Homeowners Section II Exclusion
December 28, 2015
Summary: The homeowners business pursuits liability exclusion, which also appears in the dwellings program personal liability supplement, excludes coverage for liability arising out of business activities of the insured. This provision has given rise to much dispute regarding its application. Because of varying interpretations of the word “business,” litigation often follows attempts to apply the exclusion to a claim of loss.
Questions regarding whether an activity must have an element of continuity, or a profit motive have been presented to courts, with varying answers. Is a hobby a business? What about a part-time endeavor? It is often suggested that there is no ready answer regarding the application of the business pursuits exclusion. Applying the generally accepted methods of interpreting contracts if the term “business” or “business pursuits” is found to be ambiguous will be construed against the insurer and in favor of the insured. This is often called the contra preferentum rule.
Disputes particularly arise as to whether an activity is directly related to the business activity, or is incidental to the business. Each fact pattern will be examined in view of the particular circumstances and the position taken by the particular jurisdiction.
The Insurance Services Office (ISO) homeowners 2011 program gives some coverage for certain activities, as do the current American Association of Insurance Services (AAIS) homeowners forms. The forms will be examined in this discussion.
Topics covered:
Evolution of the business pursuits exclusion
Exception to the business pursuits exclusion
Other business activities on residence premises
Current ISO and AAIS exclusions and exceptions
Evolution of the Business Pursuits Exclusion
Personal liability insurance—whether written as part of a homeowners package, or as a separate comprehensive liability policy—is designed to protect the insured and family members from negligence claims they might incur in their private (as opposed to business or professional) activities. Coverage encompasses claims arising out of conditions at the insured's residence or out of personal, nonbusiness activities of an insured away from the residence.
The Insurance Services Office homeowners (ISO) and American Association of Insurance Services (AAIS) forms (and virtually all other homeowners forms) contain specific exclusions of liability for bodily injury or property damage arising out of any business engaged in by an insured. (We will look at the current wording of the forms later under the heading Current ISO and AAIS Exclusions and Exceptions.)
That business exposures should be excluded from a policy designed to cover personal exposures is seldom, if ever, questioned. Other liability policies, expressly designed to cover business and professional activities, are available and should be purchased by insureds who are subject to those exposures. However, many insureds, like the homemaker who babysits her working neighbor's children, do not think of a part time or sideline occupation as a business pursuit.
In the ISO 1984 homeowners, there was no coverage for bodily injury or property damage “arising out of business pursuits of an insured,” but the exclusion continued: “This exclusion does not apply to activities which are usual to non-business pursuits.” And, because business was defined as including a trade, occupation, or profession, insureds were supported in their assumption that these activities were not intended to be excluded. Many persons would not see an activity from which they made a modest amount of money as a trade, occupation, or profession.
This frequently led to difficulties for personal liability insureds. Claims stemming from sideline occupations or arising out of incidents connected with the insured's employment by others arose frequently, with the resultant conflict between coverage and the business pursuits exclusion. ISO made a change to policy language under endorsement HO-350 (attached to the 1984 homeowners, and later incorporated into the 1991 forms). The 1991 ISO forms exclude coverage for liability “arising out of or in connection with a 'business' engaged in by an 'insured'. The exclusion applies, but is not limited to, “an act or omission, regardless of its nature or circumstance, involving a service or duty rendered, promised, owed, or implied to be provided because of the nature of the 'business'.” A “business” was defined as including a “trade, profession or occupation.” Note that here the exception to the exclusion—for activities usual to nonbusiness pursuits—was removed.
The AAIS homeowners forms took a somewhat different approach in that the definition stated: “'Business' means a trade, a profession or an occupation including farming, all whether full or part time… 'Business' includes services regularly provided by an 'insured' for the care of others and for which an 'insured' is compensated. A mutual exchange of like services is not considered compensation… 'Business' does not include part-time or seasonal activities that are performed by minors, or activities that are related to 'business', but are usually not viewed as 'business' in nature.” With the AAIS homeowners revisions beginning in 2006, similarly to the ISO forms, the exception to the exclusion was removed.
The current ISO and AAIS forms have changed the definition of “business,” but it remains to be seen what effect this will have. Currently, this area of conflict is considerably narrowed to the benefit of insurers and with some possible loss of protection for insureds.
As noted, the 1991 ISO homeowners forms define “business” as including a “trade, profession, or occupation.” Because “trade,” “profession,” and “occupation” are not further defined or limited, it has been left up to the courts to interpret the definition and exclusion as they apply to specific cases. Unfortunately, the courts have not been able to agree either, giving rise to a steady stream of litigation on this subject. The current definitions, which allow activities generating a certain level of income to not be considered a business, will not answer the questions satisfactorily. Incidents will still occur at an insured's workplace that will cause courts to determine whether, say, the accidental bumping of a fellow employee arose out of the business or was incidental to it.
The Iowa Supreme Court stated, “The doctrine [of reasonable expectations] is carefully circumscribed and does not contemplate the expansion of coverage on a general equitable basis.” Johnson v. Farm Bureau Mut. Ins. Co., 533 N.W.2d 203 (Iowa 1995); accord Am. Family Mut. Ins. Co. v. Corrigan, 697 N.W.2d 108 (Iowa 2005). The doctrine can be invoked only when an exclusion (1) is bizarre or oppressive, (2) eviscerates terms explicitly agreed to, or (3) eliminates the dominant purpose of the transaction. Moreover, as a precondition to reliance on this doctrine, an insured must establish that an ordinary layperson would misunderstand the policy coverage, or that there are circumstances attributable to the insurer that led the insured to expect coverage. For example, in a case where the insured did not dispute that her child day care service, which she had operated for fifteen years, constituted a business pursuit. She relied instead on the portion of the exclusion that exempted activities ordinarily incident to nonbusiness pursuits, which was found by the court to not apply. Grinnell Mut. Reinsurance Co. v. Voeltz, 431 N.W.2d 783 (Iowa 1988), followed in State Farm Fire & Cas. Co. v. Mrzlak, No. 13-1552, 2015 WL 5577990 (Iowa Ct. App. Sept. 23, 2015).
However, a business pursuits exclusion of homeowners policy did not relieve an insurer of the duty to defend a named insureds' adult son, a licensed electrician, in suit by plumbing subcontractor's employee to recover for fall from deck after leaning against railing left unfastened by son after disposing of bathtub during bathroom renovation. The complaint alleged that the son served as a general contractor, but did not indicate that he served as electrician for the renovation or that he regularly engaged in supervisory or disposal activities, extrinsic facts known to insurer indicated that son lived with named insureds, and son's desire to contribute his labor out of a desire to help his parents and improve the resident, rather than for personal profit, was plausible. Preferred Mut. Ins. Co. v. Vermont Mut. Ins. Co., 87 Mass. App. Ct. 510 N.E.3d 336 (2015).
The cases discussed in this article fall into two broad groups, those questioning whether the activity giving rise to a claim was in fact a business pursuit, and those in which a business pursuit is clearly involved, but the question is whether or not the activity giving rise to the claim is usual (or ordinarily incident) to a nonbusiness pursuit. These latter cases often involve home day care.
Many courts that have examined the definition of business and the business pursuits exclusion are in agreement that a business pursuit must involve two elements: continuity of the activity, and monetary gain—or, with some courts, at least the hope or expectation of monetary gain.
For example, under Minnesota law, when a child's injury arose out of an insured's daycare business, the child's claim against the daycare operator fell within scope of a homeowners' policy's business exclusion. Where the child was a client of the daycare business when injured by another child on the daycare premises at the time when the insured was responsible for providing daycare services, and the accident was the kind of risk that is associated with operating the daycare, the exclusion applied. Metro. Prop. & Cas. Ins. Co. v. Adamez, No. CIV. 14-3430 DSD/FLN, 2015 WL 1585678 (D. Minn. Apr. 9, 2015). Courts applying this two-part test generally find that if the activity meets both requirements, it is considered a business activity even though it may be a secondary occupation and not the insured's regular, full-time occupation. Note that the definition of business does not say the trade, profession, or occupation—wording which would strongly support limiting the exclusion to the primary occupation. However, not all courts follow these general rules, and there are several instances of cases with almost identical circumstances that have rulings on opposite sides of the question.
Most courts require that the insurer establish two elements for the finding that the insured was engaged in a business pursuit at the time of the occurrence. The activity must be continually or regularly conducted and must also be engaged in with a profit motive. There is some difference of opinion among jurisdictions about what constitutes a continually or regularly conducted activity, but the majority view is that the activity need not be the insured's primary occupation.
