‘Where You Reside’ Could Bankrupt You

In Late last year, the Big “I” Technical Affairs Committee published a white paper entitled, “’Where You Reside’—The ‘Where’s Waldo®?’ Catastrophic Homeowners Policy ‘Exclusion’ That Could Bankrupt Your Insureds.” This is just another in a long line of projects and activities this committee has produced with little fanfare over the years on behalf of all Big “I” member agencies.

Last year, immediate past chairman Brett Nilsson wrote about the Big “I” Technical Affairs Committee’s work with ISO and other groups to create policy changes. In the last ISO commercial property filing, half of all changes came from the work of this committee and the Mid-America Technical Conference, which meets annually in St. Louis.

However, as the saying goes, “You win some and you lose some.” There is a very specific issue that the committee has not been successful in rectifying with ISO, despite five years of attempts. While the committee hasn’t given up, it is time to give the issue widespread national exposure because it could potentially affect millions of your customers.

Most homeowners policies (including non-ISO forms) provide coverage for the dwelling on the “residence premises.” The term “residence premises” is typically defined to include the dwelling “where you reside.” The question is, what happens if you no longer (or never) reside(d) there?

The cost to rebuild the average home in the United States is approximately $250,000. For most Americans, their home is their most valuable asset. In order to protect that asset from loss, most consumers insure the replacement cost of their homes with a homeowners policy. Most homeowners policies cover the dwelling “where ‘you’ reside.”

According to some interpretations and courts, if “you” no longer reside in the dwelling, coverage on that structure immediately terminates. If you never resided in the dwelling, coverage may never have attached. This school of thought gives rise to a number of circumstances that may lead to a catastrophic coverage gap for homeowners. Court decisions and real life insurance claim denials have supported this philosophy.

For example, an elderly widow was admitted to a convalescence home to recuperate from some health problems in order to be able to return home and be self sufficient. Her home remained her legal address and her nonresident children cared for the home, though no one lived there during her presumably temporary stay at the health care facility. After a few months, her home was totally destroyed by fire. The insurance company denied the claim on the house on the basis that she did not reside there at the time of loss.

In another example, a home was damaged by Hurricane Gustav. The homeowners had temporarily vacated the premises during remodeling, though they visited the home daily. The insurer denied the claim because the insureds were not residing there at the time of loss.

In yet another example, the purchaser of a home renovated it before moving in. During the renovations, the house suffered a six-figure fire loss. The insurance company denied the claim because the insured had never resided in the house prior to the loss.

These are not hypothetical examples. They are representative of dozens of questions the Big “I” Virtual University’s “Ask an Expert” service has responded to since late 2003. Each situation was a real-life claim where losses to homes were denied based on a lack of residency, to the complete surprise of the insured and the agent.

There is no specific exclusion for damage to a home in most homeowners policies due to a lack of residency, yet there have been court cases where such denials were upheld. The Technical Affairs Committee’s research has uncovered nine court cases that have concurred with similar claim denials (along with an equal number of judicial decisions overturning claim denials).

A nonresidency situation can arise unexpectedly due to illness or death, military deployment, foreclosures, relocations, etc. Even when it arises due to a routine sale, temporary rental, occupancy by a family member, divorce or separation, or transfer of ownership to a trust, given that there is no clear exclusion for most losses in most homeowners policies, most agents and virtually all insureds presume there is no coverage problem.

To learn more about this serious exposure, download the white paper from the Virtual University home page.The purpose of the white paper is to explore 16 very common “nonresidency” situations, the rationale for/against coverage and potential solutions in jurisdictions where a coverage gap exists. It is up to the reader to decide the best course of action in remedying these types of situations.

Feel free to share this information with your carriers. In fact, we strongly encourage you to poll your homeowners markets and ask if the carrier would cover or deny such claims. Share your stories with Bill Wilson (bill.wilson@iiaba.net), Big “I” director of the Virtual University.

—David Daniel, Chairman