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Vol. 6, Iss. 6
July 12, 2017

If It Looks Like A Business And Acts Like A Business …
Cautionary Insurance Tales For Home-Based Entrepreneurs

Guest Author: Julianne Garvey, Villanova Law School, 3L


In September 1985, Cody Susnik and his brother began regularly attending a day care run out of Loretta Donnelly’s home. Donnelly received payment to care for four or five children at a time, both on a part-time and full-time basis. While in the care of Donnelly, Cody was injured by another child, who apparently attempted to jump on the young boy. Cody suffered serious injuries. Cody’s parents brought suit against Donnelly, claiming that she was negligent in leaving the children unsupervised. Donnelly turned to her homeowner’s insurance for coverage. Not surprisingly, the insurer argued that the incident occurred during a “business-pursuit,” and, thus, was excluded by the homeowner’s policy. The court concluded that the day care was, in fact, a business, because it was (1) motivated by profit and (2) operated on a continuous basis. Therefore, based on this two-prong test to determine what is a business pursuit, no coverage was available.

The facts, arguments and outcome in the Kansas Court of Appeals’s 1989 decision in Susnik v. Western Indem. Co. are a familiar occurrence in the world of insurance claims, as providing day care services is a common home-based business.

Indeed, this situation is so frequent that some homeowner’s insurance companies have added specific exclusions to their policies to preclude coverage for home-based daycare services.

In 2013, Forbes reported that 52% of small businesses were home-based. In March 2016, the United States Census released the 2012 Survey of Business Owners, which showed that there are over 27.5 million home-based businesses being run throughout the country, a nearly 500,000 increase from the 2007 report.

With so many home-based business – and no doubt the internet has a lot to do with that -- courts frequently find themselves needing to apply the two-prong test to determine if the “business pursuits” exclusion is applicable. Specifically, was the activity regular and continuous, and was the activity motivated by profit? Some courts will take the profit motive a step further to decide if it was a significant source of income. Other courts have held that the significance of the profit is not necessary, just that the motivation to make one was there.

Providing day care is a common home-based business and it seems the kind of activity for which the “business pursuits” exclusion was designed. But with so many home-based businesses being carried on, of every shape and size, the potential applicability of the “business pursuits” exclusion is not always so cut and dry. However, despite the diversity of these home-based businesses, these cases share a common theme: when things go wrong with the operation of a home-based business, the mishap is often not covered by the entrepreneur’s homeowner’s policy. Consider the following cautionary insurance tales for all those who dream of starting their own business and doing it from home sweet home.

In Fitchburg Mut. Ins. Co. v. Diamond, a 1989 New Jersey federal court decision, an insured ran an antiques business from her home. A friend helped the insured load an antique cupboard into a van, to take to an antiques show. The friend apparently slipped and fell on the snowy, icy walkway of the insured’s home while in the process of assisting with the cupboard. The friend sued for her injuries and the claim was denied by the insurer, leaving a court to decide whether the injury arose from a business pursuit. The court applied the two-pronged test in determining that the business pursuits exclusion was applicable. The insured had a profit motive in her antiques business, despite the fact that she made only a modest amount of money. Likewise, the storing of the antiques in her home and the regular trips to antique shows to buy and sell her pieces satisfied the continuity or regular engagement standard. This case clearly demonstrates the hurdle that the business pursuits exclusion presents to home-based entrepreneurs that have mishaps. Not to mention why you should always shovel your walkway, especially when you are transporting large pieces of furniture!

A common argument made by insureds, in an attempt to defeat business-pursuits exclusions, is that the activity was more like a hobby than a business. This can be seen in the 2010 decision for the Tenth Circuit Court of Appeals. In Safeco Ins. Co. of Am. v. Hilderbrand, a high school student asked to have her senior pictures taken with a tiger at the animal sanctuary at which she volunteered. The sanctuary was operated on the insured’s farm. The young girl was attacked by the tiger during the photoshoot and died from her injuries. The insureds attempted to argue that the animal sanctuary was more of a hobby than a business pursuit. However, given the extensive training the insureds had in handling the animals, and the consistent maintenance and care of the sanctuary, the court found that this was more of a continuous pursuit and less of a sporadic hobby. Additionally, the sanctuary was intended to generate a profit. Whether or not a profit was actually made was irrelevant. It only mattered that the intent was there. This case serves as an example of a court taking a stricter approach to applying the business pursuits exclusions test.

