Analysis

 The HO 07 01 amends the homeowners policy it is attached to by providing additional coverages for the home-based business but also by amending definitions found in the homeowners policy. The definition of "business" is enlarged to encompass the "trade, profession, occupation or activity" described in the schedule and conducted "at or from" the insured residence premises.

 The insured should therefore be aware that any change in the insured business—whether type of business or location—should be submitted to the insurer and a new declarations page reflecting the change should be issued. 

 The description of the ownership of the insured business can be misleading. According to the definition of "business," the business must be owned by the named insured or an organization made up of resident relatives. However, in definition 5.c., a household resident who is not a relative, but is a partner, member, or stockholder of the insured business, qualifies as an insured. In the homeowners program, a resident who is not a relative may be given "insured" status by endorsement (Other Members of Your Household, HO 04 58 05 11) for both property and liability coverage.

 The homeowners definition of "insured" is amended with respect to the insured business. In addition to the named insured ("you"), resident relatives are insured, but only if they are partners, members, or stockholders in the business. Remember that the definition is amended only with respect to the insured business, so that a resident relative who is not a partner, member, or stockholder is still an insured under the homeowners definition. But if a resident relative who is not a partner, member, or stockholder in the business performs some business function resulting in bodily injury or property damage, that relative is not an insured for business coverage purposes.

 12. Additional Definitions

 Analysis

 A business may be operating at a net loss and still sustain a business income loss. If a negative net loss is not offset by the continuing operating expenses, the insured may collect. If the insured was operating with a net loss of $500, and continuing operating expenses were $2,000, then the insured could collect $1,500 (-$500 + $2,000 = $1,500). But say the insured is operating with a negative net loss of -$3,000, and continuing operating expenses are $2,000. The sum of (-$3,000 + $2,000 = -$1,000), so the insured would not collect following a loss.

 Although the form provides coverage for loss of business income resulting from a covered loss, there is no coverage for increased income that might have resulted because of favorable conditions caused by the peril. Say, for example, the insured ran a small upholstery shop.

 Although her shop was damaged by a tornado, her business probably would have increased substantially because of the number of persons wishing to have furniture restored following the same tornado. Business income coverage will not respond to this situation.

 c.  " Coverage Territory " means:

 Analysis

 While underlying homeowners personal property coverage (with the exception of the HO 00 08) applies anywhere in the world, this is not the case with the home business endorsement. As will be discussed in the Conditions section, coverage is limited for business property.

 d.  "Extra Expense" means:

 Analysis

 Extra expense is the amount incurred by the insured to minimize the suspension of business and continue operations. If operations cannot be continued, then the extra expense may be the amount the insured necessarily spends to discontinue his business. Extra expense may also be expense incurred to repair or replace any business property but only to the extent this reduces the amount of loss otherwise payable under business income or extra expense coverage.

The coverage may be used for repairing or replacing business property—if, perhaps, property coverage is inadequate. However, money so expended must serve to reduce the business income loss. For example, suppose the insured uses this coverage to replace desks and computer equipment because property coverage was inadequate. He spends $6,000, and reduces the business income loss by $2,500. Therefore, $2,500 of the $6,000 is payable as extra expense.

 f.   "Leased worker" means a person leased to you by a labor leasing firm under an agreement between you and the labor leasing firm, to perform duties related to the conduct of your "business". "Leased worker" does not include a "temporary worker".

 Analysis

 A worker leased to the insured becomes, for coverage and exclusionary purposes, an employee. A temporary worker does not. Although not further defined, the presence of a "lease" implies a long-term contractual arrangement for the worker's services.

 h.  "Operations" means your "business" activities occurring at the "residence premises".

 Analysis

 Although there is a seventy-two hour "time deductible" for business income coverage, there is no similar deductible for extra expense coverage. So, for example, the money the insured must spend to minimize a business income loss—perhaps renting a new office when her home office is damaged—is covered immediately following the covered direct physical loss or damage to the insured business at the residence premises.

 The period of restoration, which is not limited by the expiration of the policy, is the time following a direct physical loss resulting from a covered peril. It ends on the earlier of the date when the property at the residence premises should be repaired, rebuilt, or restored, of the date when business is actually resumed on the residence premises.

