Ho Ho Homeowners Questions

December 6, 2021 by

A consumer contacted me via email with an interesting coverage inquiry:

“Two questions, please:

“I have an in-home ‘business’ involving the manufacturing and distribution of toys for children. I do not charge for these toys and earn no income from them. I have both on- and off-premises exposures for damage to the toys, my personal property, and my liability. Would homeowners insurance cover me?

“I also operate a vehicle that travels largely by air at, frankly, great speeds, and with very frequent ground stops. The vehicle is unlicensed and, while it can be used on public roads, it was not designed as such nor is it used that way. Will a personal auto policy protect me, would a homeowners policy be sufficient, or do a need a recreational vehicle policy?

“Thanks very much for your kind consideration. If possible, please respond before December 24. Merry Christmas! kkringle@northpole.org.”

Don’t you hate getting these last minute, year-end coverage questions?

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Being in good holiday cheer, I graciously did some research, consulted some fellow insurance coverage nerds, and responded as follows:

Dear Mr. Kringle: The following is a list of my responses to your coverage questions. I have checked it twice. My response is based on “ISO standard” insurance policy language. Be aware that not all policies are the same and it’s possible you may have many coverage gaps if you do not choose wisely. Of course, you are likely aware of this since I have reason to believe that you delivered thousands of copies of my book “When Words Collide: Resolving Insurance Coverage and Claims Disputes” around the world over the past few years.

Based on your explanation of what you do, it does not appear that this involves a “business” activity as defined by the current ISO HO 00 03 (HO-3) homeowners policy. To be considered a business, your activities would have to constitute a trade, profession, occupation, or other endeavor engaged in for money or other financial compensation.

This is a good thing because the ISO HO-3 effectively extends no liability coverage for business activities. In addition, there is no property coverage on structures, other than your dwelling, used for business. While there is coverage for personal property used in a business, there are dollar limitations both on and off premises. But, again, these business restrictions do not appear to be relevant to your activities.

Under an ISO HO-3 policy, coverage for personal property you own or use is worldwide, but that raises the question of who owns the toys that you are giving to children all over the world. If you own the toys until such time as they are delivered, then they should be covered if damaged by a covered peril. However, if ownership legally transfers to the child at the time the toy is manufactured, then coverage under the policy may vanish once the toys leave your premises and some sort of inland marine coverage would likely be warranted.

The ISO HO-3 policy also only covers specified named perils that damage this personal property. You would have coverage for perils such as lightning, aircraft, smoke (e.g., from a chimney that an inconsiderate homeowner failed to deactivate), and others. A notable peril is for “falling objects,” but unfortunately, there is no coverage for damage to the object (i.e., toy) itself. We always recommend extending “open perils” (i.e., named exclusions) coverage to personal property.

There is also a list of exclusions for certain types of property that could apply. Speaking of “lists,” the good news is that the exclusion for data (e.g., your “list”) should not apply since it is only applicable to business data and, as previously outlined, it does not appear that you are engaged in a business.

As for your legal liability, the ISO HO-3 policy also extends that coverage on a worldwide basis, although your liability around the world is questionable. Is it possible that you have diplomatic immunity? This is an issue you should discuss with legal counsel and follow up with your insurer(s).

However, notable liability exclusions apply to “Aircraft Liability” and “Hovercraft Liability.” An exception for model aircraft, though, could be material. The “Motor Vehicle Liability” exclusion does not appear to apply, given your means of locomotion. This brings us to your personal auto insurance question.

Your vehicle does not appear to be eligible for an ISO personal auto policy (PAP). Even if one was in place, coverage does not extend to a vehicle that has fewer than four wheels and is designed mainly for use off public roads. The exclusion for use of a vehicle as a public or livery conveyance might also be problematic, though we suspect that this exclusion is moot, given that you are not engaged in a business activity. In addition, the coverage territory for an ISO PAP is very limited and certainly not worldwide coverage.

So, it appears that your aviation exposure warrants a specialized program and there are excess and surplus lines markets that may be able to help with your vehicle liability and the delivery of merchandise. Before closing, let me address a few other issues you did not specifically raise.

What about your elves? Are they compensated? Is there a need for workers’ compensation or employer’s liability coverage in your jurisdiction or are they exempt as domestic workers? What about legal liability coverage for your helpers if a child was injured by a toy? An unendorsed HO-3 would likely do no good since I do not believe the elves qualify as resident family members under the HO-3 unless adopted or under the age of 21 and in your care or that of your resident spouse. (My understanding that the average age of Arctic elves is several hundred years.)

What about crime coverage? Could you need employment practices liability insurance (EPLI) for elf claims? Worse, could an EPLI policy be indicated for claims from children? Charges of discrimination by naughty children who did not receive toys could be significant. Likewise, there is a possibility of sexual harassment lawsuits, given that at least one child to my knowledge has alleged in the past that he saw you kissing his mother.

There are other forms of insurance we should probably address. For example, what about environmental impairment (a.k.a., pollution liability) for hazardous wastes emitted by your reindeer? While they may be trained, accidents happen, and they can be magnified when accelerated at 32.2 ft./sec2.

I would also recommend a personal umbrella policy. We will need to meet with your financial planner to determine limits, though I would suggest something in the neighborhood of $88 trillion to be safe. We would also want to provide or broaden invasion of privacy coverage, which could be a huge exposure for you.

I look forward to hearing from you ASAP so that we can get necessary and available coverages in place before December 24. P.S. With regard to that other list I sent you in late summer, please change the iPad Pro to an iPad Air. Thanks and Feliz Navidad!