This view was adopted in Heggen v. Mountain West Farm Bureau Mut. Ins. Co., 715 P.2d 1060 (Mont. 1986). The court found that the insured was engaged in a business pursuit when a participant in a steer-roping contest conducted on his land was injured by a horse falling on him. The insured had constructed a permanent arena and charged participants a fee for the events which he had held three or four times a year for three years. The court noted that the insured's tax returns showed no profit from the venture, after deducting expenses from receipts, but found that the evidence showed a profit motive. The regularity of the contests in a permanently installed arena, along with the fees paid by customers, led the court to the conclusion that the activity was a business pursuit.
Other courts have held that seasonal or occasional activities do not meet the continuity requirement satisfied in the previous example, such as MFA Mut. Ins. Co. v. Nye, 612 S.W.2d 2 (Mo. Ct. App. 1980) (finding occasional summer lawn maintenance by insured's son did not qualify as a business pursuit). Activities that only occupy the insured's spare time, without a regular commitment, have been found not to constitute business pursuits, as have cases where the insured only engaged in the alleged activity once.
With respect to proper motive, courts are divided regarding whether the activity under scrutiny must be the insureds sole means of income or whether the business pursuits exclusion may apply to part-time or occasional work. For example, consider Stuart v. Am. States Ins. Co., 932 P.2d 697 (1997), which held, “A profit motive is a necessary consideration in evaluating whether a pursuit is in fact a business.” Also, in Travelers Indem. Co. v. Fantozzi, 825 F.Supp. 80 (E.D.Pa.1993), babysitting that had a profit motive because it was a way to earn income was, therefore, a business pursuit. In Stoughton v. Mut. of Enumclaw, 810 P.2d 80, 83 (1991) (holding that the activity need not be solely motivated by profit, nor a major source of livelihood to demonstrate profit motive and Wiley v. Travelers Ins. Co., 534 P.2d 1293(Ok.1974) that held, “Profit motive, not actual profit, makes a pursuit a business pursuit.”
In Melby v. Metropolitan Prop. and Cas. Ins. Co., 283 N.W. 2d 618 (Wis. Ct. App. 2015), the Wisconsin Court of Appeal found no coverage and applied the business pursuit exclusion because the injury occurred in a garage where the insured conducted a business.
But in Rufener v. State Farm Fire & Cas., 585 N.W.2d 696 (Wis. Ct. App. 1998), the court found that even though a part-time business—snowplowing—was involved, the activity that caused the injury was not ordinarily part of or related to the business. Rufener was injured when he attempted to help the insured install a hoist intended to lift a salter/sander on top of the insured's pickup. Even though the salter/sander was to be used in connection with the snowplowing, the court found homeowners coverage for the injury. The court said that installing the hoist was a one-time occurrence, and so was not a regular part of the business.
The reasoning in this case may have been the same as in Brown v. Peninsular Fire Ins. Co., 320 S.E.2d 208 (Ga. Ct. App. 1984). Here, the court held that the insured was not engaged in a business pursuit so that his homeowners insurance covered a claim against him for damage to a contractor's bulldozer. The insured was a real estate broker who had bought and commercially developed vacant land several times. In this instance, the insured and a partner had again purchased vacant land and the insured had hired a contractor to grade the land so that it could be developed. An employee of the contractor was using the bulldozer to grade the land when he hit an unmarked fuel pipeline, causing damage to the machine, and the contractor sued. The court viewed Webster's definition of “business” (“a usual commercial or mercantile activity customarily engaged in as a means of livelihood”) as limiting business pursuits to the insured's primary profession of real estate sales, citing an earlier decision by the same court as precedent (Southern Guaranty Ins. Co. v. Duncan, 206 S.E.2d 672 [Ga. Ct. App. 1974]). Thus, the exclusion did not apply since the insured did not customarily engage in property development.
In Oregon, the court in State Farm Fire and Cas. Co. v. Sauer, No. 3:14–CV–01274–BR, 2015 WL 510963 (D.OR. Feb.6, 2015) concluded that the business pursuits exclusion relieved the plaintiff from its otherwise-existing duty to defend for “bodily injury or property damage arising out of business pursuits of any insured.” The suit alleged that Stahl was at the Milwaukie Investment Property “at [Sauer's] invitation, and for [Sauer's] business purpose“ in that Stahl's family was a potential purchaser of the Milwaukie Investment Property. The business pursuits exclusion by its plain language excludes coverage if the conduct was undertaken as part of a business pursuit or purpose. As noted, Sauer alleges in the second amended complaint that he was on the property for business purposes.
In a suit regarding the wrongful death of a child, the named insureds, Kenneth and Linda Rockhold, who are owners and operators of Lynn's Little Wonders daycare, allegedly failed to properly account for a client's daughter's whereabouts, and left her unattended inside the Rockhold's parked vehicle outside of the daycare on a hot day. The answers filed by the Rockhold's did not deny that they owned or operated the daycare. The daycare was a business activity, and is required by law to be licensed by the state. Accordingly, the business pursuits exclusion of the policy issued by Erie Insurance Property And Casualty Company precludes coverage of “bodily liability coverage” and “medical payments to others coverage.” Erie Ins. Prop. & Cas. Co. v. Rockhold, No. 6:13-CV-20879, 2014 WL 1783603 (S.D.W. Va. May 5, 2014)
In contrast, in Fire Ins. Exch. v. Jiminez, the fact that the decision to raze a lean-to porch on a commercial building owned by insured was a “one-time decision” did not alter the fact that the insured was engaged in a business pursuit. Insured decided to raze the porch because it had become a nuisance. An individual who had permission to salvage materials was injured while doing so. The injured party sought liability coverage through the insured's homeowners insurance. The court noted that although the particular decision to allow the salvage was only made once, since it related to a commercial building that had been owned by the insured for many years, and was used in his produce business, so the decision related directly to the insured's business activities. Fire Ins. Exch. v. Jiminez, 184 Cal. App. 3d 437, 229 Cal. Rptr. 83 (Ct. App. 1986)
Similarly, the leasing of real property may be a business pursuit of the insured, even if someone else manages the property. In Becker v. State Farm Fire & Cas. Co., 664 F. Supp. 460 (N.D. Cal. 1987) the insureds' ownership of a movie theater, which was being temporarily managed by a third party was clearly a business pursuit despite the fact that it was a “one-time deal” and in a similar case Gaynor v. Williams, 366 So.2d 1243 (Fla. Dist. Ct. App. 1979) a business pursuits exclusion applied where the insured owned an apartment complex which was run through a general manager. Also reference National Farmers Union Property and Cas. Co. v. Garfinkel, 277 P.3d 905 (2012)
The majority view is that a business pursuit is an activity in which the insured has been engaged with a profit motive (in addition to being an activity conducted with continuity). However, at least one court has found that the profit motive is irrelevant under certain circumstances. There is general (but not unanimous) agreement that the activity need not be the insured's sole occupation or source of livelihood, so that part-time business activities also come within the scope of the exclusion. (This thinking would also be the outcome in relation to the ISO 2000 and AAIS exclusions.) Furthermore, many courts would agree with the Oklahoma Supreme Court in Wiley v. Traveler's Insurance Co., 534 P.2d 1293 (Okla. 1974) that the element of profit motive is met even if the venture is not successful, so long as the insured is motivated by financial gain.
In Wiley, the court stated that any activity that involves profit motive—regardless of actual profit made—should be considered a business pursuit. The court ruled that the insured's hobby of raising and selling dogs constituted a business pursuit and coverage was denied for injuries to a customer who was attacked by one of the dogs. However, four of the nine justices in Wiley disagreed strongly with this decision. These dissenting justices argued that the profit motive in this activity of the insured was not sufficient to make it a business pursuit. The insured had a full time job earning in excess of $10,000 a year, which they reasoned was his stated occupation. Even though some of the dogs sold for as high as $300, the dissenting opinion pointed out that the insured did not consider this activity an important source of income because some dogs were sold for as little as $75 and others were given away.