 Business income coverage will not respond to a delay because of the enforcement of any ordinance or law either regulating the repair or replacement of the damaged property, or governing testing for or removing pollutants.

 n.  "Temporary worker" means a person who is furnished to you to:

 Analysis

 It is important to define a "temporary worker," since, by definition, such workers are not considered to be "employees" and are therefore not insureds with respect to performing duties related to the insured's business. A leased worker, on the other hand, by definition is considered to be an "employee" and therefore enjoys insured status. (For additional discussion, see ISO Home Business Insurance Coverage—Liability.)

 It is not uncommon in a small home business to pay a friendly neighbor to work on a short-term basis. It must be remembered, however, that such persons will have no coverage under the policy for any acts carried out that are within the scope of or related to the insured business.

 o.  "Valuable papers and records":

 Analysis

 Only written records or documents are covered; electronic data is not considered for purposes of the coverage for valuable papers and records. However, the loss payment condition for valuable papers and records specifically mentions those that exist on "electronic or magnetic media," which makes this provision ambiguous.

 Property Coverages

 The home based business, to be eligible, must be operated from the insured dwelling (or apartment or unit) or an other structure on the residence premises. There are no exclusions pertaining to incidental use of the dwelling for business purposes; there are, however, exclusions applicable to other structures. The home-based business coverage form, therefore, modifies coverage B.

 B.  Coverage B — Other Structures

 Analysis

 The unendorsed homeowners form precludes coverage for an other structure "from which any 'business' is conducted, and for other structures used "to store 'business' property" unless the "business" property is solely owned by an insured. When a home business is insured by attaching the HO 07 01, coverage is given to the "other structure" as long as the other structure is described on the home business schedule and a limit of liability assigned.

 Therefore, the insured may conduct the insured business from the other structure, or may use it to store business property that he does not solely own (such as leased property), and coverage will apply.

 C.  Coverage C — Personal Property

 Analysis

 The home business insurance coverage form amends the provisions of the underlying homeowners form. Adding the HO 07 01 extends coverage to property of others in the insured's care for business purposes. For example, if a fire on the insured premises damages a sofa the insured is reupholstering, the sofa is covered as property of others in the insured's care. (Remember, the underlying coverage C perils insured against are those that also apply to property covered under this endorsement.)

 Certain of the special limits of liability for certain classes of property are amended. Instead of the homeowners limit of $200 for money and like property, the HO 07 01 changes the amount to $1,000 for this category. The limit for $1,500 on securities, accounts, deeds, and personal records, which includes the cost to research and restore information from this lost or damaged material, is changed so that the limit does not apply to research or restore information pertaining to the insured business. (That business coverage is subject to a separate limit of liability, discussed below.) The limit of $1,500 on property away from the residence premises and used primarily for business is changed to $5,000. (This limit may be increased to $10,000 by indicating the new amount on the home business insurance schedule.) However, this limit does not apply to adaptable electronic apparatus as described in categories j. and k. (See ISO Homeowners Section I, for a description and discussion.)

 Arguably the most important change to the special limits for certain classes of property, however, is the deletion of category h., property on the residence premises used primarily for business purposes. This allows the full coverage C limit of liability to be applied to this property. The insured must therefore take care in selecting coverage since a total loss could mean that either personal or business property can be replaced, but not both.

 Finally, "contraband, or property in the course of illegal transportation or trade" is added to the homeowners list of property not covered.

 Additional Coverages

 E. Additional Coverages

 Analysis

 The homeowners additional coverage 3. for trees, shrubs, and other plants is amended so that the exclusion for this type of property grown for business purposes is deleted. However, since other provisions of the policy apply, only loss caused by fire or lightning, explosion, riot or civil commotion, aircraft, vehicles (not owned or operated by a resident of the residence premises), vandalism or malicious mischief, or theft is covered. The 5 percent of the limit of liability that applies to the dwelling applies to this coverage, as does the limit of $500 for any one tree, shrub, or plant.

 Additional coverage 6. for credit card, forgery and counterfeit money, etc., is also amended. The exclusion of loss arising out of business use does not apply, and the limit of coverage is increased to $1,000.

