So far in this column, I’ve written several articles that are titled, or could have been titled, “Just Because It’s Not Covered Doesn’t Mean It’s Not Covered.” Sometimes a policy almost certainly was never intended to cover a particular type of loss, but when a specific set of circumstances and facts coincide with a quirk in policy language, we may find coverage where none was arguably ever intended. That’s the subject of this article.
For example, an ISO HO 00 03 (HO-3) homeowners policy covers three types of direct damage: (1) Coverage A for damage to the dwelling, (2) Coverage B for damage to other structures, and (3) Coverage C for damage to personal property. If a homeowner’s in-ground swimming pool is damaged by a covered peril, coverage usually falls under Coverage A or B.
However, in the case of an ISO HO 00 04 (ho-4) renters policy, there is only one type of direct damage coverage and that is Coverage C for damage to personal property. So, what happens if someone insured under an HO-4 policy owns an in-ground pool and it’s damaged by a covered peril? There’s no Coverage A or B on an HO-4 policy, so does that mean there’s no coverage for damage to this personally owned property? Let’s consider an actual claim.
A husband and wife owned an incorporated machine shop in a rural area. They insured the steel Butler-type building and business personal property on a commercial package policy. They also lived in the building, in an apartment at the rear of the structure, and insured their personal property and liability exposures on an ISO HO-4 policy.
Often their grandchildren visited on the weekends. Primarily for their grandchildren’s benefit, they installed an in-ground swimming pool at the rear of the building, presumably because this was less dangerous than playing with lathes, drill presses, and laser cutters.
During a severe storm, a tree was uprooted and caused about $3,000 damage to the swimming pool. The claim was reported to their agent who had placed both their commercial and personal lines insurance with two different insurers. The commercial lines carrier denied the claim as this was an undeclared structure and most of the damage was arguably excluded under the Property Not Covered section of the commercial property policy.
The HO-4 carrier also denied the claim on the basis that the swimming pool was real property, not personal property, and without Coverages A or B, there is no coverage under an HO-4 for real property, ONLY personal property. The adjuster advised that personal property was property that was movable and not affixed to the real estate.
The agent argued for coverage, citing several policy provisions to support that contention. The first issue was what constitutes personal property? If you asked the owners to describe their business property, they’d likely point to the equipment, machinery, stock, etc., owned by and used in their business.
If you asked them what is their personal property, they’d likely indicate their apartment furniture, clothing, and of course, the swimming pool they personally own.
Black’s Law Dictionary defines “personal property” in a traditional way, but includes the following: “Personal property also can refer to property which is not used in a taxpayer’s trade or business or held for the production or collection of income. When used in this sense, personal property could include both realty (e.g., a personal residence) and personalty (e.g., personal effects such as clothing and furniture).”
The term “personal property” is not defined in the HO-4, so the agent’s argument was that the Black’s Law Dictionary was, from the insured’s perspective, a reasonable interpretation of what “personal property” means. When a contract term has more than one reasonable interpretation, that term may be deemed to be ambiguous and, if so, the insured’s interpretation usually prevails.
Next, the agent pointed out that the HO-4’s Property Not Covered section included a lengthy list of property that was specifically excluded. If the policy drafters did not want to cover real property in general or swimming pools in particular, they could have included that in this list of excluded property, but they didn’t.
Finally, the agent directed the adjuster’s attention to the Additional Coverage – Collapse. This coverage says, “Loss to an awning, fence, patio, pavement, swimming pool, underground pipe, flue, drain, cesspool, septic tank, foundation, retaining wall, bulkhead, pier, wharf or dock is not included…unless the loss is a direct result of the collapse of a building.”
In other words, IF the insured’s swimming pool had been damaged, not by windstorm, but by the collapse of the machine shop building, there the policy clearly would have covered that loss. However, the adjuster had said that ONLY personal property is covered by the HO-4. So, if there is collapse coverage for damage to the swimming pool, then the swimming pool must be personal property since, according to the adjuster, that’s the only type of property coverage by the policy.
The adjuster, conceding that the scales of justice appeared to tip in favor of the insureds, paid the claim under the HO-4 policy.
Is a renters policy intended to cover damage to real property under Coverage C? Probably not, but in this confluence of circumstances — logic and policy language — the adjuster acquiesced and paid the claim. If there is a need to clarify the contract language, an easy fix would be an entry for real property in the Property Not Covered section of the policy.
Next month, we’ll examine another potentially erroneous preconception about coverage in a CGL policy. We know that there is no coverage if a contractor damages his own work. Or is there?
Wilson, CPCU, ARM, AIM is the founder and CEO of InsuranceCommentary.com and the author of four books, including “When Words Collide: Resolving Insurance Coverage and Claims Disputes.”
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