In some cases, it may be possible for the insured to derive a financial benefit from an activity without realizing a profit. This was the case in Saha v. Aetna Casualty & Surety Co.. The insured was not covered for liability due to the business pursuits exclusion when a child drowned in a pond on land used in connection with a cattle operation the insured had been involved in for several years. The business pursuits exclusion applied even though the insured, a doctor, did not make his living raising cattle and the venture was unprofitable. The court found that an absence of profit from the activity was not significant, particularly since the insured used the venture to take deductions from his income taxes, providing a de facto financial benefit. (Saha v. Aetna Casualty & Surety Co., 427 So.2d 316 (Fla. Dist. Ct. App. 1983))
Although profit motive is an essential element of a “business” an insurer relying on a business pursuits exclusion must demonstrate that the insured regularly engaged in a particular activity with a view toward earning a livelihood or making a profit. Generally, the business pursuit exception is intended to apply to all activities that are involved in furtherance of any business, employment, trade, occupation, or profession. New York courts held that the business pursuits exclusion applies where the contact applies where the conduct is “incidental to the insured's employment.” Salimbene v. Merchants Mut. Ins. Co., 217 A.D. 2d 991, N.Y.S. 2d. 913 (1995).
In Macdonell v. OneBeacon American Ins. Co., it was alleged that MacDonell, made defamatory statements about Englert's conduct as a forensic consultant. Regardless of whether MacDonell made the actual statements for profit, which it is not alleged that he did, the statements relate directly to the business profession in which both Englert and MacDonell are engaged. The complaint did not suggest that MacDonell would have made such statements but for his professional relationship with Englert or that such statements relate to anything other than Englert's forensic consulting activities. MacDonell v. One Beacon Am. Ins. Co., No. 12-CV-6258, 2013 WL 6181867 (W.D.N.Y. Nov. 25, 2013)
United Food Service, Inc. v. Fidelity & Casualty Co. of New York, found that the policy's nonbusiness exception to the business pursuits exclusion is inapplicable since the insured's activities were not merely incidental to nonbusiness pursuits and thus cannot be deemed to have constituted nonbusiness pursuits as to trigger the nonbusiness exception. The conduct also falls within the business pursuits exclusion as the statements were, at least, incidental to MacDonell's forensic consulting business. Therefore, Plaintiff is not entitled to a defense or indemnification for the underling lawsuit. MacDonell v. One Beacon Am. Ins. Co., No. 12-CV-6258, 2013 WL 6181867, (W.D.N.Y. Nov. 25, 2013), and United Food Service, Inc. v. Fidelity & Casualty Co. of New York, 74 N.Y.S.2d 887 (3rd Dep't 1993).
Some courts have ruled that a small amount of profit that is earned by a minor child for something other than self-support is not enough to activate the business pursuits exclusion. In AMCO Ins. Co. v. Moran, 929 P.2d 162 (Kan. 1996) the court held that the money received ($2.00 per hour) by an insured youngster to babysit was not such a source of money as to meet the test of a profit motive. In this case, a child in the insured's care was badly burned in a hot bath, and the parents sued. The insurer denied coverage, citing the exclusion for bodily injury arising out of or in connection with a business. The court disagreed, stating that the small amount of money earned could not even begin to provide a livelihood, and so the babysitting fell outside the exclusion. (The court also noted that not all babysitting would be covered; possibly thinking of the home day care cases we will discuss below.)
At least one court has held that the absence of a profit motive is irrelevant to the question of whether the insured was engaged in a business pursuit when the activity “is incidental to the insured's regular employment.” This decision was reached by a federal appeals court, applying Missouri law, in American Family Mutual Ins. Co. v. Nickerson, 813 F.2d 135 (8th Cir. 1987). The case involved an insured who was an off-duty policeman. While walking in his neighborhood one night, he observed a man sitting in his car with the motor running and the parking lights on. Because there had been several burglaries in the neighborhood recently he believed that another burglary was in progress, so he got his revolver and went over to the car. He showed his badge to the man sitting in the car, stated that he was a police officer, and ordered the man from the car. The man got out of his car but made some kind of gesture that made the insured think that he was reaching for a weapon. The insured shot the man in the face. As it turned out, the injured party and his wife had been visiting friends in the neighborhood.
The insured argued that he was acting both as a homeowner and as a neighbor, and not in his official capacity as a police officer at the time of the shooting. The court responded that he had invoked his official authority and that police officers, even off duty, have the obligation to investigate suspected criminal activity. The profit motive was irrelevant because his acts were incidental to his regular employment, and the business pursuits exclusion applied.
When the insurer raised a genuine issue of material fact regarding the application of the “business pursuits” exclusion because of the existence of a profit motive finding that the operation of land to collect rents was sufficient to defeat a demand for defense or indemnity. Aggio v. Estate of Aggio, No. C 04-4357 PJH, 2008 WL 2491697, (N.D. Cal. June 19, 2008). Also see, Uhrich v. State Farm Fire & Cas. Co., 135 Cal. Rptr. 2d 131 (2003), and State Farm Fire & Cas. Co. v. Drasin, 199 Cal. Rptr. 749 (Ct. App. 1984).
In Home Ins. Co. v. Aurigemma, a person was electrocuted in a swimming pool following electrical work performed by the insured as a favor for a friend. The court held that friendly help done as a favor (no charge) was not a business pursuit even if the help was within the insured's business specialty. The facts of the case indicated that the insured's only regular and continued occupation was his employment as an estimator for a public utility company. Although trained as an electrician for several years, he had not engaged in installation of electrical wiring. The insured derived no profit from the installation of wiring in his friend's pool since he did not charge for his time and labor, only for the materials. Home Ins. Co. v. Aurigemma, 257 N.Y.S.2d 980 (1965).
The majority of jurisdictions that have considered this issue have followed the decision made in Home Ins. Co. v. Aurigemma, holding that the term business pursuits means a continued or regular activity that is conducted for the purpose of profit, such as a trade, profession, or occupation. (Pac. Indem. Ins. Co. v. Aetna Cas. & Sur. Co., 688 A.2d 319 (1997)). Ultimately, “[t]he determination of whether a particular activity constitutes a business pursuit is to be made by a flexible fact-specific inquiry” as stated in Berardino v. Hartford Underwriters Ins. Co., No. FSTCV106005619S, 2012 WL 1222356, (Conn. Super. Ct. Mar. 23, 2012).
And in Rayburn v. MSI Ins. Co., 624 N.W.2d 878 (Wis. Ct. App. 2000), the insured, sole proprietor of a carpentry business, helped his father, brother, and a neighbor build a shed on the father's property. The neighbor was injured, and sued the carpenter, who tendered defense to both his homeowners and his businessowners insurers. The insurers each moved for summary judgment, asking for a ruling that their respective policies did not cover the loss. The homeowners carrier argued that the insured was engaged in the conduct of his business and cited the business pursuits exclusion. The businessowners carrier argued that even though building the shed was certainly an activity the insured might engage in during the course of his business, nonetheless on the day of the occurrence the insured was simply helping his father. The court agreed with this line of reasoning, saying that the homeowners insurer was the one to provide a defense and coverage.
Sometimes an insured wants an incident to be part of his or her business pursuit to obtain coverage under his business policy as a covered risk of loss rather than as an exclusion. The policy language “conduct of business” is unambiguous and applies to any activity that is performed for the purpose of business. In Schofield v. Smith, when a party was injured during a hunting incident, Smith focuses on his alleged purpose for going deer hunting, rather than on the act of deer hunting itself. Smith asserts that he went deer hunting for the sole purpose of promoting his business and building goodwill or, “to keep a customer happy.” Therefore, he maintains that because his purpose for deer hunting was related to his business, the hunting accident occurred with respect to the conduct of his business.
Society responds that the policy language is unambiguous, however, it applies only to the type of activities that comprise the business's activities and are also performed in furtherance of the business. Society asserts, “A person's internal intentions when he goes hunting do not control whether the activity is within the conduct of his tavern business.”
Smith did not dispute that deer hunting is not an activity in which he engages in the usual course of his tavern business. Because his sole argument for coverage rests on his assertion that he agreed to join Schofield for the purpose of building “business goodwill,” which they concluded is not sufficient to trigger liability, Smith was not an insured within Society's policy definition when he was deer hunting. The court concluded that the act of loading a gun into a vehicle includes the preparatory act of removing ammunition from it, and as such, it constitutes a “use” of a vehicle. Therefore, there is potential coverage for Smith's injuries under the auto policies. However, because Smith was not engaged in the “conduct of a business” when he joined Schofield in deer hunting, the businessowners policy does not provide coverage for Schofield's injuries. Schofield v. Smith, 2003 WI App 188, 266 Wis. 2d 1061, 668 N.W.2d 563.
