Businesses Operating out of Homes: Insurance Coverage Challenges and Opportunities

By David A. Gauntlett*

Introduction

With the vastly increased popularity of work-from-home arrangements following the COVID-19 pandemic, more businesses than ever have elected to forego the expense of a dedicated office. Many such businesses still require a legal address, and the business owner’s residence can be a convenient solution. In addition to the basic Commercial General Liability (“CGL”) policy that all business owner’s should maintain, a Homeowner’s policy and an Errors and Omissions (“E&O”) policy should be considered for additional protection.

Homeowner’s Policies Can Provide Business Coverage

Homeowners policies often include a “Business Pursuits” exclusion that will prevent coverage for claims arising out of “business pursuits” of the insured. In Springer v. Erie Insurance Exchange,[1] the court had to determine whether the exclusion precluded coverage when the insured “had used two websites, jgw-sucks.com and jgwentworth-scam.com, to spread defamatory and false light information in an attempt to lure customers away from J.G. Wentworth.”[2] 

The court concluded that the exclusion did not apply because the insurer was obligated to consider the lack of “continuity” and “profit motive.”[3] The policyholder prevailed by arguing that there was no “continuity” because “[n]o evidence demonstrated that Springer was acting within his ‘customary engagement’ or ‘stated occupation’ when he engaged in the alleged defamation. Rather, . . . Springer was previously in the business of structured settlements in connection with [Sovereign Funding Group] . . . .”[4] Nor was there any “profit motive” because “[t]he only evidence before Erie when it denied coverage was that Springer was not engaged in business pursuits related to structured settlements or [Sovereign Funding Group]. Thus, Springer would have had no profit motive to engage in the alleged defamation.”[5]

This result suggests that as long as a statement, spurious and self-inflating as it may be, targets another without hope of proprietary gain, the defamation might fall outside the business purposes limitation on homeowner’s policies. This enables Umbrella policies issued to homeowners policies (the best value any policyholder can procure) to cover business activities so long as the “occurrence” creating liability arises outside the course and scope of activities performed to secure a pecuniary gain.

CGL Policy May Require Supplements for Workers’ Compensation for Remote Employees

A business that has remote employees may have ones that are out of state. The workers’ compensation law applicable would be that where the employee maintains its domicile (typically the location of the employee’s principle residence). To facilitate such payment, a sophisticated payroll service company’s assistance may be essential. The failure to include workers’ compensation for remote employees would be violative of the law where the employee is domiciled.

E&O Policies May Have Coverage Gaps for Consulting Work

E&O policies are often purchased by professionals (e.g., lawyers, doctors, etc.), but the policies offer good coverage opportunities for any business that regularly gives advice or offers services to clients. The standard language of these policies will offer coverage for any “Wrongful Act” with a limitation restricting coverage to the policyholder’s field of expertise. For example, a policy for a lawyer would state that a “Wrongful Act” is:

the following actual or alleged conduct by an Insured, or by any person or organization for which an Insured is legally liable, and which results from the performance of Legal Services for others:

1. a negligent act, error, or omission;

2. Personal Injury; or

3. Publishing[6]

“Legal Services,” in turn, is defined as:

Professional services rendered by an Insured as:

1. a lawyer . . . .

Critically, “Legal Services” does not expressly include coverage for expert witness work. But where legal analysis involving the area of practice defined by the declarations page of the E&O policy is at issue, the differentiation between rendering legal services for a client as opposed to offering expert testimony for a client blurs. No definitive case law appears to address whether that work is covered under standard E&O language that does not specifically include expert witness work. Such activity could arguably fit within the definition under the “lawyer” category, but insurers are not known for taking the policyholder’s side when coverage is debatable. As a result, any policyholders seeking to engage in work as an expert witness (or other form of consulting within their field) should consider a clarifying endorsement to explicitly bring those consulting activities within the scope of coverage.

Insurer Failures to Send Endorsement Policy Language Are Problematic

Under California law, insurers are obligated to provide: “(a) At least 45 days prior to policy expiration, an insurer shall deliver to the named insured . . . (1) an offer of renewal of the policy contingent upon payment of premium . . . stating . . . (A) Any reduction of limits or elimination of coverage . . . .”[7] For commercial policies, insurers are further required to provide written notice by mail at least 30 days prior to any reductions or changes in the conditions of coverage, and such changes are only valid if supported by a specific reason (e.g., willful or grossly negligent acts, failure to mitigate losses, etc.).[8] Together, these insurance statutes are designed to protect policyholders from insurers that may wish to quietly reduce coverage at the time of renewal.