 13. The following Additional Coverages are added:

 Analysis

 The HO 07 01 adds coverages not found in the underlying homeowners policy: coverage for accounts receivable. The records must first sustain a loss caused by a peril insured against. For example, if the endorsement is attached to an HO 00 03, then the coverage C named perils apply. (Some of the homeowners exclusions do not apply to this coverage, however, as will be discussed.) The coverage, which is an additional amount of insurance, is limited to $5,000 for accounts receivable on the residence premises and $2,500 for accounts receivable away from the residence premises. The coverage will pay amounts the insured is unable to collect because of destruction of the records; interest on any loan the insured must obtain to offset the uncollected amounts pending the insurer's payment; collection expenses in excess of normal collection expenses; and other reasonable expenses incurred to re-establish the records.

 b.  Valuable Papers And Records

 Analysis

 The insurer will pay up to $2,500 for valuable papers and records lost or damaged by a peril insured against. The amount includes the cost to research any lost information.

 Certain exclusions apply. Property held as samples or for delivery following a sale, or held in storage away from the residence premises is not covered. Few of the underlying homeowners exclusions apply to this coverage, although some exclusions not in the homeowners are added. Remember, the peril insured against that triggers coverage must be a peril insured against in the underlying homeowners policy.

 c.  "Business Income"

 Analysis

 This is the first of the coverages that apply to loss of revenue, or to the extra expenses the insured business generates, following a covered loss. Business income is the net income (net profit or loss before income taxes) plus continuing normal operating expenses, including payroll, that is lost because of suspension of operations resulting from a covered loss. Business income does not include prospective net income based on favorable conditions. For example, if because of a covered windstorm loss the insured now owns the only remaining small appliance repair shop in town, the anticipated increase in business is not covered.

 The HO 07 01 provides coverage for actual loss of business income sustained because of the suspension of operations during the period of restoration following loss caused by a peril insured against. These are the perils insured against on the underlying homeowners forms. For example, flood is specifically excluded, so if a flood damages the insured premises and results in a loss of business income, there is no coverage. But the loss need not be to business property; a covered loss to any property at the residence premises that causes an interruption will trigger coverage.  

   Coverage will not begin until seventy-two hours following the direct physical loss. The loss or damage must occur to property at the "residence premises," although business personal property in the open or in a motor vehicle, if within 100 feet of the site at which the residence premises is located, is considered to be on the "residence premises" for coverage purposes. So, for example, if the insured has business personal property stored at a neighbor's, and the property is destroyed by fire, there is no coverage for loss of business income unless the property happens to be in the open within 100 feet, or in a motor vehicle located within 100 feet, of the residence premises.

 There are two limitations of coverage. The first is that the business income loss must be sustained during the period of restoration (see Definitions); and the second is that the loss must occur within twelve consecutive months following the date of direct physical loss or damage. Payment is not limited to the expiration of the policy, although the trigger for coverage must occur during the policy period.

 Coverage for "ordinary payroll expenses" ceases following sixty days. These are expenses for workers who may easily be replaced. The insured business would try to retain officers and managers, so those salaries  (as continuing operating expenses) are covered. Salaries for employees who are under contract are covered, since presumably suspension of operations does not constitute a reason to void a contract.

 d.  Extended "Business Income"

 Analysis

 Extended business income coverage is included in the HO 07 01. This coverage extends business income after the date the property (except for finished stock) is actually repaired, replaced, or rebuilt, and operations are resumed. The property can be repaired, replaced, or rebuilt, and the operations resume at a different date. Once both occur—the rebuilding or replacing are complete and operations resume—then the coverage clock begins to tick. Payment is available up to thirty days or until the business income equals the amount that would have existed had no direct physical loss or damage occurred, whichever is earlier. This coverage gives the insured breathing space to bring operations back to their preloss condition. It is an additional amount of insurance. No deductible applies to the coverage.

 e.  "Extra Expense"

 Analysis

 The definition of "extra expense" includes those additional expenses incurred to minimize the business suspension and continue operations or to minimize the suspension and discontinue operations. The expenses must be "necessary"; for example, expense to locate a temporary office, install a phone line, or notify customers that the business has been forced to close. Expenses deemed "unnecessary"—for example, expense to purchase decorations for the temporary office—might not be reimbursed.

 The definition of "extra expense" also includes reimbursement for repairing or replacing any business property or replacing or restoring information on valuable papers and records, but only to the extent this expenditure serves to decrease the business income amount of loss.

