In September 1985, Cody Susnik and his brother began regularly attending a day care run out of Loretta Donnelly's home.
While in Donnelly's care, Cody suffered serious injuries when another child apparently attempted to jump on him. Cody's parents sued Donnelly, claiming that she was negligent in leaving the children unsupervised.
Donnelly turned to her homeowner's insurance for coverage. Not surprisingly, the insurer argued that the incident occurred during a "business-pursuit," and, thus, was excluded by the homeowner's policy.
The court concluded that the day care was, in fact, a business, because it was (1) motivated by profit, and (2) operated on a continuous basis. Therefore, based on this two-prong test to determine what a business pursuit is, no coverage was available.
The facts, arguments and outcome in the Kansas Court of Appeals' 1989 decision in Susnik v. Western Indem. Co. are a familiar occurrence in the world of insurance claims, as providing day care services is a common home-based business. This situation is so frequent that some homeowner's insurance companies have added specific exclusions to their policies to preclude coverage for home-based day care services.
Did you pass the test?
With so many home-based businesses, courts frequently find themselves needing to apply the two-prong test to determine whether the "business pursuits" exclusion is applicable. Specifically, was the activity regular and continuous, and was the activity motivated by profit?
Some courts will take the profit motive a step further to decide whether it was a significant source of income. Other courts have held that the significance of the profit isn't necessary, just that the motivation to make one was there.
The potential applicability of the "business pursuits" exclusion is not always obvious. But these cases share a common theme: When things go wrong with the operation of a home-based business, the mishap often isn't covered by the entrepreneur's homeowner's policy.
Consider the following cautionary insurance tales for all those who dream of starting their own business and doing it from home sweet home.
(Photo: Shutterstock)
With a little help from a friend
In Fitchburg Mut. Ins. Co. v. Diamond, a 1989 New Jersey federal court decision, a friend helped the insured, who ran an antiques business from home, load an antique cupboard into a van, to take to an antiques show. The friend apparently slipped and fell on the snowy, icy walkway of the insured's home while in the process of assisting with the cupboard. The friend sued for her injuries and the claim was denied by the insurer, leaving a court to decide whether the injury arose from a business pursuit.
The court applied the two-pronged test in determining that the business pursuits exclusion was applicable. The insured had a profit motive in her antiques business, even though she made only a modest amount of money. Likewise, storing the antiques in her home and regular trips to antique shows to buy and sell her pieces satisfied the continuity or regular engagement standard.
This case clearly demonstrates the hurdle that the business pursuits exclusion presents to home-based entrepreneurs that have mishaps. Not to mention why you should always shovel your walkway, especially when you're transporting large pieces of furniture!
(Photo: Shutterstock)
Hold that tiger
A common argument made by insureds is that the activity was more like a hobby than a business. In Safeco Ins. Co. of Am. v. Hilderbrand, a decision from the U.S. Court of Appeals for the Tenth Circuit, a high school student asked to have her senior pictures taken with a tiger at the animal sanctuary on the insured's farm at which she volunteered. The young girl was attacked by the tiger during the photoshoot and died from her injuries.
The insureds argued that the animal sanctuary was more of a hobby. Given the extensive training the insureds had in handling the animals, and the consistent maintenance and care of the sanctuary, the court found that this was more of a continuous pursuit and less of a sporadic hobby. Additionally, the sanctuary was intended to generate a profit. Whether a profit was actually made was irrelevant. It only mattered that the intent was there.
(Photo: Shutterstock)
Ain't that a kick in the head?
Although babysitting and day care services are probably the most common business pursuits exclusion cases seen by the courts, cases involving the boarding of animals seem to be a close second. Housing exotic animals, like those in Hildebrand, isn't an ordinary occurrence in the United States, but boarding farm animals is, which leads to a greater potential for animal-related injuries to occur, which is what happened in the 1997 Connecticut case of Pacific Indem. Ins. Co v. Aetna Cas. & Sur. Co.
The insureds owned a stable where people could pay to have their horses housed and cared for. A woman hired to care for the horses was kicked by one of them. The insurer refused to defend and indemnify the insureds, arguing that boarding horses was a business pursuit. The court again sided with the insurer, finding that the stables were run in order to make a profit and that boarding the horses was a continuous operation.
(Photo: Shutterstock)
Who let the dogs out?
Dog-breeding cases are also commonly seen in the context of the business pursuits exclusion. In State Auto Prop. & Cas. Ins. Co. v. Raynolds, a dog handler was bitten by a dog at the home of insureds, who bred and sold dogs for profit, as well as regularly attended dog shows. The dog handler sued for personal injury and, as expected, the insurers argued that the injury was excluded because it fell under a business pursuit.
Unsurprisingly, the Supreme Court of South Carolina found that the insureds' dog breeding was a continuous operation, and it was profit-motivated. The dogs were regularly bred, showed and sold for nearly 15 years. Further, the insureds intended to make a profit from their dog breeding operation, even though a profit was never actually made. Despite not actually making a profit, the continuity and profit-motive standards were met, and thus the business pursuits exclusion applied.
(Photo: Shutterstock)
Free falling
There are exceptions to the business pursuits exclusion, which are argued by insureds to maintain coverage of an incident. In these cases, the insured often claims that the injury occurred outside the scope of the business.
Courts don't always buy this argument, as was the case in N. Sec. Ins. Co. v. Rosenthal. The insureds operated a couple's therapy retreat from their home, which included room and board for paying guests. During a breakfast buffet, a guest fell through a trapdoor leading to the laundry room. The insureds agreed that the retreat was a business, but falling through a trapdoor had no connection to its operation, and thus fell under the "non-business pursuits exception."
The Supreme Court of Vermont, however, didn't fall for it. After all, "[i]f [the court] were to adopt that logic, the business pursuits exclusion would seem to have no effect at all in any home-business case involving the condition of the premises."
(Photo: Shutterstock)
Numbers of home-based businesses growing
In 2013, Forbes reported that 52% of small businesses were home-based. In March 2016, the U.S. Census released the 2012 Survey of Business Owners, which showed that there are more than 27.5 million home-based businesses throughout the country, a nearly 500,000 increase from the 2007 report.
With the rapid growth of home-based businesses, it is unlikely that business pursuits exclusion arguments will be slowing down anytime soon. Creativity and ambition are needed when it comes to starting up a new business. Some of the greatest business ideas in history started in a person's home. But the lesson that every entrepreneur should learn from these cases is simple: Make sure the business is insured. If it isn't, then a great business idea could be over before it even begins.
Julianne Garvey is a rising 3L at Villanova Law School. She is spending the summer at White and Williams, LLP in Philadelphia as a research assistant on the forthcoming 4th Edition of General Liability Insurance Coverage – Key Issues in Every State by Randy Maniloff and Jeffrey Stempel.
© Arc, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to TMSalesOperations@arc-network.com. For more information visit Asset & Logo Licensing.