There’s No Place Like Home … For a Catastrophic Claim Denial

An elderly widow in Kentucky was admitted to a nursing home to recuperate from surgery. During her convalescence, her nonresident children visited the home frequently, though no one spent the night there, prepared meals, or otherwise lived in the home. After a few months, the home was totally destroyed by fire. The insurance company denied the claim under the homeowners policy.

A couple in Georgia bought a “fixer upper” home that was being renovated by their contractor son before their occupancy began. During this three to four month period, they stayed in an apartment. Near the end of the renovation, the house suffered a $186,000 fire loss. The insurance company denied the claim under the homeowners policy.

Gulf Coast homeowners had temporarily vacated their home while it was being remodeled, though they visited the home almost daily. The home was damaged by Hurricane Gustav to the tune of five figures during the renovation. The insurance company denied the claim under the homeowners policy.

What do these three claim denials have in common? In each case, the denial was based not on an exclusion in the policy, but rather a three-word phrase in a definition referenced from an insuring agreement. Next year marks the 20th year that I have been writing and speaking on this onerous premise for denying an otherwise covered claim. Still, these types of denials continue to this day, especially in New York.

When I did the original research on this, I found court cases in Arkansas, Maine, Maryland, Michigan and Texas that upheld such denials. In contrast, I also found court cases in Illinois, Kansas, Oregon and South Carolina that refuted the basis for these denials. In some states (e.g., Georgia), I found case law going both ways.

So, what is the basis for the denials? With very, very few exceptions, most homeowners policies provide a Coverage A limit on the dwelling on the “residence premises” shown in the homeowners policy Declarations.

The term “residence premises” is usually defined to be the dwelling “where ‘you’ reside.” The “where ‘you’ reside” language is what is being cited as the basis of these claim denials.

If you do not reside in the dwelling at the time of loss, this restrictive interpretation is that you have no coverage for damage to the dwelling. In most cases, you could operate a dynamite factory or a meth lab in the basement of your home and, as long as you live there, you are insured for covered damage to your dwelling. However, if your residency is interrupted, coverage vanishes immediately, even for otherwise covered losses.

Residency Interrupted

How can residency potentially be interrupted? A homeowner could be admitted to a nursing home, have a job relocation, suffer a foreclosure, experience a divorce, transfer ownership to a trust, allow a buyer to move in before closing a sale and/or take possession and move into a home before closing a purchase, move out (or not move in initially) when a home is being renovated, is militarily deployed, and the list goes on.

According to authoritative definitions of “residency,” this term means that you live somewhere and anticipate continuing to live there. If someone is temporarily in a nursing home but anticipates returning home at some point, then their dwelling residency has not ended, though I have seen two claim denials attempted under such circumstances, both ultimately paid when the agents argued successfully for coverage.

However, if at some point it becomes clear that the nursing home patient will be unable to return home, one interpretation of “where ‘you’ reside” is that coverage on the dwelling ends immediately when that circumstance is clear. I have not seen case law that supports that contention, but I’ve heard it argued by a policy drafter.

So, what is the basis FOR coverage when residency ends or never begins? First and foremost, there is extensive case law that exclusions must be conspicuous, plain and clear to be enforceable. In my book “When Words Collide: Resolving Insurance Coverage and Claims Disputes,” I cite several court cases upholding this doctrine. For example, in Ponder v. Blue Cross of Southern California, 145 Cal.App.3d 709 (1983), the court opined, “To be conspicuous, an exclusion must be positioned in a place and printed in a form which will attract the reader’s attention.”

I taught my first homeowners class over 30 years ago and never interpreted this language in such an onerous, exclusionary fashion. Again, the basis for these denials does not involve an exclusion, but rather a phrase within a definition referenced from an insuring agreement. Certainly, it is not clear and conspicuous and easily interpreted as exclusionary.

When I did my original research on this, courts that did not uphold this language as exclusionary did so on the premise that “where ‘you’ reside” are words of description, not a warranty of continuing occupancy. This phrase did not exist in the 1976 ISO homeowners forms. It was added in the 1984 edition, but the regulatory filing made no such reference of any change in original intent as far as I can read.

From the standpoint of logic and reason consider this. Under ISO eligibility rules, a home under construction can be insured on a homeowners form. Needless to say, no one resides at a home under construction, so based on this limiting residency interpretation, you would be purchasing a homeowners form that doesn’t cover anything until occupancy takes place. That is completely illogical and, in fact, not reality.

The good news is that there are workable solutions to this issue. The best is an insurer who has eliminated the “where ‘you’ reside” language, making residency an eligibility, not coverage, issue. Next would be a series of endorsements introduced by ISO for owner-occupied dwellings, condos, and mobile homes in an effort to remedy the problem.

If you would like to dig deeper into this subject, the Independent Insurance Agents & Brokers of America have a resource page at http://tinyurl.com/WhereYouReside.

Tune in next month when we explore how a claim might be rightfully denied under one part of a policy, but covered elsewhere in the policy. All you have to do is RTFP!