Exception to the Business Pursuits Exclusion
The 1984 ISO homeowners included an exception to the business pursuits exclusion, and that was for activities “usual to nonbusiness pursuits.” As noted, this exception does not appear in the later ISO or AAIS exclusions. Many insurers have by now adopted the deletion, but cases involving the exception to the exclusion are still being decided. For this reason, and because of the exception, cases analyzing this provision are presented below. Many of the cases interpreting the exception have involved babysitting activities in the insured's home.
A case in which the exception applied to allow coverage is Vandenberg v. The Continental Ins. Co., 628 N.W.2d 876 (Wis. 2001). Vandenberg's infant son suffocated to death while in the care of Stephanie Riehl. Continental cited the exclusion, and Vandenberg sued, alleging Riehl's negligent supervision of her own son, who had accidentally caused the death of the infant, was the cause of the loss. The court found that Riehl's supervision of her own child was not related to her business of providing child care, and thus held for coverage.
But in American Family Mut. Ins. Co. v. Moore, 912 S.W.2d 531 (Mo. Ct. App. 1995), the insured cared for two children in her home after school. Her son owned a dog that bit one of the children. When a suit was filed, the Moores turned the claim over to their insurer, which filed for declaratory judgment. Although the court agreed that keeping a dog was a nonbusiness activity, the babysitting was the activity leading to the injury. Had it not been for the babysitting the children would not have been on the premises and so the injury would not have occurred.
In Elorza. v. Massey, 783 So. 2d 453 (La. Ct. App. 2001), the policy excluded “bodily injury or property damage arising out of the past or present business activities of an insured person.” “The phrase 'arising out of' implies an element of causality, though not necessarily the proximate cause,” stated the court, in finding that there was no coverage when a child was injured at the insured's in-home day care facility. The child fractured her knee when she was allegedly pushed down onto a trampoline by another child. The fact that the trampoline was normally used by the insured's family did not circumvent the exclusion because the trampoline was often used as well by the children in the facility.
In State Farm Fire and Cas. Co. v. Mrzlak, Dawn Mrzlak, also known as the insured, entered into an arrangement to care for the Johnson children within Bryan Johnson's residence for part of each week. In addition to caring for the children, Dawn also occasionally performed housekeeping. From August to December, Dawn provided the agreed upon services and Johnson compensated her for her services. The mother of Johnsons children, Jennifer Woodbury, was not living in the residence while Dawn provided childcare and housekeeping, but one week prior to the Christmas holiday Jennifer moved into the Johnson home. Dawn continued caring for the children, but at her home instead of the Johnson home. One day the children were being cared for at the insureds home, the minor daughter was bitten by the Mrzlak's dog.
The trial court found, “Despite the relative menial pay, the childcare services provided by Mrzlak (the insured) were continuous and motivated by profit.” Substantial evidence supports this finding.
The insureds claim that the care of the children at the insured's house was outside of the arrangement between the insured and Johnson, and fell within the exception to the business pursuit exclusion which states that activities that are ordinarily incident to non-business pursuits are not covered by the exclusion. The district court found that the testimony in which Dawn stated that she provided the child care as a favor was a “self-serving attempt to avoid the result of an exclusion” and coverage was refused. State Farm Fire & Cas. Co. v. Mrzlak, No. 13-1552, 2015 WL 5577990 (Iowa Ct. App. Sept. 23, 2015).
Other Business Activities on Residence Premises
Although most court cases concerning a business conducted in the home involve babysitting, a variety of other service occupations are also commonly conducted in a residence. As the following case illustrates, insureds with businesses in their homes would do well to buy extra coverage rather than rely on their homeowners liability coverage. Certain homeowners endorsements can be added to provide the necessary protection. For a discussion see Standard Homeowners Endorsements. Both ISO and AAIS have developed coverage for home-based businesses—those where the business may be an insured's chief livelihood. (These forms are not intended for home day care coverage.) See AAIS Home-Based Business Coverage Form—Property; see AAIS Home-Based Business Coverage Form—Liability; see The ISO Home-Based Business Coverage—Property; and see ISO Home-Based Business Coverage—Liability.
In Callahan v. American Motorist Ins. Co., 289 N.Y.S.2d 1005 (1968) the insured was a real estate broker who conducted the business from his home. Another broker was injured on the insured's premises when she came to pick up a key to property that had been listed for sale. The court in New York held that the injury arose out of the insured's business pursuit and thus there was no coverage under the homeowners policy. Clearly, added the court, there was an increased risk—due to the traffic that a business office generates—and this is what the insurer intended to and did exclude from coverage through the business pursuits exclusion.
The circumstances were somewhat different in Georgia Farm Bureau Ins. Co. v. Caster, 546 S.E.2d 30 (Ga. Ct. App. 2001), although a real estate business was involved. The policy contained an exception for activities usual to nonbusiness pursuits. The insured normally visited clients in their homes, but in one instance the client visited the realtor. When she went into another room to use a copier, the client walked around and fell down a step into the sunken living room, injuring himself. The insurer denied coverage for the claim, citing the exclusion. But the court said maintaining a home was usual to a nonbusiness activity, and so there was coverage for the claim.
An insured decided to host a birthday party for himself, and, because of the number of invited guests, used a warehouse which he leased for a business and which was some twenty miles from his home. A guest was injured, and sued. The homeowners insurer denied coverage, citing both the business pursuits exclusion and the distance from the residence premises. The court said that the distance did mean the warehouse was not “used in connection with” the residence premises, and was thus an insured location. Further, the party was not in any way connected with business, and so the exclusion did not apply. This case is Erie Ins. Exchange v. Szamatowicz, 597 S.E. 2d 136 (N.C. Ct. App. 2004).
In Spears v. Shelter Mut. Ins. Co., the business-pursuits exclusion in professor's liability insurance policy failed to preclude an insurer from having a duty to defend a professor in a student's action which asserted that the student sustained emotional and psychological trauma due to professor's threatening actions when he became enraged during class, although student alleged that the professor was spitting during the incident and had struck a fellow student, where student, in her petition, alleged that professor suffered from a mental health issue that caused delusions, that the professor was suffering from a delusion at the time of the incident, and that the professor's actions could have been the result of his mental disorder. Accepting as true the allegations that the professor was suffering from a mental disorder, and the trial court correctly observed that the mental health allegations necessarily factored into the question of whether the specific conduct could be viewed as accidental. For this reason, the court found no error in the trial court's rejection of Shelter's alternative contention that the conduct was excluded either as an intentional act or as undertaken as part of a business pursuit.
Though the petitions allege outrageous conduct and that it occurred in the classroom where the professor was conducting a class, those circumstances cannot be viewed absent the allegation of the delusional episode. The petition alleged only intentional acts and that they were undertaken as part of a business pursuit which cannot be supported as a result of the professor's delusions. Spears v. Shelter Mut. Ins. Co. 2014-1191 (La. App. 3 Cir. April 1, 2015).
Current ISO and AAIS Exclusions and Exceptions
In the homeowners 2000 and subsequent 2011 program, ISO revised the definition of business and the exclusion. Now, “business” means:
a. A trade, profession or occupation engaged in on a full-time, part-time or occasional basis; or
b. An other activity engaged in for money or other compensation, except the following:
(1)One or more activities, not described in (2) through (4) below, for which no “insured” receives more than $2,000 in total compensation for the 12 months before the beginning of the policy period;
(2)volunteer activities for which no money is received other than payment for expenses incurred to perform the activity;
(3)Providing home day care services for which no compensation is received, other than the mutual exchange of such services; or
(4)The rendering of home day care services to a relative of an insured.
It appears, therefore, that many activities heretofore excluded, such as a hobby which generates a bit of money, will not fall outside the definition and therefore be covered. In theory, an insured engaging in home day care would be covered so long as the income derived is no more than $2,000. (But note that many states' mandatory endorsements exclude coverage for this activity.)
The ISO 2011 forms business pursuits exclusion reads:
Coverages E and F do not apply to…
2.”Business”
a”Bodily injury” or “property damage” arising out of or in connection with a “business” conducted from an 'insured location' or engaged in by an “insured”, whether or not the “business” is owned or operated by an “insured” or employs an “insured”.
This Exclusion E.2. applies but is not limited to an act or omission, regardless of its nature or circumstance, involving a service or duty rendered, promised, owed, or implied to the provided because of the nature of the “business”.
b.This Exclusion does not apply to…An 'insured' under the age of 21 years involved in a part-time or occasional, self-employed “business” with no employees.
