The Homeowners Nonexclusion Exclusion

In 2004, almost 18 years ago, I began an initiative to expose one of the most onerous and egregious provisions of any mainstream personal lines policy I had ever seen. The article was entitled “Rent Your Home, Void Your Insurance Policy?” I followed it up with 15 other articles related to the issue.

In 2005, the national technical affairs committee of the Independent Insurance Agents & Brokers of America (IIABA or the Big “I”) first presented this issue to Insurance Services Office (ISO) at our annual meeting. In 2009, these articles and this advocacy formed the basis of a 29-page white paper entitled “‘Where You Reside’ — The Where’s Waldo? Catastrophic Homeowners Policy ‘Exclusion’ That Could Bankrupt Your Insureds” published by the IIABA. You can still access that white paper and related resources for free at the Big “I” website (www.independentagent.com) by searching for “where you reside.”

In 2015, ISO produced a series of endorsements designed to resolve or at least mitigate this potentially catastrophic coverage gap in their homeowners policies. My research indicated that this problem also existed in the vast majority of non-ISO homeowners policies in the marketplace.

At least one carrier solved the problem by eliminating the offending language from their homeowners policies at that time.

After almost two decades of writing and speaking about this issue, I had hoped it had been resolved. Recently, however, I learned of a September 2021 Michigan Court of Appeals decision, Mohamed A. Hassanein and Ebtisam Khalifa v. Encompass Indemnity Company, et al. The court ruled that the fire damage to the home owned by this couple was not covered, citing a 1995 Michigan court case from my original white paper, Heniser v. Frankenmuth Mut. Ins. Co.

Here is the crux of the coverage gap. Most homeowners policies cover the dwelling on the “residence premises” shown on the policy’s declarations page. The term “residence premises” is defined to include the dwelling “where you reside,” with “you” referring to the named insured and, even if not named, resident spouse.

According to one interpretation, the insuring agreement that applies to the dwelling is not triggered unless the named insured and/or resident spouse live there. In other words, if you don’t reside in your home, for whatever reason, at the time of a loss, you have no coverage on the dwelling.

As the original white paper discusses, courts are split on this. But, even in the Heniser case, a dissenting judge opined, “[T]he mere statement that the insured property is a dwelling used principally for dwelling purposes is not clear and explicit enough to create a warranty.” Most courts finding coverage concur with that opinion that the “where you reside” language is simply descriptive and does not warrant continuing occupancy past the policy inception date. And most courts require that, to be enforceable, an exclusion must be clear and conspicuous in a policy. Apparently this principle in some states does not apply to a claim denial that does not technically involve an exclusion.

Many of these cases involve homes where the owners moved and temporarily held the property out for rental. But the white paper identifies well over a dozen other scenarios such as sudden work relocations, extended rehabilitation stays following illness, a parent that moves out and a child moves in (or vice versa), divorce, foreclosure, death, ownership transfers to trusts, a home buyer who takes possession and moves in prior to final closing or a home seller who remains after closing but coverage is now provided by the purchaser, temporary vacancies due to home renovations, and the list goes on.

If you write any significant homeowners business, you have customers at this moment with homeowners policies on homes where they no longer live in. Many of these homes are insured by carriers who will deny a claim based not on an exclusion, but on three words in a definition referenced from an insuring agreement. Do you know who these carriers are? Do you know who these insureds are? Have you ever discussed this issue with your insurers or customers?

In a seminar based on the white paper I presented for over 10 years, I included examples of denied claims that I was personally involved in as a consultant. Four of these claims were six-figure fire losses on homes being rented in Florida and Georgia. Three others were fire claims in New York, Arizona and Pennsylvania where the owners had temporarily moved out during renovations. Another was a theft and vandalism loss in Maryland that occurred after parents moved to one of two homes they owned and allowed their daughter to move into the other.

An insured in a Kentucky nursing home suffered a total loss to her home that was denied. A rented Florida condo experienced a $100,000 fire loss, and the death of the occupant, that was denied though condo eligibility did not require owner occupancy and the HO-6 form was endorsed with the HO 17 33 – Unit Owners Rental To Others that said, “For an additional premium, this coverage applies while the ‘residence premises’ is regularly rented or held for rental to others.” A denied Pennsylvania fire loss occurred while a daughter occupied her parents’ home when they took care of her grandmother for several months at a distant location. In a Rhode Island claim, a couple bought a home and insured it on a homeowners policy but discovered after 30 days the home needed significant renovation that required them to move out for six months, during which a fire occurred.

For most of your customers, their home is by far the most valuable asset they own or will ever own. Are they aware that they could be forced into bankruptcy by three words buried in a definition referenced from an insuring agreement in their homeowners insurance policy?