Business Use Exclusion Is Reasonable and Common in a Homeowners Policy

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Warranty Statute Does Not Apply to an Exclusion

Steven Kutchera bought a homeowners policy from defendant State Farm Fire and Casualty Company. In 2020, Kutchera submitted a claim to State Farm under that policy, alleging that his garage collapsed because of the weight of ice and snow on the roof. State Farm denied the claim on the ground that Kutchera had been using the garage for business purposes, so it was excluded from coverage. In Steven Kutchera v. State Farm Fire And Casualty Company, No. 20-cv-930-jdp, United States District Court, W.D. Wisconsin (September 15, 2021) the USDC was asked to make an exclusion a warranty or an exclusion.

BACKGROUND

Kutchera concedes that he was using his garage to repair cars for money during the relevant policy period. But he contends that the damage to his garage was unrelated to any car repair work that he was doing, so State Farm was prohibited from denying coverage under Wis.Stat. § 631.11(3), which applies when there is “a failure of a condition” or a “breach of a promissory warranty.” State Farm contends that the business-use clause is an exclusion, not a warranty or a condition, so § 631.11(3) doesn’t apply.

Kutchera asserts claims for breach of contract, bad faith, and a violation of Wis.Stat. § 628.46 for untimely payment of an insurance claim. Both Kutchera and State Farm moved for summary judgement.

Kutchera purchased a homeowner’s policy with an off-premises structures endorsement, which would afford coverage for the garage. Kutchera began running an automobile service center out of the garage. He contacted State Farm to buy an insurance policy for the garage, but State Farm told him that it didn’t provide insurance for “automotive-type repair.” So Kutchera bought a business policy for “Kutchera LLC” from another insurance company, with an annual premium of $2,590.

Later, Kutchera cancelled his business policy. He contacted State Farm again, stating that he had “basically closed” the service center and needed insurance on the garage for “personal use.” His homeowner’s policy still included an off-premises structures endorsement, so no additional policy was needed.

State Farm’s homeowner’s policy included an off-premises structures endorsement with the following language: “This coverage does not apply to any structure: … (4) used either completely or in part for business purposes; …”

In January 2020, Kutchera reported to State Farm that the roof on his garage had collapsed as a result of the weight of accumulated ice and snow. A claim adjuster visited the garage and observed that there was a hydraulic car lift inside. But Kutchera told the adjuster that he closed the garage in 2017. State Farm later obtained tax records, invoices, and other records from Kutchera showing that he was still doing business out of the garage in 2018 and 2019. His ledger showed $22,179 in gross receipts for 2019, and most of that amount was for dates during the policy period. In May 2020, State Farm denied Kutchera’s claim because its investigation had revealed business use of the garage.

ANALYSIS

The portion of the policy at issue in this case is an endorsement for “other structures.” The endorsement includes the following clause: “This coverage does not apply to any structure . . . used either completely or in part for business purposes.”

The statute provides that is the basis of Kutchera’s argument states: “No failure of a condition prior to a loss and no breach of a promissory warranty constitutes grounds for rescission of, or affects an insurer’s obligations under, an insurance policy unless it exists at the time of the loss and either increases the risk at the time of the loss or contributes to the loss.”

The question presented to the court was whether the clause is a “condition” or a “promissory warranty” within the meaning of the statute, as Kutchera contends, or simply an exclusion, as State Farm contends.

The clause at issue is written as an exclusion: it states that the policy “does not apply” to structures used for business purposes.

There is little case law interpreting § 631.11(3), and the Wisconsin Supreme Court has indicated that the meaning of the terms hasn’t changed and is the same as their common-law meaning. In an insurance policy, an exclusion is a provision which eliminates coverage where, were it not for the exclusion, coverage would have existed. An exclusion limits the scope of coverage provided by the policy in the first place.

A promissory warranty is a statement made by the insured, which is susceptible of no construction other than that the parties mutually intended that the policy should not be binding unless such statement be literally true. It is clear that the clause relating to business use isn’t a statement by Kutchera that he won’t use his garage for business use. Rather, the clause is framed as an exclusion because it limits the scope of coverage takes out events otherwise included within the defined scope of coverage, and expressly refuses to assume a specific hazard or risk, namely a structure used for business purposes.