The AAIS forms are similar. The 2006 forms (the 2008 forms are the same with regard to “business”) state that:
Business means:
a.a trade, a profession, or an occupation, including farming, all whether full time, part time, or occasional. This includes the rental of property to others, but does not include:
1)the occasional rental for residential purposes of that part of the “described location” normally occupied solely by “your” household; or
2)the rental or holding for rental of a portion of that part of the “described location” normally occupied by 'your' household to no more than two roomers or boarders for use as a residence; or
b.any other activity undertaken for money or other compensation, but this does not include:
1)providing care services to a relative of an “insured”;
2)providing services for the care of persons who are not relatives of an “insured” and for which the only compensation is the mutual exchange of like services;
3)a volunteer activity for which:
a)an “insured” receives no compensation; or
b)an “insured's” only compensation is the reimbursement of expenses incurred to carry out the activity; or
4)an activity not described in 1) through 3) above for which no “insured's” total compensation for the 12 month period just before the first day of this policy period was more than $2,500.
The AAIS exclusions applicable to liability coverages declare that there is no coverage for “'bodily injury' or 'property damage' arising out of or in any way related to a 'business' conducted from an 'insured premises' or undertaken by an 'insured,' regardless of location, whether or not the 'business' is owned or operated by an 'insured' or employs an 'insured'.” However, the AAIS incidental liability coverage for business states that there is coverage for bodily injury or property damage arising out of “'business' activities of an 'insured' under the age of 21 years, but only if such 'insured' is involved in a part-time or occasional, self-employed 'business' that does not employ others and the 'bodily injury' or 'property damage' arises out of activities related to that 'business.'”
Although the exclusions specifically make an exception for minors, and although an insured's activities generating no more than $2,000 or $2,500 by definition will fall outside the exclusion, it is still often difficult to reconcile business activities with activities normally viewed as nonbusiness in nature. The judge in Thoele v. Aetna Casualty & Surety, 39 F.3d 724 (7th Cir. 1994) complained, “We are more than a little puzzled as to why insurers…have not attempted a better articulation of the exception.”
Insureds and insurers often view the nature of spare-time activities differently, as the following cases illustrate. Remember in reviewing these that under the new ISO and AAIS language there might have been some coverage.
The case of Riverside Ins. Co. v. Kolonich, 329 N.W.2d 528 (Mich. Ct. App. 1982) involved a claim for injuries from a fall on the insured's premises by a woman who was there in connection with the insured's ceramics firing and teaching activities. The insured considered her ceramics activities to be a hobby rather than a business, and neither reported any income on her tax returns nor possessed a sales tax license. But because the activity met both of the business pursuits criteria (gain and continuity) the court found this activity to be a business pursuit, and as the claimant was on the premises because of this activity, held that the insurer was relieved of liability.
In Loehrs v. Loehrs, Marlyn Loehrs was injured while he and his father, Elmer Loehrs, were working on Stanley Wabbe's farm. Elmer caused an injury to Marlyn's hand, and Marlyn soon commenced a negligence action against his father and Mr. Wabbe. When the injury occurred Elmer had retired from farming, but was working informally for Wabbe making about $500 a year. Elmer's homeowner's policy excluded coverage for “liability resulting from activities in connection with [the] insured's business.” In discussing a similar provision, the Supreme Court has held that the intent is to exclude coverage for a type of activity in which a person regularly engages for the purpose of earning a livelihood, or for gain such as a “trade, profession, or occupation.”
In Minnesota Casual, activities “ordinarily incident to non-business pursuits,” for example hobbies, are not excluded under a business pursuits' exclusion, even if the activity could be construed as a business pursuit. Reinsurance Ass'n of Minnesota v. Patch, 383 N.W. 2d 708 (Minn. Ct. App. 1986). In order for an act to be considered part of a business pursuit it must be one that the insured would not normally perform but for the business, and must be “solely referable to the conduct of the business.” Therefore, the business pursuits exception barred the claim.
A different conclusion was reached in Southern Guaranty Ins. Co. v. Duncan, 206 S.E.2d 672 (Ga. Ct. App. 1974). The court held that the insured's spare time car racing interest was not a business pursuit under a homeowners policy even though the insured was an automobile mechanic by trade and occasionally received prize money for racing. Thus, coverage was provided when a minor sustained an eye injury from a piece of metal propelled into his eye while the insured was removing the steering wheel from a race car.
A Minnesota court ruled in the insured's favor in Reinsurance Association of Minnesota v. Patch, 383 N.W.2d 708 (Minn. Ct. App. 1986). The insured worked full-time as a laborer and machine operator for a construction company. In his spare time, he repaired bicycles in his garage. He charged customers for this service, although he often did repairs for free, and he did not keep business records or advertise. Because he did not keep records the insured did not know whether or not the activity generated any income. One of his customers sued him for injuries received while riding a bike that the insured had repaired. The repair had been performed as part of an arrangement with a hardware store whereby customers would take bikes to the store, the insured would pick them up, repair and return them to the store, and the store would credit his store account for the value of the repair.
The insured's homeowners section II coverage excluded coverage for liability “resulting from activities in connection with an insured's business.” Business was defined as “a trade, profession, or other occupation…all whether full or part time…” However, the policy also included an exception to the exclusion for “activities in conjunction with business pursuits which are ordinarily considered non-business in nature.”
The court found that the insured's activities did not amount to a “commercial enterprise” engaged in for financial gain. Then the court found that even if repairing bicycles could be seen as a business pursuit, the exception would apply. This conclusion was reached after citing Minnesota Supreme Court cases that had applied the exception, but with no specific analysis of how these rulings related to the present case.
Another case in an insured's favor is Shelter Mut. Ins. Co. v. Smith, 779 S.W.2d 149 (Ark. 1989). The case involved the question of whether horse racing activities conducted by the insureds were a business pursuit or a hobby. The insureds' tax returns provided evidence to support either view. Recent tax returns treated the racing activities as an unprofitable business, which was also the opinion of their current accountant. However, tax returns prepared by H&R Block for earlier years were filed on a nonbusiness basis. The appeals court found that this evidence, and the fact that the burden was on the insurer to prove that the exclusion applied, was enough to support the jury's finding for the insureds.
Sometimes the claim that work was merely a hobby fails. In Allstate Ins. Co. v. Crouch, Robert Crouch and Raymond Smith shared an interest in restoring and repairing vehicles which fueled their friendship for many years. In the mid 1980s Crouch and Smith formed an unincorporated auto partnership in order to take advantage of dealers' price discounts and to depreciate their tools for tax purposes. The work performed by the members of R&R was performed in an attached two-car garage at Smith's home. Not only did the Smith's garage house the partnership, but it was also used for fixing Smith's own vehicles and for storing belongings from Smith's marriage.
Under the R&R partnership, Smith and Crouch did auto body work to raise funds for their own hobbies including restoring their own vehicles. R&R was fairly official, with business cards, and letterhead, and occasional promotional items for the partnership. Profits were divided equally between the two and used to purchase tools for the partnership.
In March 1991, a fire destroyed the garage while Crouch was welding a pickup truck frame that belonged to Smith. The welding sparks exploded propane tanks and ignited other combustible materials in the garage. All the cost of renting the propane tanks, and the electricity for the garage was paid for by the partnership.
The fire destroyed the garage, the home of the Smith's, and all the contents of the Smith's home. After paying out the losses, Smith's insurance carrier instated a subrogation action against Crouch, defended by Allstate pursuant to his personal homeowner's policy which included a “business pursuits” exclusion, which provides: “We do not cover bodily injury or property damage arising out of the past or present business activities of an insured person.” “Business” is defined in the policy as “any full or part-time activity of any kind engaged in for economic gain and the use of any part of any premises for such purposes.”
Crouch maintained, however, that since he was working on Smith's vehicle voluntarily, the exclusion should not apply. The business pursuit in this case was a profitable car repair business, and although the work causing the injury was the norm for the business, the particular instance with the work being performed gratuitously likely does not take the case outside of the business pursuit's exclusion.
The court in Crouch concluded that the business pursuit was the profitable aspect of the automotive repair business. The injury-causing activity was the type that R&R Auto customarily performed. On the particular occasion at issue, just because the work was being performed gratuitously does not take it out of the business pursuit's exclusion. When Crouch and Smith formed their partnership, they wanted to take advantage of dealer's discounts and tax breaks, and some of their income went towards their automotive hobbies, so the partnership financially benefitted both members of the partnership. The profit motive was the primary reason for beginning the partnership.
