Author: Chris Boggs
Believe it or not, these two photos are of the same house (please open this article in Chrome if you cannot see the images below):
According to early reports, an explosion caused by a natural gas leak turned this $1.2 million house into a pile of sticks and rubble. Tragically, the homeowner was killed in the explosion and her husband was severely injured. But even in the midst of this tragic situation, and while the investigation was still progressing, rumors about the real" reason the explosion happened began to swirl. One unconfirmed and unfounded rumor was the operation of a meth lab.
Although the meth lab theory is almost certainly nothing but idle gossip (and interesting water cooler talk), an exploding meth lab does trigger an interesting homeowners' (HO) insurance question: Does participating in an illegal act affect insurance coverage? In this case, does an explosion in a meth lab preclude coverage?
Coverages A Dwelling and B Other Structures
Dwelling (Coverage A) and Other Structures (Coverage B) are provided open peril (risk of direct physical loss, all risk") protection in the HO-3 and HO-5. Coverage is provided unless it is specifically excluded. Are there any applicable exclusions related to damage caused by the explosion of a meth lab?
No, there are no exclusions in the unendorsed HO related to an explosion caused by poor management of a meth lab. The only two exclusions that could potentially applying are:
SECTION I PERILS INSURED AGAINST
A. Coverage A Dwelling And Coverage B Other Structures
2. We do not insure, however, for loss:
c. Caused by:
(6) Any of the following:
(b) Mechanical breakdown, latent defect, inherent vice or any quality in property that causes it to damage or destroy itself;
SECTION I EXCLUSIONS
B. We do not insure for loss to property described in Coverages A and B caused by any of the following. However, any ensuing loss to property described in Coverages A and B not precluded by any other provision in this policy is covered.
3. Faulty, inadequate or defective:
b. Design, specifications, workmanship, repair, construction, renovation, remodeling, grading, compaction;
c. Materials used in repair, construction, renovation or remodeling; or
of part or all of any property whether on or off the "residence premises".
Both exclusions contain a similar exception that gives back coverage for any damage caused by any ensuing loss not otherwise excluded. Even if any of these exclusions possibly apply, the exception means the carrier owes someone for this loss.
However, there are provisions specific to Other Structures that could present a problem is this loss occurred in or to an other structure":
B. Coverage B Other Structures
2. We do not cover:
c. Other structures from which any "business" is conducted; or
d. Other structures used to store "business" property. However, we do cover a structure that contains "business" property solely owned by an "insured" or a tenant of the dwelling, provided that "business" property does not include gaseous or liquid fuel, other than fuel in a permanently installed fuel tank of a vehicle or craft parked or stored in the structure.
Unless the makers are altruistic pushers, giving this away to those poor folks addicted to meth, most meth labs are for business purposes. If the carrier discovers that there was a meth lab, the explosion damaged the other structure and that the liquid was gaseous or liquid fuel, they have grounds to deny coverage for the outbuilding (if there is one).
Coverage C Personal Property
Unlike Coverages A and B, Coverage C in the HO-3 is named peril coverage meaning that the peril causing the loss must be specifically listed for coverage to apply. There isn't much question here, the list of covered perils specifically lists explosion:
SECTION I PERILS INSURED AGAINST
B. Coverage C Personal Property
We insure for direct physical loss to the property described in Coverage C caused by any of the following perils unless the loss is excluded in Section I Exclusions.
The apparent total destruction of personal property is also covered by the HO-3 policy in effect. And if the HO-5, which grants open peril coverage for personal property, is in place, the loss is not excluded and is thus covered.
Section II Liability
If the explosion injured another person or damaged property, could the insured, or their legal representative, be held legally liable for the injury or damage because of the exploding meth lab? That is a question for the courts, not this article; however, the concept of legal liability is detailed in the article, How Does a 'Person' Become Legally Liable.
For the purposes of this article, assume the insured is found legally liable? Is there coverage from the HO policy?
Unequivocally, there is no coverage from the HO for such liability. Two exclusions take away any chance of coverage, the business exclusion and the controlled substance exclusion.
