Case Study: Where You Reside
Case: Six weeks after their daughter Francene moved back home with her five kids, Fred & Frieda moved into a retirement condo. Since Francene and the kids will be staying in the home, Fred’s agent suggested they simply keep the Homeowners policy in force. Francene is a family member, she will not be paying rent, and, of course, the Homeowners policy is less expensive than a fire policy. Two years pass and the home burns. Is there a problem?
Case: Her family has finally convinced old Aunt Agnes to go into the nursing home until her hip heals. Her favorite nephew, Bill, has agreed to keep an eye on her home until she returns. Weeks stretch into months and Agnes does not return. Five years later, while Agnes is still in the nursing home, the house burns down. Is there a problem?
Case: Sam received a promotion to plant manager in the printing firm, but it meant moving Sassy and the kids to Peoria. They have not been able to sell their home in Pewaukee. His agent advised Sam there is no vandalism coverage and the policy has a restriction on freezing of pipes while it is vacant, but there should be no other problem. Six months later the home burns down. Is there a problem?
Case: Billy John is delighted to have finally sold his seasonal dwelling, even if it is on a land contract. He didn’t have to reduce the price, but he did throw in the pontoon boat and agree to provide the insurance for the first six months. When his Homeowners policy on the house expires in the spring, the new owner will get replacement coverage. Billy John’s agent said it should not be a problem since Billy John will continue to hold title to the place until the last installment is made on the land contract. Two months later the house burns down. Is there a problem?
In each of these cases, the insured has an insurable interest in the home involved. Each has a Homeowners policy written to cover the dwelling. Now the house in question is damaged by a covered cause of loss, fire. No policy exclusions in the contract come into play. Is coverage in force? Will there be a problem with the claim?
THE COVERAGE GRANT
When we look at the coverage provided for dwelling in the Insurance Service Office (ISO) HO 00 03, 1991 edition, we find the following wording:
"We cover the dwelling on the residence premises shown in the Declarations…"
For this policy to apply to a specific dwelling, two conditions must exist:
The house must be shown on the declarations page of the policy.
The house must fit the policy definition of "residence premises."
Both these conditions must be in existence at the time of loss for coverage to apply. To appreciate the impact of these conditions, one must review the definition of residence premises.
RESIDENCE PREMISES
The phrase
residence premises is a defined term in the Homeowners policy. Residence Premises means:
- The one family dwelling, other structures, and grounds; or,
- That part of any other building; where you reside and which is shown as the residence premises in the declarations.
The key phrase in this definition is
where you reside.
To appreciate the impact of these words, we need to look at the definition of both you and reside.
You
The definitions section of the Homeowners policy states, "In this policy you and your refer to the named insured shown in the Declarations and the spouse if a resident of the same household."
Reside
Reside is not a defined term in the Homeowners policy. According to Webster’s Ninth New Collegiate Dictionary “reside” means “to dwell permanently or continuously.
Does old Aunt Agnes still reside in her home, now that she has been in the nursing home for over five years? An insurance company posed this question to the experts at National Underwriter and the answer was published in the Question & Answer section of the FC & S resource manuals. The FC&S answer included the following:
"Since the insured was in a nursing home for five years . . . the home in question was no longer her residence. She still owned it; it just didn’t meet the definition of ‘residence.’ Because the home did not meet the definition of residence premises, it did not qualify for Homeowners coverage. You were technically correct in denying the claim."
A COURT CASE:
An insured owned a house in Michigan that he used as a seasonal residence. In September 1988, he renewed his Homeowner’s policy on the house for a one-year period. In November 1988, he sold the property on a land contract and the buyer took possession. In January 1989, while the policy was still in effect, the house was destroyed by fire. The insured sought coverage under his policy. When the insurer denied coverage the insured brought suit in a Michigan trial court. The court found the policy provided no coverage for the claim and entered judgment for the insurer. The insured then appealed to the Court of Appeal of Michigan.
The appellate court upheld the trial court’s decision. The property coverages section defined residence premises as that building where you reside. The court concluded that this was unambiguous and not in conflict with any other language in the policy. In this case, when the insured sold the house, two months prior to the fire loss, he relinquished his possessory interest and all rights to reside there. The policy terminated when the property was sold and the insured was not entitled to coverage. Heniser v. Frankenmuth Mutual. Ins. Co., 506 N.W.2d 247 (Mich.App.1993).
THE BOTTOM LINE
The insured may have an insurable interest in the property at the time of loss. He/she may also have a valid Homeowners policy in force on the property. However, if the named insured, or resident spouse, is not currently residing in the home, the policy may not provide the protection expected.
Often an agent does not know when occupancy on a dwelling changes; there is little that can be done in these situations. However, when the insured specifically asks the question, care should be given to make certain the answer is correct.
This article is excerpted from the book Case Studies In Personal Lines, written by Phyllis Van Wyhe, CPCU, CIC.