Say, for example, the insured sustains a covered loss but does not have adequate coverage C to apply to both personal and business personal property. The insured may use extra expense to repair or replace the business personal property (perhaps buying new office furniture for a cost of $3,000). But the purchase must reduce the business income loss. So, if the business income loss would have been $12,000, but purchasing the furniture reduces it by $2,000, the $2,000 is reimbursable as extra expense.

 This coverage is an additional amount of insurance. No deductible applies. However, there are additional exclusions.

 f.   Civil Authority Prohibits Use

 Analysis

 If the insured is unable to access the residence premises because of action of a civil authority, then, following a seventy-two hour time deductible, up to three consecutive weeks' business income coverage is available. Extra expense coverage begins immediately after the time of the action and ends the later of three consecutive weeks after the time of the action or when the business income coverage ends.

 The action must be the result of a covered cause of loss. For example, if a tornado levels several buildings around the residence premises and civil authority prohibits access to the premises, then there is coverage. But if there is a flood (an excluded cause of loss) that causes access to be blocked, then there is no coverage.

 Section I Exclusions

 The ISO home business insurance coverage form is designed to be attached to an underlying homeowners form. Therefore, the exclusions discussed are in addition to those in the homeowners form. They do not replace the homeowners section I exclusions. 

 10. The following exclusions are added. This is Exclusion A.10. in Forms HO 00 03 and HO 00 05:

 Analysis

 There is no coverage under the HO 07 01 for employee dishonesty, nor is coverage available. Dishonest or criminal acts of the insured or anyone with an interest in the property that result in loss are not covered. There are two exceptions: the first is that acts of destruction by employees are covered, but not acts of theft by employees. For example, if a disgruntled employee breaks into the insured business at night, steals some business property, and vandalizes walls and furniture, the vandalism is covered but not the theft. The second exception is that there is coverage if accounts receivable or valuable papers and records are the subject of criminal or dishonest acts by a "carrier for hire."

 b.  False Pretense

 Analysis

 There is no coverage for loss resulting from voluntarily parting with property. For example, if an employee gives a reupholstered sofa to someone pretending to be its owner, there is no coverage for the loss.

 c.  "Business Income" And "Extra Expense"

 Analysis

 This exclusion applies specifically to the coverages for business income and extra expense. Coverage is precluded for any extra expense or increase in business income loss resulting from action of strikers or other persons. Note, though, the action of the strikers must occur at the location of the repair, rebuilding, or replacement. For example, if the insured business owner is having repairs made to the insured dwelling following a covered loss, and a strike occurs at the contractor's office, it will not affect coverage.

 There is no coverage for loss of business income resulting from a lapse or cancellation of a license, lease, or contract unless the suspension, lapse, or cancellation is the result of the suspension of operations. For example, a covered loss results in a two month long period of restoration. The insured was contractually obligated to supply crafts to a shop each month. Because of the loss, the contract is cancelled. Business income is therefore payable for two months but not for what would have been the life of the contract.

 Other consequential loss, such as loss of market following a covered direct physical loss, is excluded.    

 d.  Accounts Receivable And "Valuable Papers And Records"

 Analysis

 Although the underlying homeowners exclusions apply to the HO 07 01, the only homeowners section I exclusions that apply to the additional coverages of accounts receivable and valuable papers and records are neglect, war, nuclear hazard, and intentional loss. Therefore, loss resulting from earth movement, water damage, or power failure is covered. For example, if a flood damages valuable papers and records, the resulting loss is covered. (Other exclusions—those in the HO 07 01—apply and are discussed later.. Additionally, the exclusions of dishonesty and false pretense already discussed continue to apply.)

 Loss to accounts receivable or valuable papers and records resulting from electric or magnetic disturbance, injury, or erasure of electronic recordings caused by faulty programming or faulty installation or maintenance of data processing equipment is not covered. Direct physical loss or damage caused by fire or lightning is covered. Loss or damage to contraband or property in the course of illegal transportation or trade is not covered.

 Certain exclusions, in addition to those already noted, apply only to valuable papers and records coverage. These are loss resulting from errors and omissions in processing or copying (loss or damage caused by resulting fire or explosion are covered), or wear and tear, deterioration, or latent defect. Latent defect is generally held to be any quality within something that causes it to destroy itself.