To comply with these statues, insurers will routinely add a “California Changes Endorsement” to the end of a policy issued in California. The endorsement will simply state the insurer’s promise to comply with the above conditions regarding renewals or cancellation of the policy.

That said, insurers have no financial incentive to do more than the bare minimum required for compliance, leading to constant testing to determine the boundaries of these legal protections. As a concrete example, what if an insurer sends a notice because your renewal policy will include a new exclusion. How much information does the insurer have to provide? Is the full text of the exclusion required? Just the name of the exclusion? What about a simple notice stating “Coverage may be changed upon renewal”?

Case law provides additional insight to determine the requirements under these statutes. The California Supreme Court has concluded that “no change may be made in the terms of the renewal policy without notice to the insured.”[9] When an insurance company changes, reduces, or limits the coverage or benefits of a policy upon renewal, the notice of such change must “be provided in a ‘plain, clear and conspicuous writing.’”[10] This rule applies with particular force where “the coverage portion of the insurance policy would lead an insured to reasonably expect coverage for the claim purportedly excluded.”[11] The “conspicuous” requirement is met where the notice is “displayed or presented” in a way that it would be “noticed” by a reasonable person.[12] Examples of conspicuous notice “includes . . . a heading in capitals . . . larger type than the surrounding text, or in contrasting type, font, or color to the surrounding text of the same size . . . .”[13] Moreover, the notice of reduction in coverage must be “specific.”[14] Thus, “a general admonition to read the policy for changes is insufficient.”[15] The failure to provide “adequate notice” renders the attempted reduction or limitation in coverage “ineffective.”[16]

Because every judicial decision is necessarily limited to the facts before the court,[17] the validity of any particular notice would have to be challenged in court for a conclusive determination. That said, policyholders who find themselves lacking coverage they expected due to changes made at renewal should consult with coverage counsel to determine whether the insurer’s notice complied with the legal requirements to make the change enforceable.

Conclusion

For business owners operating from their homes, there may be coverage opportunities for business-related claims under a Homeowner’s policy. An E&O policy should also be considered with appropriate endorsements to clarify coverage for any revenue streams not squarely within the business’s primary function. It is also critical to monitor all notices received from insurers prior to renewal to ensure you are fully informed of any intended reductions in coverage. Only through such diligence can policyholders make an educated choice in determining whether to renew or seek coverage elsewhere.

*David A. Gauntlett is a principal of Gauntlett Law and represents policyholders in insurance coverage disputes regarding intellectual property, antitrust, and business tort claims, as well as in the underlying actions. Mr. Gauntlett can be reached at (949) 553-1010 by voicemail or dag@gauntlettlaw.com. For more information, visit Gauntlett Law at www.gauntlettlaw.com.

[1] 439 Md. 142 (2014).

[2] Id. at 146.

[3] Id. at 168.

[4] Id. at 157.

[5] Id.

[6] Golden Bear Insurance Company E&O Policy, Form GB-PLL002 (03 2020).

[7] Cal. Ins. Code § 678 (for personal lines policies); see also Cal. Ins. Code § 675.5 (same requirements for commercial policies).

[8] Cal. Ins. Code § 672.2(c)(1).

[9] Industrial Indemnity Co. v. Industrial Accident Commission of California, 34 Cal. 2d 500, 506 (1949).

[10] Everett v. State Farm General Ins. Co., 162 Cal. App. 4th 649, 663 (2008).

[11] E.M.M.I. Inc. v. Zurich American Ins. Co., 32 Cal. 4th 465, 469 (2004).

[12] Broberg v. Guardian Life Ins. Co. of Am., 171 Cal. App. 4th 912, 922–23 (2009).

[13] Id. at 923.

[14] Davis v. United Services Auto Ass’n, 223 Cal. App. 3d 1322, 1332 (1990).

[15] Id.

[16] Id. at 1333.

[17] Rosen v. State Farm Gen. Ins. Co., 30 Cal. 4th 1070, 1076 (2003) (“‘It is a well-established rule that an opinion is only authority for those issues actually considered or decided.’”).