Author: Bill Wilson, CPCU, ARM
Assoc. VP, Education & Research
In 2001, we learned of a potentially catastrophic coverage gap in most homeowners policies. For the past 14 years, we have written about this and discussed it in seminars and webinars across the country. For the past 10 years, we have worked with ISO through our national Technical Affairs Committee and the Mid-America Insurance Conference in negotiating a resolution to this problem that all affected parties can live with. This effort has culminated in the recently filed ISO changes addressed in this article.
Fourteen years ago, in the March 16, 2001 edition of our Virtual University VUpoint newsletter (Vol. 2, No. 6), we published what I believe was our first article on what would later become known as the “Where You Reside” homeowners insurance issue. That article was followed by several more related articles emphasizing the importance of a potentially catastrophic coverage gap in most homeowners policies we reviewed. In order to bring the issue to focus, in October 2009 we combined all of the articles into a white paper and presented a countrywide webinar on December 3, 2009. Both the white paper and webinar are linked from the “Where You Reside” page in the “Featured Resources” area of the VU.
In the meantime, in 2005, our national Technical Affairs Committee presented this issue to ISO in our annual meeting with them. For 10 years, we pursued a remedy for ISO HO forms in this forum and at the Mid-America Insurance Conference via a series of points and counterpoints until, in November 2014, we were able to reach a negotiated agreement on changes to ISO’s Homeowners program that we all could live with. Neither viewpoint “won” but we believe the resolution is workable and a starting point for further evolution and tempering of this homeowners issue.
The countrywide ISO filings effecting this change have been made with an effective date in most states of October 1, 2015. The forms changes include a new mandatory endorsement, an optional broadening endorsement, and a nonfiled notice/questionnaire form. The purpose of this article is to provide an overview of the issue and the purpose of the ISO filings. We will also identify several caveats and preview several initiatives we plan to undertake this year.
Consider the following scenarios:
- A homeowner is confined to a nursing home and then learns she will never be able to return home. Her home is fully furnished and full of her personal property, but she no longer lives there and will not be able to return. According to one interpretation by a number of adjusters and courts, at the instant she learns that she will not be able to return to her home, her residency ends and so does the coverage on her dwelling. If it is destroyed overnight by a covered peril, she has no coverage for the damage to her home, the largest asset she owns and one she would probably need to sell in order to afford the costs of long term nursing home care.
- You sell your existing home and buy or build another home. Your new home is ready and the purchasers of your old home have qualified for a loan that will be closed in 5 days. In the meantime, you move to your new residence which you have insured on a new HO policy and you allow the purchasers to begin painting, replacing carpeting, etc. in your old home. Your existing HO policy remains in force on your old house until the closing. Unfortunately, a tornado strikes the day before the closing and the adjuster denies the claim because you no longer reside in the home.
- You purchase a “fixer-upper” and place homeowners coverage effective on the date of closing. You plan to move into the home in 28 days after your contractor son completes some renovations (hardwood floors, new kitchen countertops and appliances, bathroom remodeling, etc.). Three days after the closing, a fire breaks out overnight causing $186,000 in damage to the dwelling. When the adjuster learns that you have not yet moved into the home, he denies the claim based on a lack of residency, citing three court cases in your state upholding such claim denials.
These are not hypothetical situations. In our original white paper on this issue, we identify over a dozen scenarios where residency may end during the policy term. We also cite a similar number of court cases that have considered this coverage scenario. Some courts overruled the claim denials, but a slight majority of decisions that we have identified have agreed with the interpretation that the end of residency ends the coverage on the dwelling. In addition, based on real-life claims submitted through the VU “Ask an Expert” service or directly by member agents, we are aware of at least a dozen claim denials:
- Total loss while insured was in a nursing home (KY)
- $100,000+ condo rental claim (FL)
- 5-figure loss while home was being remodeled (AZ)
- $186,000 renovation claim (GA)
- $150,000 ten-month house rental (FL)
- $135,000 four-year house rental (FL)
- $123,000 two-year house rental (FL)
- $300,000 “nonclaim” with daughter occupancy (NY)
- $229,000 total loss with niece occupancy (MN)
- Small fire loss (NC)
- Fire loss with daughter’s temporary occupancy (PA)
- Fire loss while house was undergoing renovation (RI)
Using the ISO HO-3 policy as a model form, this is the language being cited in the claim denials we’ve heard about and most of those in the court cases we’ve reviewed:
HO Insuring Agreement:
“We cover…The dwelling on the ‘residence premises’ shown in the Declarations….”
“’Residence premises’ means…The one family dwelling where ‘you’ reside….”
The basis for these denials is that, according to the policy definition of “residence premises,” if “you” (named insured or resident spouse) don’t reside in the dwelling at the time of loss, the dwelling is not a “residence premises” and, if it’s not a “residence premises,” then the insurer does not cover, under the insuring agreement, the dwelling because it’s not on the “residence premises.”