 Certain exclusions apply only to accounts receivable coverage, in addition to those already discussed (neglect, war, nuclear hazard, intentional loss, false pretense, and dishonesty). These are for loss or damage caused by or resulting from actions taken to conceal wrongful giving, taking, or withholding of money, securities, or other property. The exclusion applies only to the extent of the wrongful giving, taking, or withholding, so that other accounts receivable are not affected by the exclusion.

 Loss caused by or resulting from bookkeeping, accounting, or billing errors is not covered. Any loss requiring an audit or inventory as proof of its existence is not covered, although, of course, an audit or inventory may be used to further document the extent of a loss.

 Section I Conditions

 As was the case with section I exclusions, the home business insurance coverage form adds conditions to those in the underlying homeowners policy.

 J.   Loss Payment

 Analysis

The loss settlement provision governing property of others in the insured's care is settled on an actual cash value basis, even if the insured has added replacement cost coverage for personal property (HO 04 90 10 00 ). For example, if a sofa is left with the insured to be reupholstered and it burns in a covered fire, the customer's loss is settled on an actual cash value basis. If the sofa has been finished but not yet returned to the customer, the cost of the new fabric and labor is taken into account.

 2.  "Valuable Papers And Records"

 Analysis

 A covered loss to valuable papers and records is settled on the basis of the cost of blank materials for reproducing the records plus the cost to transcribe or copy the records. However, this provision applies only to those papers and records that are not replaced or restored. Remember, there is up to $2,500 additional coverage for direct physical loss to such property, including cost to research lost information when duplicates do not exist.

 An ambiguity exists between this loss settlement provision and the definition of "valuable papers and records." If, by definition, valuable papers and records do not include converted data, then how can the insurer determine the value of "'valuable papers and records', including those which exist on electronic or magnetic media"? There is some loss of business income coverage for direct physical loss to electronic media and records; however, the intent of this provision remains ambiguous.

 3.  Accounts Receivable

 Analysis

If the insured is unable to accurately establish the value of the lost or damaged accounts receivable, the insurer will determine the average monthly value of the accounts, adjust for any monthly fluctuations (such as an increase in sales because of the holiday season), and deduct a sum based on undamaged accounts, accounts the insured can collect, probable bad

debts, and unearned interest and service charges.

 M. No Benefit To Bailee is replaced by the following:

 Analysis

 The no benefit to bailee provision in the underlying homeowners policy states that the insurance will not be for the benefit of a bailee or other person or organization holding, storing, or moving property for a fee. This provision is amended to grant the insured coverage as a bailee for the property of others.

 Q. Policy Period is replaced by the following:

 Analysis

 The homeowners form states, "This policy applies only to loss which occurs during the policy period." The endorsement adds the further stipulation that it applies only within the applicable coverage territory.

 T.  The following conditions are added:

 Analysis

 Three conditions are added to those found in the underlying homeowners policy to which the HO 07 01 is attached. The first of these amends the coverage territory of the homeowners (where, for example, personal property is covered anywhere in the world) to the defined "coverage territory." Coverage applies to a loss to insured property when the loss begins within the coverage territory, or, if in transit, when between points in the coverage territory. There is thus no coverage, for example, for loss to business personal property in Europe, even if caused by a peril insured against.

 2.  Resumption Of Operations

 Analysis

 The second additional condition governs resumption of operations. If the insured can resume operations by using any damaged or undamaged property (note, not just business property, but any property) at the residence premises, then a business income loss will be reduced to that extent. Extra expense coverage will be reduced to the extent that operations can be returned to normal, and such extra expense discontinued. So, for example, if a business income loss can be offset through sales of slightly damaged merchandise, then the insured is obligated to do so.

 3.  Limitation – Electronic Media And Records

 Analysis

 The third additional condition addresses loss of business income caused by direct physical loss of electronic media and records. Coverage is limited to the longer of sixty consecutive days from the date of direct physical loss, or the period, beginning with that date, necessary to replace, rebuild, or repair other property at the residence premises that has been damaged by the same event.

 Endorsements

 Some of the loss payment conditions that were found in the earlier edition of the home business insurance coverage form have been moved to the applicable endorsement.