The court found that it may be reasonable for an insured to expect coverage under a homeowner's policy for damage resulting from occasionally participating in a hobby, but once the hobby has been transformed into a business, even just a part-time business, it is unreasonable to expect that the insurer has agreed to cover such a risk. In this case the part-time business had close to fifty customers, an annual revenue of over $30,000, and tools and equipment appropriate for the business. The court concluded, therefore, that the business pursuit's exclusion applies to preclude the coverage in this case.
Social Activities Related to Business
Courts have also taken different positions on whether mixing business with pleasure precludes looking to the homeowners insurer for liability coverage. In one case, the insured was a cement and masonry contractor who paid his employees every Friday at his home and then allowed them to socialize in his converted garage. There was no expectation that the employees would stay, but they could choose to stay, drink beer, and play pool and dice. The purpose of the gatherings was to foster better relations with his employees. One Friday night, a fight broke out and an employee and former employee were injured. They sued the insured for negligently providing alcohol and failure to control people on his premises. Both the comprehensive general liability (CGL) carrier and the homeowners insurer denied coverage. In West American Ins. Co. v. California Mut. Ins. Co., 240 Cal. Rptr. 540 (Cal. Ct. App. 1987), the court held that the CGL carrier had the duty to defend or indemnify (because the exclusion for bodily injury to an employee arising out of and in the course of employment did not apply), and that the homeowners carrier was absolved from liability under the business pursuits exclusion. The court found that the dual nature of the activity—social and business—did not eliminate the business aspect of the gatherings, stating that “Nothing in the insurance policy requires that the business pursuit be wholly business related for the exception to apply.”
A different conclusion was reached by a Minnesota court in Hennings v. State Farm Fire and Cas. Co., 438 N.W.2d 680 (Minn. Ct. App. 1989). This case involved an insured who owned a marina. The insured was boating with his niece and nephew, who were to be employed at the marina that summer, in a boat belonging to the marina's inventory when he ran into another boat. The driver of the other boat was knocked unconscious and thrown from the boat, suffering chronic medical problems as a result. It was established at trial that part of the purpose in taking out the marina boat was to orient the young people to the lake and boating safety. The marina was insured under a general liability policy and the insurer agreed to defend and indemnify, but the insured's homeowners carrier denied liability because of the business pursuits exclusion. (The trial and appeals courts found that since the insured did not own the boat, the watercraft exclusion did not apply.) Citing an earlier Minnesota case, the court held that an act can be considered a business pursuit only if it is one that the insured would “not normally perform but for the business, and must be solely referrable [sic] to the conduct of the business.” Since there was a finding that boating with his niece and nephew had a dual social and business nature, and was not solely tied to a business purpose, the court held the business pursuits exclusion inapplicable. Consequently, the homeowners insurer was liable for the difference between the amount paid by the other insurer and the damages awarded.
In Metalios v. Tower Ins. Co. of New York, the Plaintiff hosted a party for her employees and friends at her Pluck U restaurant after closing hours. Early the morning after the party Plaintiff witnesses a guest and former employee engage in a verbal altercation with someone else in the restaurant kitchen. A fight ensued. Soon after, a Pluck U employee fatally stabbed the guest and severely injured another person outside of the restaurant. Metalios v. Tower Ins. Co. of New York, 77 A.D. 3d 471, 910 N.Y.S. 2d 28 (2010).
The exception to the exclusion, that “[t]his exclusion does not apply to: (1) activities which are ordinarily incident to non-business pursuits,” dictates a result contrary to that reached by the trial court. The exception focuses on the objective nature of the activity itself rather than on the motivation of the policy holder. A social gathering is “ordinarily incident to a non-business pursuit.” Thus, even if Metalios's motivation was employee morale, a party falls under the exception to the exclusion. Even were the exception somewhat ambiguous, it must be strictly construed against the insurer.
But in Shelby Ins. Co. v. Heritage Mut. Ins. Co., 616 N.W.2d 923 (Wis. Ct. App. 2000), the court held that a boating trip had an essential business purpose and therefore the business insurer owed coverage. In this situation, the CEO and president of a marina was driving a power boat owned by the marina when the boat flipped. One passenger drowned and the others were injured. Even though two passengers (one a mechanic employed by the marina) stated that they thought the primary purpose of the trip was social, the fact that the CEO logged time testing parts on the boats he took out persuaded the court that the usage was for business purposes.
Social events with a business purpose were held to be “business pursuits” in Myrtil v. Hartford Fire Ins. Co. 510 F. Supp. 1198 (E.D. Pa. 1981), which held that in a party given by a restaurant owner at rented home for employees and their guests and business-related persons and their guests was clearly engaged in a business pursuit.
In Torgenson v. North Pacific Ins. Co., a mobile home park tenant's fall down the stairs in the recreational building owned by the landlord arose out of the business pursuits of the landlord, and, thus, the business pursuits exclusion of liability coverage in landlord's homeowners' insurance policy applied, even though tenants could use the building without a fee, except for coins to do laundry, and tenant was not using the building to do laundry; the tenant was not in the building in response to a social invitation by the landlord, but was there as a tenant.
Perhaps the most clear-cut of the decisions applying the business pursuits exclusion are those relating to injury at a workplace, or stemming from work activities away from residence premises. This is particularly troublesome in states that allow negligence suits against fellow employees for on-the-job injury, apart from workers compensation recovery. (The current CGL form states that employees are insureds, but not with regard to bodily injury to a co-employee while the co-employee is in the course of employment or performing duties related to the insured's business.) Below are some of these on-the-job cases.
The court in Bertler v. Employers of Wausau, 271 N.W.2d 603 (Wis. 1978) concluded that the business pursuits exclusion applied to relieve the insurer of liability for a claim by a fellow employee of the insured. The fellow employee was injured when struck by a fork lift truck driven in a work capacity by the insured. The court found that the insured was engaged in an activity that fulfilled both the elements of continuity and profit motive at the time of the injury. The court also specifically held that it did not violate public policy to find that there was no coverage under the homeowners policy even though the state allowed injured workers to sue co-workers.
Another case in which homeowners coverage did not apply was Pitre v. Pennsylvania Millers Mut. Ins. Co., 236 So. 2d 920 (La. Ct. App. 1970). The insured asked his fellow employee to check a blockage in a piece of machinery and then absent-mindedly pushed a starter button, an act that cost the other man his arm. The insured contended that his momentary forgetfulness was an act ordinarily incident to nonbusiness pursuits, but the court disagreed. The exception was not allowed since starting the machine was part of the insured's job, whether he did it deliberately or forgetfully. Furthermore, the court—while acknowledging the difficulty in some cases of determining if a particular activity is “ordinarily incident to nonbusiness pursuits”—found no ambiguity in this case when the exception was examined with respect to these specific facts.
In Economy Fire & Cas. Co. v. Beeman, 656 F.2d 269 (7th Cir. 1981), a federal court of appeals found that no homeowners liability coverage applied when an electrician rudely lifted a restaurant employee and moved her out of the way of his work, injuring her back. The waitress argued that the electrician's attempt to repair the machine was not a business pursuit, or, if it was, the act of moving her aside was an activity ordinarily incident to a non-business pursuit. In finding that the insured was involved in a business pursuit at the time of injury, the court said: “[W]e cannot accept the…definition of business pursuits to include only those activities strictly necessary to the business activity. To the contrary, numerous cases have held activities resulting in injury to be incident to business pursuits even though the actions in question were not strictly necessary, and in most events were counterproductive, to carrying out the business activities.”
The Alabama Supreme Court also found that no homeowners coverage applied in Pullen v. Cincinnati Ins. Co., 400 So. 2d 393 (Ala. 1981). The insured was the building supervisor for a high school and his duties included providing security for property and persons on the school grounds. He also provided these services on the public road leading up to the school. One morning he went to investigate strange behavior by a young man in the middle of the road leading up to the school and got involved in a physical fight with the man. The insured's pistol went off and a bullet struck the young man, who later died. The court had no trouble upholding the lower court's finding that the insured was involved in his usual occupation of building supervisor and security officer at the time of the shooting, so the business pursuits exclusion applied.
But in Monfils v. Charles, 575 N.W.2d 728 (Wis. Ct. App. 1998), the court found coverage under the homeowners policy. Monfils worked at a paper mill and allegedly informed the police that a fellow employee was planning to steal a piece of company equipment. The employee went to Charles, the local paper workers union president, and he counseled the employee to make the action public to the other union members. In the following confrontation Monfils was killed, and Charles was sued for negligence. The court found for homeowners coverage, stating that Charles's primary occupation was that of a paper worker, and the union presidency involved intermittent work and nominal compensation.