E. Coverage E Personal Liability And Coverage F Medical Payments To Others
Coverages E and F do not apply to the following:
a. "Bodily injury" or "property damage" arising out of or in connection with a "business" conducted from an "insured location" or engaged in by an "insured", whether or not the "business" is owned or operated by an "insured" or employs an "insured".
This Exclusion E.2. applies but is not limited to an act or omission, regardless of its nature or circumstance, involving a service or duty rendered, promised, owed, or implied to be provided because of the nature of the "business".
(Note: "Business" means: a. A trade, profession or occupation engaged in on a full-time, part-time or occasional basis; or b. Any other activity engaged in for money or other compensation, except the following (none of the exceptions apply));
8. Controlled Substance
"Bodily injury" or "property damage" arising out of the use, sale, manufacture, delivery, transfer or possession by any person of a Controlled Substance as defined by the Federal Food and Drug Law at 21 U.S.C.A. Sections 811 and 812. Controlled Substances include but are not limited to cocaine, LSD, marijuana and all narcotic drugs. However, this exclusion does not apply to the legitimate use of prescription drugs by a person following the lawful orders of a licensed health care professional.
There are no exceptions applicable to either of these exclusions in this loss situation. As already stated, few build a meth lab for personal use, so the intent is to make money. Even if the business use exclusion does not apply, the controlled substance exclusion applies because the explosion in our fantasy case resulted from the manufacture of a controlled substance.
Remember, this is only a theoretical discussion. No law enforcement official has postulated on the theory of a meth lab. Please don't spread the idea a meth lab was the cause of this explosion.
Within the ISO world, there do not appear to be any endorsements that alter these conclusions. Yes, there is the Permitted Incident Occupancies endorsement (HO 04 42) that removes the business" use exclusion for other structures; but it seems unlikely any homeowner would ask for the endorsement saying that there is a meth lab operating at the premises (what is the rating structure for such an operation). And saying that it was anything else is material misrepresentation which voids coverage.
Who Gets Paid and How Much?
Regardless the ultimate findings of cause, the insurance carrier owes someone but who. The owner was killed in the explosion and her husband lives and works as a doctor in West Virginia, thus he does not appear to reside with the named insured precluding him from protection as an insured (unless named on the policy).
For sake of the discussion, assume the husband is not named on the policy and does not qualify as a you" or an insured otherwise. If this is the case, who gets paid when the insured is no longer around?
The mortgagee is ignored as a known loss payee. Once the mortgagee is satisfied, does the insurance carrier owe anyone else?
Death of the named insured is addressed in the very last provision of the unendorsed HO policy. The form states:
If any person named in the Declarations or the spouse, if a resident of the same household, dies, the following apply:
1. We insure the legal representative of the deceased but only with respect to the premises and property of the deceased covered under the policy at the time of death; and
2. "Insured" includes:
a. An "insured" who is a member of your household at the time of your death, but only while a resident of the "residence premises"; and
b. With respect to your property, the person having proper temporary custody of the property until appointment and qualification of a legal representative.
The insured's legal representative becomes the insured and is entitled to payment for the property. But the amount of payment is a function of plans to rebuild.
Although both the HO-3 and HO-5 provide dwelling coverage on a replacement cost basis (subject to proper limits), replacement cost is paid only when the dwelling is rebuilt. If the new" insured makes the decision not to rebuild the premises, the carrier owes actual cash value (ACV) only.
Personal property is covered at ACV in the unendorsed HO-3 and HO-5. Valuation of personal property is changed to replacement cost if the HO 04 90 Personal Property Replacement Cost Loss Settlement endorsement is attached. But, like the real property side, replacement cost is owed only when the property is replaced or repaired, otherwise the carrier owes only the personal property's ACV.
Depending on the decisions made by the legal representative, the carrier may owe only the ACV for all real and personal property damage. Nothing in the policy requires more than the ACV when property is not replaced, even when a mortgagee is involved.
Bringing this to a Close
Investigators determined the cause was, in fact, an internal gas leak. There was no meth lab and there never was (as best we can tell at this point). Although I knew this up front, the goal of this article was to review how a homeowners' policy might respond when the damage is the result of this type of an illegal act.
Last Updated: July 19, 2019