HO 07 52 05 11, Loss Payable Provisions, addresses how payment following a covered loss will be made in three circumstances.

When the loss payable provision a. loss payable applies, then the insurer adjusts all losses with the insured and pays a claim to the insured and the loss payee, as interests may appear.

 This provision might apply when the insured finances some business equipment, such as a copier.

 When loss provision b. lender's loss payable applies, losses are settled as interests appear, each loss payee in the order of precedence. The loss payee's interest must be established by written contract. This loss provision is applicable when the insured has entered into a contract for the sale of covered property. The loss payee may still receive payment even if the insured's claim is denied because of failure to comply with the terms of the policy or endorsement. In this, the conditions are similar to those governing a mortgagee's ability to receive payment under the homeowners policy. The loss payee designated under provision b. also receives notice of cancellation or nonrenewal of the policy.

 If the loss payable provision c. contract of sale is designated, losses are adjusted with the insured and payment is made jointly to the insured and loss payee, as interests appear. The difference between provisions b. and c. is that, with provision b. to apply, the contract for the sale of covered business property must be written and documented by warehouse receipts, bills of lading, financing statements, or a contract or deed. Provision c., on the other hand, does not specify that the contract be written.

 Endorsement HO 07 55 05 11, Special Coverage – Spoilage of Perishable Stock, covers property on the business location that is kept under controlled temperature or humidity conditions for preservation and susceptible to loss if these conditions change. Remember, though, that the eligibility rules do not contemplate any operation involving manufacture, sale, or distribution of food, or sale or distribution of any personal care products manufactured by the insured.

 Perishable stock is covered for direct physical loss caused by or resulting from contamination by a refrigerant, mechanical breakdown or failure of equipment, or power outage resulting from loss of power due to circumstances beyond an insured's control.   

 The endorsement provides open perils coverage, in that the homeowners exclusions that apply are earth movement, war, nuclear hazard, governmental action, and water damage. Other exclusions are added: disconnection from refrigerating, cooling, or humidity control system; deactivation of electrical power caused by manipulation of any switch or other power control device; inability of electrical utility company or other power source to provide power due to lack of fuel or governmental order; inability of power source at described premises to provide sufficient power due to lack of generating capacity to meet demand; or, breaking of any glass that is a permanent part of any refrigerating, cooling, or humidity control unit.

 Endorsement HO 07 56 10 00, Valuable Papers and Records Coverage Increased Limits, allows the insured to increase the limit of liability for valuable papers and records, and endorsement HO 07 57 05 11, Special Coverage for Valuable Papers and Records, provides open perils coverage for these items. Thus, the insuring agreement for direct physical loss "from a peril insured against" becomes "we insure against risk of direct physical loss…."

 The homeowners exclusions of war, nuclear hazard, and governmental action apply (but the exclusion for intentional loss is eliminated). The home business insurance form's dishonesty exclusion is amended, and an exclusion for unauthorized instructions to transfer property to any person or any place is added.

 The final two endorsements pertain to both section I property coverage and section II liability coverage. For a discussion of the section II portions, see ISO Home Business Insurance Coverage—Liability.

 Endorsement HO 07 58 10 00, Sections I and II Exclusions for Computer-Related Damage or Injury, precludes coverage for any direct or indirect loss arising out of computer failure to recognize dates or times. The exclusion extends to acts or omissions of anyone who consults, designs, repairs, restores, or oversees (the next word in the endorsement is "others," which makes this exclusion somewhat ambiguous) to determine, rectify or test, potential or actual computer failure or deficiency.

 But if such a loss results in a peril insured against, then the loss caused by such peril is covered. For example, if the insured's computer is programmed to begin a print run at 12:01 a.m. of 12/01/01, and the computer reads the 12/01/01 as the date to stop the run so that it runs continuously, shorts out and starts a fire, the resulting fire damage is covered.

 Finally, endorsement HO 07 59 10 00, Sections I and II – Limited Coverage for Year 2000 Computer-Related and Other Electronic Problems, covers actual loss of income the insured business sustains caused by computer failure or deficiency. Actual and necessary extra expense incurred due to computer failure is likewise covered. Coverage is limited to $25,000 in any one policy year. For section II liability coverage, see ISO Home Business Insurance Coverage—Liability.