The business pursuits exclusion was held to apply to deny coverage for damage to a hotel room while the insured was traveling overnight on business. The insured hung his garment bag on a fire sprinkler head, causing the head to break off and allowing water to damage the room. The hotel claimed against the insured, who brought claim under his homeowners policy. That claim was denied, and the denial upheld in court, due to the business pursuits exclusion. The case is United Food Service Inc. v. Fidelity & Cas. Co., 189 A.D.2d 74 (N.Y. App. Div. 1993).
Business and nonbusiness intermingled in the case of South Carolina Farm Bureau Mut. Ins. Co. v. S.E.C.U.R.E. Underwriters Risk Retention Group, 554 S.E.2d 870 (S.C. Ct. App. 2001). The insureds took their dog to work with them occasionally if they had nowhere to leave it. While on the business premises, the dog bit a child, and both the homeowners and commercial liability insurers filed for declaratory judgment. The homeowners insurer cited the business pursuits exclusion, and the CGL insurer said the dog bite did not originate with any risk connected with the business. The court found that the dog was personally owned and there was no proof it was connected in any way with the business. Therefore, the homeowners insurer's coverage was primary. (The court also looked at the “overall intent” of the policy—that being to protect against negligence in everyday activities, such as owning a dog.) But because the bite occurred on the business premises, and the insured had a reasonable duty to protect persons coming onto the premises, the CGL insurer could not avoid responsibility and provided excess coverage.
Contrast this case with American Family Mutual Ins. Co. v. Moore, 912 S.W.2d 531 (Mo. Ct. App. 1995). Here, a child on the premises was severely bitten by the insured's son's dog. The insured cared for two children for pay after school in her home, and, while the court agreed that keeping the dog was a nonbusiness activity, the children would not have been on the premises but for the business activity. So, the business pursuits exclusion applied.
Another group of cases where the application of the exclusion is fairly clear cut relates to farming activities. Most policies written before the homeowners '76 program included farming within the business definition, as do the current AAIS forms. This left no doubt that the business pursuits exclusion of the homeowners policy applied with respect to farming operations. In subsequent policies, the reference to farming has been deleted from the definition, in the interest of language simplification, but with no change in the intent to exclude farming activities from homeowners coverage unless additional coverage is purchased. A homeowners insured whose principal business is not farming can buy liability coverage for farming activities by endorsement. The following cases have affirmed the applicability of the homeowners business pursuits exclusion to farming premises or activities.
In Aetna Cas. & Sur. Co. v. Brethren Mut. Ins. Co., 197 A.2d 1234 (1977), the Court of Special Appeals also considered the business pursuits exclusion in the context of a policy which failed to define “farming” as a business with regard to an incident that occurred on a farm which bred and raised horses. Even after construing “the ambiguity in this case . . . against the company which prepared the policy and in favor of the insured,” held that the trial court erred in not upholding the business pursuits exclusion.
In Wint v. Fidelity and Casualty Co. of New York, 507 P.2d 1383 ( Cal. 1973), a horse escaped from a pasture through a gate negligently left open and was struck by a car, injuring the occupants. The court found that the business pursuits exclusion of the horse owner's policy precluded coverage. Although this case was decided before the homeowners '76 program, the policy defined “business” as including a trade, profession, or occupation, without making any exception for farming. The court concluded that grazing animals for a fee was included within the meaning of farming and that the activity from which liability arose was farming for profit.
An Illinois court, in State Farm Fire and Casualty Co. v. Stinnet, 389 N.E.2d 668 (Ill. App. Ct. 1979), found that mowing weeds in the strip between a road and a corn field constituted farming operations and was excluded as a business pursuit under the insured's homeowners policy. The insured argued that the mowing had a dual purpose, one purpose being to make the farm look good for his father, from whom he rented the property. The insured reasoned that because there was a nonbusiness purpose as well as a business purpose for the activity, the exception to the business pursuits exclusion applied. The court did not agree that the dual nature of the activity transformed it into an activity ordinarily related to a nonbusiness pursuit.
In McNeilus Hog Farms v. Farm Bureau Mut. Ins. Co., 197 A.2d 1234 (1977), the insureds argued that because “business” is defined as “a trade, profession or occupation, other than farming“ and “custom farming” would appear to be a type of farming. (emphasis added). However, the policy separately defines the two terms with “farming” defined as “the process of investment management or labor to produce agricultural products” and “custom framing” defined as “any farming operation performed by you for others for a charge under any contract or agreement, written or oral.” In addition, by excepting from the definition of “business” custom farming grossing less than $3,000, the policy plainly includes within the definition of “business” custom farming grossing more than $3,000. Finally, the “custom farming” language would be rendered superfluous if the McNeiluses's argument were adopted. This is impermissible. The court concluded that the “business pursuits” exclusion applied and, based on that exclusion, Farm Bureau was not obligated to defend and indemnify the McNeiluses. Accordingly, the district court did not err in granting summary judgment in favor of Farm Bureau.
Another case denying coverage is LeBlanc v. Broussard, 396 So. 2d 535 (La. Ct. App. 1981), in which the court held that the insured's homeowners policy did not cover the insured's liability for an accident between the tractor he was driving and a car. The insured and his brother had formed a farming partnership that occasionally cut other farmers' hay for a fee. At the time of the accident, the insured was driving a tractor that was towing a mowing machine to another farmer's field. He argued that he was not engaged in a business pursuit until he reached the other person's field and began cutting the grass, paralleling an argument that has been upheld in worker's compensation cases (when does the actual work begin?). The court did not approve of this analogy, reasoning that the purpose of the business pursuits exclusion in a homeowners policy is to lower rates by removing nonessential coverage. The court found that driving the tractor to the field was a “necessary and essential part of the commercial enterprise,” and that the insured had been engaged in a business pursuit. The insured also asserted that the activity of driving the tractor was ordinarily incident to a nonbusiness pursuit, to bring it within the exception to the exclusion, because he sometimes used the tractor for cutting his grass and the grass of relatives. The court was unimpressed by this assertion and held that the purpose of the activity at the time of the accident was the pursuit of a business undertaking.
A claimant in Erickson v. Grinnell Mut. Reinsurance Co., 622 N.W.2d 138 (Minn. Ct. App. 2001) attempted an unusual approach to force additional coverage under the insured's homeowners. The insured owned a farm and had both farm and homeowners coverage. The insured's twelve year-old son drove a farm tractor across a highway and collided with the claimant motorcyclist. The farm policy responded, but the motorcyclist argued that the homeowners policy should also contribute because the business pursuits exclusion applied only if the person liable for the accident was engaging in his own business. The court said no, the focus of the exclusion is on the activity causing the accident. Because the son was driving the tractor in conduct of the father's business, coverage was excluded.
The current exclusion of coverage for liability arising out of “the rental or holding for rental of any part of any premises by an 'insured'” was also part of the business pursuits exclusion in the 1984 homeowners program. (Earlier homeowners forms included such rentals in the definition of business.) The exclusion contains three exceptions for residential rental, so that there is liability coverage if an insured location is rented: (1) on an occasional basis for residential purposes; or, (2) part of the insured premises is rented for residential purposes and each single family unit has no more than two individuals who are roomers or boarders; or (3) part of the insured premises is rented out as an office, school, studio, or private garage.
Deviations from the rental arrangements specified in the policy can cause protracted coverage disputes. Remember that a homeowners policy's liability coverage applies to conditions arising out of the residence premises as well as to insureds' activities away from the residence premises. Therefore, if an insured owns other rented premises, the exposure entitles the insurer to additional premium. Insureds would do well to avoid any rental situation outside those specified unless they purchase additional coverage.
The insured's liability was not covered in Salmon v. Commercial Union Insurance Co., 267 S.E.2d 273 (Ga. Ct. App. 1980). The insured boarded someone else's horse in his barn and pasture for $25 a month. The horse escaped, was struck by a truck, and killed. The horse's owner sued, and the court held that the insured was not covered due to the rental exclusion.
Generally, the ownership of rental properties constitutes a business pursuit and thus liability arising out of the ownership of such properties is precluded pursuant to the business pursuit exclusion. Further, necessary repairs and maintenance of rental property performed by the owner is considered incidental to the ownership of the property and will therefore constitute a business pursuit. See, for example, National Farmers Union Property and Cas. Co. v. Garfinkel, 277 P.3d 905 (Co. Ct. App. 2012); Travelers Home and Marine Ins. Co. v. Liston., Civil Action No. 10–931, 2011 WL 4859191 (W.D.Pa. Oct. 13, 2011)
Most insureds who are sophisticated enough to be asked to serve on the board of directors of a commercial entity realize that their homeowners insurer will not cover their liability for such activities. The difficulty in filling boards with qualified directors due to the liability exposure has prompted corporations over the past decade to seek coverage for outside directors.
