“Residence Premises”: The ISO Homeowners’ Hidden Total Loss Exclusion

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By Jerry L. Kennedy, CIC

Let’s say your agency provides the homeowners insurance for the following clients:

  • Jim, who was recently relocated by his employer to Raleigh, North Carolina; his home in Seattle, Washington, is up for sale and is being rented until it sells.
  • Ervin, a widower, is in a nursing home and it is unclear when or if he will return to his home in Austin, Texas.
  • LeAnn and Tyler just bought a “fixer upper.” They have hired a contractor for renovations which are expected to take six months, and are continuing to live in their apartment during that time.
  • Lloyd purchased a home for his daughter and her family.
  • Bailey has sold her home, but moved out before closing.

These clients all have one thing in common: a Homeowners Policy that may not provide coverage in the event of a loss!


Definition of “Residence Premises”— More Important than You Think

One of the least known, but potentially most serious, limitations of coverage seen in a Homeowners Policy is not found in the exclusions, but in the policy’s definition of “Residence Premises.”

The ISO Homeowners Policies (HO-2 Broad Form, HO-3 Special Form, HO-5 Comprehensive Form, and the HO-6 Unit-Owners Form) all provide coverage for the dwelling located on the “residence premises.” The policy defines the “residence premises” as the single family home where the insured resides, which is the address indicated in the policy declarations. Most people would read this definition as merely a description of the home that is being insured.

However, in a number of court cases across the country, insurance companies have used this definition to successfully deny coverage for property losses, many of them total losses, to homes that weren’t owner-occupied when the loss occurred. The argument successfully made follows—in other words, this is how the insurance companies, and in some cases the courts, connected the dots. And, for each of the examples cited previously, insurance companies successfully denied claims.


Is There A Solution?

In response to the concerns of insurance professionals across the country, ISO recently filed a mandatory endorsement adopted by most states. The endorsement is titled Residence Premises Definition Endorsement (HO 06 48 10 15) and it revises the definition of “residence premises” to include the dwelling where you (the policyholder) reside at the inception date of the policy or the beginning of the current policy period. This means that as long as the policyholder lived in the dwelling on the inception date of either the new policy or the renewal policy, it will still be a “residence premises” if, at the time of a loss, residency is not there.

This will make it more difficult for insurance companies to deny claims when the home is owner-occupied at inception or policy renewal, and the loss of owner occupancy occurs later in the current policy period. For some of the situations mentioned earlier, this revised definition may provide coverage until the end of the policy period in which residency ceased, but will not provide coverage once the policy renews. For this reason, this new, more specific requirement that the home be owner-occupied at the beginning of the policy period may make coverage denials even more likely when the lack of owner occupancy continues past policy renewal.

The revised definition also provides no help for those situations when the insured delays occupying a new home after purchase, as in the case of needing to make repairs prior to occupancy, since it requires owner occupancy at policy inception. To address this exposure, ISO introduced the Broadened Residence Premises Definition Endorsement (HO 06 49 10 15). In exchange for an additional premium, the endorsement suspends the owner occupancy requirement from the definition of “residence premises” when the residency of the policyholder will not begin on the inception date of the policy period. This is effective for those situations when the non-owner occupancy is on a temporary—not permanent—basis. Of course, the use of this endorsement is subject to the insurance company’s underwriting requirements and any filings made with the state’s insurance regulatory body.


Conclusion

The “residence premises” definition is not a problem with all insurers because many do not include a residency requirement in their specific policy forms. Many states also require exclusionary language to be clearly stated in the policy, which may not be the case here.

Whether or not there is a limitation in the definition of “residence premises,” insurance professionals need to be alert for situations when a home may no longer be owner-occupied. The best time to find out if a home you insure on a Homeowners Policy is no longer owner-occupied is before the loss occurs!

When there is a change in occupancy, the insurance company should be promptly advised, and whenever possible, the insurance professional should arrange for more appropriate coverage— often a dwelling fire policy.

ISO’s Homeowners Program allows for three- to four-family homes to be insured when the owner lives in one unit.

Many insurance companies have policies that typically define the “residence premises” as the one- or two-family dwelling where the owner resides. Insurance professionals should be aware that coverage has been denied in cases where the owner-occupied home had more units than allowed by the definition. In one case, the insureds suffered loss to a triplex where they lived and the company denied the claim since it was a threefamily dwelling and their definition of “residence premises” only allowed for one- or two-family dwellings.


Learn More, Earn More

P&C Insurance Essentials

The CIC Personal Lines Institute and CISR Insuring Personal Residential Property Course are both excellent options for learning more about the Homeowners Policy and associated exposures and coverages. And for reference material, consider purchasing The National Alliance Research Academy’s P&C Insurance Essentials book— it has a full chapter devoted to the HO Policy


Jerry L. Kennedy, CIC, is a principal with Foisy & Kennedy, Inc., in Grand Coulee, WA. He’s been a member of the CIC national faculty since 1995 and serves as educational consultant in Nevada. He’s chaired agent forums with ISO and serves as a faculty member for IIABA’s Virtual University. Jerry also served as a member of the CISR Board of Governors from 1995–2001.

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