The “where you reside” language was not in ISO’s 1976 HO policies, nor was its addition in the 1984 edition mentioned in that filing. The language has been in subsequent ISO HO forms in 1991, 2000, and 2011. Our research also indicates that this language is common in most non-ISO HO forms in the marketplace, though not all policies.
For the record, OUR interpretation does not agree with that of a number of adjusters and courts. Numerous courts have held that, to be enforceable, an “exclusion” must be “clear and conspicuous.” We believe that coverage for the primary asset owned by a family should not hinge on three words in a definition referenced from an insuring agreement. There is nothing “clear and conspicuous” about this language that would lead an insured to believe that an interruption of residency would suspend coverage on the dwelling. From the standpoint of public policy, it makes little sense that, if the insured is operating a meth lab and blows up his home, there is coverage under his HO policy, while there is no coverage for a tornado destroying her home the Friday evening an 80-year-old homeowner learns that she will be confined to a nursing home henceforth.
Courts that have found FOR coverage have generally interpreted the “where you reside” language to be “words of description,” not a warranty of occupancy or a condition for coverage. Additional rationales for our continued position on this are outlined in our original white paper. And, for what it’s worth, in a past Property Loss Research Bureau publication, PLRB also took the position that this language does not preclude coverage for damage to a dwelling.
The Big “I” national Technical Affairs Committee meets annually with ISO to discuss changes in, or additions to, ISO policy form portfolios that we believe are beneficial to consumers and businesses. Our agendas are typically 150-200 pages. Some of our recommended changes are accepted fairly quickly by ISO, others are declined, and many others are discussed over a period of years before being accepted by ISO or dropped by our committee. In the case of the “where you reside” issue, we considered a number of options over a ten-year period before we reached a compromise with ISO for changes in their HO forms.
The preference of our committee would be the complete elimination of the “where you reside” language, but that was not a resolution ISO could accept. So, unlike Congress, we compromised on a mandatory conditional “grace period” endorsement and an optional endorsement that does eliminate the “where you reside” language. While, from our perspective, this is not a perfect nor ideal solution, it is one that is workable if certain caveats are followed by all parties, as discussed later in this article. In the meantime, let’s examine the changes being made in two new ISO filings – forms and rules – that have a proposed effective date in most states of October 1, 2015, along with a nonfiled notice/questionnaire form.
ISO has made two countrywide filings:
- Forms Filing HO-2015-ORPFR
Homeowners Residence Premises Definition Revised; Optional Endorsements Introduced
- Rules Filing HO-2015-RRPRU
Homeowners Manual Rules Revised
Forms Filing HO-2015-ORPFR
The forms filing includes the following new endorsements:
- HO 17 47 10 15 – Broadened Residence Premises Definition Endorsement – Unit-Owners
- HO 17 48 10 15 – Residence Premises Definition Endorsement – Unit-Owners
- MH 04 26 10 15– Residence Premises Definition Endorsement – Mobilehome
- MH 04 27 10 15 – Broadened Residence Premises Definition Endorsement – Mobilehome
The three “Residence Premises Definition Endorsements” are mandatory forms…the HO 17 48 is used with the HO 00 06 condo form while the HO 06 48 is used with all other HO forms. The three “Broadened” endorsements are optional forms…the HO 17 47 is used with the HO 00 06 condo form while the HO 06 49 is used with all other HO forms. There are two complementary Mobilehome program endorsements. You can review the endorsements by clicking on the links above.
Using an excerpt from the above forms, the mandatory endorsements redefine “residence premises” to mean the “dwelling where you reside…on the inception date of the policy period shown in the Declarations and which is shown as the ‘residence premises’ in the Declarations.” The highlighted language is new and is explained by ISO in the filing as follows [emphasis added]:
These endorsements introduce revised language to more explicitly describe that the residency requirement, when determining coverage applicability, will be satisfied as long as the insured resides at the residence premises on the inception date of the policy period. Currently, depending on insurer claims practices, a policyholder may or may not have coverage when they cease to reside at the residence premises mid-term or at renewal. These revisions will provide coverage through the end of the policy period despite mid-term changes in residency while allowing an insurer the opportunity to confirm residency as part of the renewal underwriting process.
In other words, if the insured resides in the dwelling at the inception of the (new or renewal) policy period, coverage remains in force even if the insured should discontinue residency later in the policy period. This “grace” period lasts throughout the policy term but should be reaffirmed by the carrier on each renewal.
The optional endorsements completely remove the “where you reside” language from the “residence premises” definition for a specified period of time in indicated on the endorsement. As we read these new endorsements, they can be used in two ways.
First, the inception and termination dates on the endorsement can be identical to the policy’s inception and termination dates. This is the solution IIABA sought from the beginning. Our position has always been that residency is an eligibility issue, not a coverage issue, and should be dealt with as an underwriting consideration, as it was in the pre-1984 HO forms.