While babysitting and daycare services are probably the most common business pursuits exclusion cases seen by the courts, it would be no surprise if cases involving the boarding of animals came in a close second. Housing exotic animals, like those in Hildebrand, is not an ordinary occurrence in the United States. However, boarding farm animals is. This leads to a greater potential for animal-related injuries to occur. This is exactly what happened in the 1997 Connecticut case of Pacific Indem. Ins. Co v. Aetna Cas. & Sur. Co.

The insureds owned a stable where people could pay to have their horses housed and cared for. A woman hired to care for the horses was kicked by one of them. The insurer refused to defend and indemnify the insureds, arguing that boarding horses was a business pursuit. The court again sided with the insurer, finding that the stables were run in order to make a profit and that the boarding of the horses was a continuous operation. Therefore, the business pursuits exclusion was applicable.

Dog breeding cases are also commonly seen in the context of the business pursuits exclusion. In State Auto Prop. & Cas. Ins. Co. v. Raynolds, a dog handler was bitten by a dog at the home of insureds, who bred and sold dogs for profit, as well as regularly attended dog shows. The dog handler sued for personal injury and, as expected, the insurers argued that the injury was excluded because it fell under a business pursuit. Unsurprisingly, the Supreme Court of South Carolina found that the insureds’ dog breeding was in fact a business pursuit, because it was a continuous operation and it was profit-motivated. The dogs were regularly bred, showed and sold for nearly fifteen years. Further, the insureds intended to make a profit from their dog breeding operation, even though a profit was never actually made. Despite not actually making a profit, the continuity and profit-motive standards were met, and thus the business pursuits exclusion applied. While each of these cases involves different business ideas, they all ultimately share one thing in common: they qualify as business pursuits and their mishaps were excluded from the insured’s homeowner’s policy. These cases demonstrate that the business pursuits exclusion does not discriminate, and virtually all business ideas could qualify.

There are exceptions to the business pursuits exclusion, which are argued by insureds as a means to maintain coverage of an incident. In these types of cases, there is usually no dispute that there is a business pursuit; however the insured will often argue that the injury occurred outside of the scope of the business, for example, not on the property or through a non-business related act. In some instances, courts are not inclined to accept this argument, as was the case in N. Sec. Ins. Co. v. Rosenthal. In Rosenthal, the insureds operated a couple’s therapy retreat from their home, which included room and board for paying guests. During a breakfast buffet, a guest fell through a trapped door leading to the laundry room. While it was not disputed that the retreat was a business, the insureds argued that falling through a trapdoor into the laundry room had no connection to the operation of the business, and thus fell under the “non-business pursuits exception”. The Supreme Court of Vermont, however, didn’t fall for it. After all, “[i]f [the court] were to adopt that logic, the business pursuits exclusion would seem to have no effect at all in any home-business case involving the condition of the premises.”

In some cases, the court will accept the argument that an incident fell outside of the business pursuits exclusion, evidenced by the Supreme Court of Wisconsin’s 2001 decision in Vandenberg v. Cont’l. Ins. Co. Here, an infant was accidentally suffocated to death by the 5-year old son of the insured. The insured operated a day care out of her home. While the care and supervision of other people’s children in a home day care business is clearly not covered in a homeowner’s insurance policy, the court in this case found that the care of one’s own child, in this case the insured supervising her 5-year old son, qualified as a “usual to non-business pursuits” exception. In other words, being a parent is not a business pursuit motivated by profit; it is an ongoing job that never stops.

With the rapid growth of home-based businesses, it is unlikely that business pursuits exclusion arguments will be slowing down anytime soon. Creativity and ambition are needed when it comes to starting up a new business. Some of the greatest business ideas in history started in a person’s home. But the lesson that every entrepreneur should learn from these cases is simple: make sure the business is insured. If it isn’t, then a great business idea could be over before it even begins.


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