Black’s Law Dictionary says: “A warranty that facts will continue to be as stated throughout the policy period, such that a failure of the warranty provides the insurer with a defense to a claim under the policy.” That definition is consistent with and supports State Farm’s view. A business-pursuits exclusion, such as the one in this case, is a common exception to the broad coverage provided in homeowners and general liability insurance policies.

Kutchera’s position, if adopted by the court, would significantly change the law on business-use exclusions, requiring insurers in each instance to prove that the loss was related to the business use. In a situation like Kutchera’s, involving a structure that had both personal and business uses, determining which use contributed to the loss could turn into an expensive and time-consuming investigation.

Taken to its logical conclusion, Kutchera’s view would permit an insured to use a homeowner’s insurance policy to obtain coverage for a structure that was used entirely for business purposes, so long as any damage to the property was unrelated to the business use, such as a tree falling on the structure.

The USDC noted that Kutchera raised interesting questions but his view isn’t supported by Wisconsin law and would significantly change the scope and application of business-use exclusions in Wisconsin. Therefore, the court granted State Farm’s motion for summary judgment on the breach-of-contract claim. As for Kutchera’s other claims, both are contingent on the success of his breach-of-contract claim. A bad-faith claim requires the plaintiff to show that there is no reasonable basis for the insurer to deny the insured’s claim for benefits under the policy.

The court granted State Farm’s motion for summary judgment and denied Kutchera’s. The clause at issue is written as an exclusion, not a warranty or a condition. Kutchera’s other arguments challenging the scope and validity of the business-use clause also fail. Accordingly, State Farm is entitled to summary judgment on the breach-of-contract claim. Kutchera’s other claims are contingent on the success of his contract claim, so those claims fail as well.

ZALMA OPINION

Kutchera knew exactly what he was doing. He had purchased business insurance to cover the garage and paid a hefty premium for the coverage. He cancelled that policy and told State Farm that he had stopped doing business at the garage. In so doing he misrepresented the use of the garage to State Farm who discovered the lies during its investigation. Because there was clearly no coverage Kutchera tried to use a statute to make coverage that didn’t exist. He should have told the truth and kept the business coverage.


© 2021 – Barry Zalma

Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders.

He also serves as an arbitrator or mediator for insurance related disputes. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 54 years in the insurance business.

He is available at http://www.zalma.com and zalma@zalma.com. Mr. Zalma is the first recipient of the first annual Claims Magazine/ACE Legend Award. Over the last 53 years Barry Zalma has dedicated his life to insurance, insurance claims and the need to defeat insurance fraud. He has created the following library of books and other materials to make it possible for insurers and their claims staff to become insurance claims professionals.

Go to the podcast Zalma On Insurance at https://anchor.fm/barry-zalma;  Follow Mr. Zalma on Twitter at https://twitter.com/bzalma; Go to Barry Zalma videos at https://www.rumble.com/zalma ; Go to Barry Zalma on YouTube- https://www.youtube.com/channel/UCysiZklEtxZsSF9DfC0Expg; Go to the Insurance Claims Library – https://zalma.com/blog/insurance-claims-library/  The last two issues of ZIFL are available at https://zalma.com/zalmas-insurance-fraud-letter-2/  podcast now available at https://podcasts.apple.com/us/podcast/zalma-on-insurance/id1509583809?uo=4

 

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1 Response to Business Use Exclusion Is Reasonable and Common in a Homeowners Policy

  1. Anthony Verreos says:

    As a matter of opinion, if an insurer takes premium for a legal risk (in this case insuring a home with a detached garage), they ought to owe a duty to pay for the claims associated with their policy, with the exception of those excluded due directly to use and/or occupancy of a business nature which acted in some way to contribute to the loss. As a matter of public policy – this seems the fair thing to do.

    On the other hand, I’m sure every honest agent will agree that it is never OK to lie or misrepresent the facts to an insurer. This is a case where the insured tried to save a relatively small amount of money, and instead ended up wasting far more on his legal fees and uninsured losses.

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