Is it a Business?

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By Phyllis Van Wyhe, CPCU, CIC, CSP

Printable Version

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• Bob Benson has an exciting career as an actuary with Aetna but photography is a hobby.  He will do your daughter’s wedding for half the going rate.  Is this a business exposure?

• Molly Murphy is the local Avon lady in a ten-block area on the south side of town.  In an average month she makes between $50 and $100 selling these personal care products.  Is this a business?

• Fred Fenton is a computer programmer for a large corporation.  He belongs to a barter club and trades his programmer services for good and services.  Is this a business?

The homeowners policy contains both exclusions and limitations for business exposures.  Before we look at these policy provisions we must focus on what activates the provisions: the definition of "business." If your client’s enterprise is considered a hobby these exclusions and limitations will not apply.  It is when an activity becomes a business that the insured loses a great deal of coverage. The definition of business is the key.

The Insured’s Opinion

Ask Sam & Hilda if they have any business exposures and the answer is likely to be negative.  Sam may look wistfully and comment "Someday, I hope."  He will tell you he has not made a dime on his various ventures; he has not even recouped his investment.  Until he turns a profit he will not think of any of these activities as a business exposure.

Unfortunately, when Sam submits a claim to the insurance company, his definition of business will carry little weight.  The company will determine if the activity is a business, based on their interpretation of the policy definition.  If they decline coverage, and Sam is not able to change their position, Sam’s option is to sue.  Then the courts will make the determination.  Ultimately it is company interpretation and the court’s opinion that will determine if an activity is a business.

The Policy Definition

Whenever the word "business" is used in the homeowners policy it is used to either exclude coverage or limit it.  As a result, the broader the definition of business, the more restrictive is the coverage.  The current edition of the ISO homeowners policy defines "business" on page one of the contract. There we find the following:

"‘Business’ includes trade, profession, or occupation."

While the majority of the independent agency companies use the ISO contract with only slight revision, many direct writers have been slow to adopt some of the more recent ISO revisions.  Some contracts from the direct writers use this definition:

"‘Business’ means trade, profession, or occupation."

Is there a difference in the two definitions?  Definitely!  The first definition allows many more activities to be included under the meaning of the word "business."  As a result, the use of the first definition can result in less coverage than the use of the second one.

Company Interpretation

Just reading the definition of this term in the contract is not sufficient to determine whether a given activity is a business. One must also consider how that definition is likely to be interpreted.

Dudley DoRight, CIC, learns one of his clients is building an ant farm in his attic.  The client has sold one ant farm already and has not yet decided if he will sell this one.  Dudley calls three different insurance companies to determine when this activity will become a business.

Assume that all three companies use an identical definition of business in their homeowners contract.  What are the chances of Dudley getting identical answers from the three underwriters? The answer, of course, is "slim and none."

Although the term business is defined in the contract, it is also subject to company interpretation. Dudley must try to determine if the companies he is using are going to use a more literal or a more liberal interpretation of the defined term.

An agent should always be careful in this area.  A company that has traditionally used a more liberal interpretation may be switching to a more literal reading, especially in today’s competitive environment.  The policy definition and how a particular company interprets that definition are key factors in determining if an activity is a business.

The Courts

Sam submits a liability claim to his homeowners carrier.  The insurance company declines coverage based on a "business" exclusion. If Sam wants to pursue the issue he will have to get an attorney and bring suit against the company.

Ultimately it is the courts that decide whether a given activity is a business.  While the court cases vary from one jurisdiction to another, all courts look at two factors to make their determination:

Profit Motive
While some courts use profit or income as the threshold here, many simply require that the activity be entered into with the intent to make a profit.  Using this standard, a venture could be a business even if the insured has not received any money from the activity.

The difficult court cases are those where the activity is part time and of very limited scope.  The majority of courts have established that the actual amount of income or the part-time or supplemental nature of the activity do not prevent it from being considered a business.

Continuity
The courts also require that a venture be ongoing, or continuous, for it to be considered a business.

Jane Plane has one garage sale.  It is such a horrible experience she will never have another. Is this a business?

Sally Sommers has a garage sale every weekend.  She haunts estate sales and buys items that are underpriced. She stores the merchandise in her garage and every Saturday at 8:00 she opens the door and puts out the sign: "Garage Sale."  Is this a business?

The person who has one garage sale probably does not have a business.  Their neighbor who has a garage sale every week probably does.  The difficult question is just when the line has been crossed. Did Sally’s venture become a business after the second sale or after the tenth? Continuity is a gray concept, subject to interpretation.  Often, it is the courts that are asked to make the determination.

The Bottom Line

Dudley DoRight, CIC has been reviewing the insurance of Swen, a long-term client.  Dudley has discovered that Swen makes and sells fishing tackle from his garage.  For the last forty-five minutes Swen has been making the case for why this should not be considered a business.

Finally Dudley says "Swen, I might agree with you, but my definition and your definition are not going to matter when there is a claim.  It is what the contract says and what the courts have said that are going to make the difference.  We need to talk to your insurance company to find out if they consider it a business, and maybe look at a few court cases."