than the duty toindemnify).

The court noted that it had rejected, withregard to property coverage cases, that a loss would be covered ifone cause was covered even though another cause wasexcluded—particularly if it was impossible to separate the coveredfrom the non-covered cause. The court also noted that it hadaddressed a concurrent causation third-party claim in the case ofSalem Group, discussed previously.

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

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

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

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