Second, these endorsements can be used to temporarily remove the “where you reside” language during a specified portion of the entire policy term. The best example of this use is when a policy if first issued on a newly built or purchased home. Residency in the home may not take place for several days or a week or more following the closing of a loan. Or, as presented as a scenario at the beginning of this article, the homeowner may wish to spend a month or longer renovating the home…this endorsement could serve to clarify that there is no residency until the renovations are complete.
Rules Filing HO-2015-ORPFR
The rules filing primarily addresses the use of the Broadened endorsements on a “temporary” nonresidency basis, though there’s nothing that appears to preclude that period encompassing the entire policy period if the carrier’s eligibility and underwriting guidelines permit. This filing indicates that the Broadened endorsements, under ISO rules, are premium bearing so that the Base Premium can be increased, for example, by up to 12% (2% per month) for a six-month nonresidency period.
Nonfiled Notice/Questionnaire Form
ISO has also developed the following nonfiled form:
This form can be used by carriers on new and renewal business to provide notice to insureds of the importance of residency and, based on the insured’s responses, identify whether the Broadened endorsement is appropriate. We suspect that carriers might prefer a “stronger” notice of the importance of residency and notification of the insurer when residency is discontinued. We plan to work with ACORD in the coming months to draft an ACORD notice/questionnaire form and to determine what changes might be indicated in other ACORD forms such as the ACORD 80 Homeowner Application.
As indicated earlier, this resolution is not perfect or exactly what we believe is in the best interest of consumers, agents, and the industry at large. However, it is a reasonable compromise that we believe can serve as a starting point for a more complete market-based solution in the coming year. Still, there are caveats to this change that must be acknowledged.
First, even with a mandatory endorsement, there is still a potential for a coverage gap at policy inception for carriers who interpret the “where you reside” language to be a residency requirement for coverage. For example, on new business it is customary to provide a policy (or, more likely, a binder) effective on the date of the loan closing. However, as is often the case, the insured may not move into the home and begin residency on the date of closing. As a result, for carriers with a restrictive interpretation of “where you reside,” a Broadened endorsement should likely be used at policy inception and the insured made to understand the importance of revising the termination date on the form if move-in takes longer than expected.
Second, since renewals are usually processed a month or two in advance, even with a notice form, it’s possible that an insured might unexpectedly discontinue residency (e.g., medical conditions, unanticipated work relocation, military deployment, etc.) between completing the renewal paperwork and renewal policy inception. Again, it is critical when placing or renewing insureds with carriers that hold to a restrictive interpretation of “where you reside” that the insured fully understand the importance of providing notice of nonresidency. In such instances, then Broadened endorsement may be used until (if necessary), the account needs to move from a Homeowners to a Dwelling Fire policy.
Third, when we originally presented this issue to ISO for consideration, one of the points we made with regard to our belief that this is an eligibility, not a coverage, issue is that ISO’s own eligibility rules permit the use of an HO policy on a home under construction. Obviously, no one can reside in a home under construction, so our argument is that a literal reading of the “where you reside” language couldn’t preclude coverage because evert unoccupied home under construction would have illusory coverage, something courts have uniformly found to be prohibitive. But, for insurers who hold the restrictive interpretation of “where you reside,” the Broadened endorsement should be attached at inception for the duration of construction.
In the months prior to October 1, we will be approaching ACORD about the need to amend any existing ACORD forms and develop an industry-standard residency “notice” form.
We will be issuing a news release on this change in the near future and making contact with various industry and consumer media. We recommend that agents do the same in their local communities and communicate this change to their customers.
We plan to initiate a dialog with independent agency carriers about adopting the Broadened language that eliminates the “where you reside” language. We continue to believe that the restrictive interpretation of this language is detrimental to consumers and to the image of the insurance industry, and we believe that residency has always been, and should continue to be, an eligibility and underwriting consideration for new and renewal business, not an unclear and inconspicuous “exclusion.”
Our July 8, 2015 webinar has now been archived and is available for free by clicking this link:
The instructional portion of the webinar is one hour long, followed by a 30-minute Q&A session.
How to learn more…
If this issue is new to you, you can download our original white paper and review our original webinar on the “Where You Reside” page in the “Featured Resources” area of the VU.
How can you stay abreast of emerging issues and announcement regard this change? Subscribe to our free, biweekly Virtual University newsletter, The VUpoint. This award-winning newsletter is the primary communications vehicle we use to bring emerging, relevant, and urgent insurance coverage issues and developments to your attention. Each issue usually features a personal lines coverage article, a commercial lines coverage article, and a rotating third article on agency management, sales, customer service, or technology. You do not have to be a member agency to subscribe…many of our 10,000 subscribers in 70 countries are company underwriters, adjusters, regulators, risk managers, and defense attorneys.
Last Updated: July 14, 2015
April 10, 2015