An example of an insured familiar with insurance coverages who nonetheless made a claim against his homeowners carrier is found in Krings v. Safeco Ins. Co. of America, 628 P.2d 1071 (Kan. Ct. App. 1981). The insured had held various positions in the insurance industry (presumably in property and casualty) throughout his career. He was asked to sit on the board of a savings and loan in which he had invested $320,000. Payment of $25 (later $50) was made for his attendance at board meetings. After serving several years, the insured became aware that there were loan delinquencies and allegations of self-dealing involving other board members. He resigned from the board after disagreements with other board members over these issues. When suit was brought against the members of the board, neither his homeowners nor his excess insurance carrier provided defense or indemnification.
The court rejected the insured's position that part-time or supplemental income activities are not business pursuits, pointing out that by being on the board the insured had hoped to maximize the return on his investment. Because the insured's service on the board was a regular activity engaged in with a profit motive, it met the requirements for a finding that it was a business pursuit.
Theodore Smyth was an outside director of a corporation that owned a hotel in Puerto Rico. A fire caused many injuries and deaths, and Smyth was sued as a director. Although the insured argued that he had taken the position of director as a favor to a friend and received no monetary compensation, the court still held that the activity fell within a business activity. The case is Smyth v. USAA Property and Cas. Ins. Co., 75 Cal Rptr. 2d 694 (1992). It is interesting to speculate, however, what the outcome would have been if the current ISO language exempting “volunteer activities for which no money is received other than payment for expenses incurred to perform the activity” from the definition of a business had been in place. A prudent person, however, would be unwise to test this premise.
In two cases involving political activities by holders of public office, the business pursuits exclusion was found not to apply. In Burdge v. Excelsior Ins. Co., 476 A.2d 880 (N.J. Super. Ct. App. Div. 1984), the court found that campaign activities of a county clerk seeking reelection were outside the scope of the exclusion (but instead were related to the exercise of the insured's personal and political rights).
In Ritter v. U.S. Fidelity and Guaranty Co., 573 F.2d 539 (8th Cir. 1978), the exclusion in a personal excess liability policy did not apply to a mayor who was sued for libel because of an ad placed in a newspaper expressing his views on a public issue. The court found the business pursuits exclusion to be ambiguous, noting that it contained no reference to political activity, so the court declined to find that “political functions integral to the performance of an elected public office constitute business pursuits.”
Many persons provide foster care for children with no other thought than to be providing a much-needed service. There is no clear-cut line, however, governing when the activity rises to the level of a business. Stuart v. American States Ins. Co., 932 P.2d 697 (Wash. Ct. App. 1997) was remanded for trial to determine if a profit or purely humanitarian motive was the driving force when a husband and wife operated a licensed foster home, sometimes with as many as five children at one time.
Many insurers would not construe fostering one or two children as a business. Indeed, the definition of insured includes a foster child. However, the safest procedure is to make sure the agency responsible for the children provides necessary liability coverage for the foster parents.
A case involving vacant land where the business pursuits exclusion was held not to apply is American Motorists Ins. Co. v. Steffans, 429 So. 2d 335 (Fla. Dist. Ct. App. 1983). The claim occurred on vacant land in land parcels where the insureds had done some property development. Here, the court found that a canal and land underlying it, still owned by the insured after he had developed and sold the adjacent residential development, qualified as vacant land and that the insured was covered under his homeowners policy for liability when he was sued by an individual who was injured when he dove into the canal. The insured had created a small lake in the development which he connected to the Intracoastal Waterway by digging the canal. He thought that he had conveyed all the property after development, but in fact he had retained title to the land under the canal. The court said that “the inquiry should be whether, at the time the injury arose, [the insured] owned the land as part of a business pursuit,” pointing out that the trial court had determined that the business pursuit relating to the canal had long been abandoned by the insured. On the issue of whether the property qualified as vacant land, the court dismissed the argument that use of the canal by watercraft disqualified it from such designation, construing the term to mean “land which is unoccupied by any permanently affixed structure or inanimate object.”
In Brown v. Peninsular Fire Ins. Co., 320 S.E. 2d 208 (Ga. App. 1984), a policy that defined “business” as “trade, profession, or occupation” caused the court to hold that the business pursuit's exception did not apply to a real estate broker who occasionally purchased and developed vacant land.
In American Motorist Ins. Co. v. Steffens, 429 So.2d 335 (Fla. App. 1983), Robert Lutostanski was injured while diving into a canal. At one point the canal had been part of a business operation. Lutostanski sued Steffens, the landowner, for damages. Though Steffens did not live there, he did have a homeowners policy issued to him by his insurer included within its definition of insured premises “vacant land, other than farm land, owned by or rented to any insured.” Steffens demanded his insurer provide coverage for the claim that Lutostanski had brought against him. The insurer sought a declaratory judgment with the assertion that the claim was within the policy exclusion that excluded a claim for bodily injury that “arose out of business pursuits of any insured except activities therein which are ordinarily incident to non-business pursuits.”
Appellant should have but did not raise the issue in pleadings, that the canal bottom where the injury occurred was not vacant land (and thus not within the policy definition of the insured premises). In entering final judgment adverse to the insurer, the court found that while at one time the canal had been a part of a business pursuit of Steffens, at the time of Lutostanski's injury that business pursuit had long been abandoned, and Steffens was not even aware he still owned the property. The court held that the business pursuit exclusion was not applicable, and the issue as to whether the canal bottom was vacant land was not properly a part of the case, but even if it were the canal bottom was “vacant land” within the insuring definition of the policy because the land is covered only by the waters of the canal.
The insurer argued that the canal was built to accommodate watercraft traffic, constructed to provide access to the interior lake, and was designed to enhance the value of the lots by connecting them. The policy itself does not further define the term “vacant” but the term is construed as being land which is unoccupied by any permanently affixed structure or inanimate object.
It is difficult to imagine that someone would consider a parcel of land as anything but vacant merely because it contained a drainage ditch filled with water. Land over which a canal flows, despite hosting boat traffic and marine life, is, in the ordinary use of the word, vacant land.
But in O'Conner v. Safeco Ins. Co. of North America 352 So. 2d 1244 (Fla. Dist. Ct. App. 1977), the court looked at both the definition of vacant land and the business pursuits exclusion, and found that coverage was excluded on both grounds. The insureds owned a vacant tract which they subsequently divided into lots serviced by a clay road which they maintained. O'Conner was injured when an auto she drove skidded on the clay road. The court held that the clay road was not vacant land because it had been improved through additions of clay. Further, the road led to improved lots. The business pursuits exclusion applied because the insureds' dividing the land into lots and maintaining the road for prospects and purchasers to use clearly pointed toward a business.
The court in American Family Mut. Ins. Co. v. Page, 852 N.E.2d 874 (2d Dist. 2006) stated, “When determining if an insured's land qualifies as vacant land under homeowners' insurance policies that include vacant land as insured premises, relevant inquiry centers not on the economic effect of any structures on the property, but rather on the existence of any structures on the property.”
The Final Word
We conclude this discussion with a case resolved in favor of the insured involving alleged libel and slander. The insured's employment as manager of a law firm was terminated. Suits to divide the assets of the firm followed, as well as a suit against the insured alleging libel, slander, and invasion of privacy. The insured's homeowners policy provided personal injury coverage, but the insurer declined to defend, citing the business pursuits exclusion. The court held otherwise in Nationwide Mut. Fire Ins. Co. v. Erwin, 525 S.E.2d 393 (Ga. Ct. App. 1999), because once the insured's employment was terminated she had no trade, occupation, or profession. “Vendettas do not constitute the pursuit of business, even if motivated by bitterness from a former business relationship,” said the court, and therefore the insured was owed a defense.
However, in Ploen v. Aetna Cas. And Sur Co., 525 N.Y. S.2d 522 (1988), an insurer had the duty to defend an insured, a local union president, against a claim of libel, despite the fact that his homeowner's policy language excluded coverage for bodily injury or property damage arising out of business pursuits of any insured or injury arising out of business of the insured. It is reasonable to interpret the first exclusion as not excluding coverage for damages based on mental anguish, and by using the word “business” in the second exclusion, the insurer intended to refer only to the president's principal occupation, trade, or profession as union president and did not pertain to his activities in seeking reelection.