Maine High Court Upholds Insurer for Non-Renewing Homeowners Policies Over Day Care in Home

April 12, 2004

The Maine Supreme Court has upheld the right of an insurer not to renew a homeowners policy for insureds operating at-home day care centers, even though the operators had a separate commercial policies for their businesses.

In York Insurance Co. v. Superintendent of Insurance, decided on April, 7, Justice Donald Alexander writing for the court found that the insurer’s stated reason that the day care business contributed to higher traffic in the home and presented the insurer with a heightened duty to defend were reasons enough for its non-renewal.

The case began with two 2003 administrative rulings in which the insurance superintendent found that York had not met its burden of proving that the reasons for non-renewal were “good faith reason[s] rationally related to the insurability of the property” as required under Maine law.

The Superior Court overturned a 2003 administrative ruling that York had shown that the reasons for non-renewal. Now the high court has handed York a victory by upholding the lower court reversal of the administrative rulings.

The case involves two homeowners insurance policies issued by York Insurance Company. The policies contain identical business pursuits exclusions and endorsements stating that a home daycare is an excluded business. There is no dispute that under both policies, York had no obligation to indemnify the insureds for losses arising from the daycare business. York’s concern was over the potential for exposure to claims against the homeowner’s policy by users of the daycare business.

The first insured had homeowner’s insurance with York since 1994. They obtained a license to operate a home daycare in 1998, and opened the business in 1999. The homeowner asked York to provide coverage for the daycare. York refused. The homeowner then obtained commercial liability coverage for the daycare business from another carrier. According to York, it did not discover the first insured’s home daycare business until February 2002, in the course of collecting information related to their automobile policy. Shortly thereafter, York sent a notice of nonrenewal, effective June 10, 2002.

The second insured had homeowner’s insurance with York, or its predecessor, since 1984. They did not open their daycare business until 1999, at which time they obtained commercial liability coverage through another carrier. In May 2002, a York claims adjuster discovered the existence of the daycare business while investigating an unrelated claim. Shortly thereafter, York sent a notice of non-renewal, effective December 14, 2002.

The notice of non-renewal, sent to both homeowners, stated:
“The reason for nonrenewal is the insurability of this risk is threatened due to the discovery of the business conducted on the premises. The insured is currently operating a day care business on the insured premises substantially increasing our liability exposure.”

Both policyholders requested a hearing before the superintendent to contest York’s decision not to renew the policies. In general, York presented the same evidence in both cases. A York representative testified that the company could be required to defend lawsuits arising from the daycare business even though the policy excludes coverage for business-related losses because, under Maine law, an insurer’s duty to defend is broader than the duty to indemnify

York submitted its underwriting guidelines for homes with daycares. York is no longer issuing new policies if there is a daycare in the home, and will renew a homeowner’s policy only if York also writes the commercial liability policy for the daycare. A memo fromYork’s in-house counsel stated that the presence of a daycare is related to insurability of the property and that “we do not insure daycare exposures.”

The representative further testified that the home daycare business is not a market that York is targeting, and that the premiums for homeowner’s insurance do not take into account the increased exposure due to the presence of the daycare.

York expressed particular concern about (1) liability exposure due to possible child sexual molestation claims that may lie dormant for years after the policy period expires, and (2) increased liability exposure under the homeowner’s policy for ordinary incidents such as slip-and-falls due to the greater number of people who come on to the property. York also submitted copies of summaries of cases from other jurisdictions showing that other insurance companies have had to pay claims arising from a home daycare business, even though the policies had business pursuits exclusions.

York’s representative testified about several homeowners’ claims that York had paid when there was a dispute as to whether the insured’s loss was personal or arose from a home daycare business. No documentation was provided regarding these claims, and none of the cases had been litigated. At the second hearing, the York representative provided records of defense costs paid by York for an insured who had been accused of dumping chemicals on his property, even though the policy contained a pollution exclusion.

Based on this evidence, the hearing officer found that York had not established a reason “rationally related to the insurability of the property” for non-renewal under Maine law. The hearing officer stated in findings in both cases that “[n]o evidence was submitted to suggest a lawsuit or claim has ever been brought under the policy in question, nor was any documentary proof submitted to demonstrate an increased likelihood of a suit being brought solely as a result of the existence of the daycare operations.” Because the policyholders each had a commercial liability policy covering the business, the hearing officer concluded that “a policy specifically covering the business exposure would respond to any daycare-related claims, thus shielding the homeowners policy, at least in part, from any duty to defend.”

The hearing officer ordered York to renew the two policies on the same terms as the expiring policies.

According to the latest ruling by the high court, the hearing officer’s finding recognized that “in part” the homeowner’s policy was not shielded and that the separately insured home daycare business could result in increased duty to defend exposure for the York homeowner’s policy.

York’s actions are governed by the Maine Property Insurance Cancellation Control Act which gives policyholders certain rights and restricts insurers’ capacity to freely cancel or decline to renew various types of property and casualty policies, when the policy has been in effect 60 days or more. The statute at issue in this case, requiring that the insurer provide reasons for non-renewal, provides, in relevant part:

“The reason or reasons for the intended non-renewal action shall accompany the notice of intent not to renew and the reason or reasons shall be explicit. Explanations such as “underwriting reasons,” “underwriting experience,” “loss record,” “location of risk,” “credit report” and similar insurance terms are not by themselves acceptable explanations of an insurer’s intended non-renewal of a policy insuring property of the kind defined in section 3048. The reason for non-renewal shall be a good faith reason rationally related to the insurability of the property.”

The court maintained that the legislature’s choice of the term “rationally related” indicates that what is required is proof of “a reasonably conceivable state of facts” establishing that the insurer’s decision is founded in reason, rather than being based on whim or caprice, and is related to the insurability of the property.
The hearing officer’s finding that the commercial policy on the daycare operations would address daycare related claims “thus shielding the homeowner’s policy at least in part, from any duty to defend “inferentially accepted York’s position that the daycare operation—though separately insured—would increase its duty to defend exposure.”

The court also agreed that York established that a daycare business will increase traffic to and at the property covered by its homeowner’s policy; increased traffic increases the risk that a greater number of claims could arise, compared to what would occur on a normal homeowner’s property without an associated daycare business drawing people to the property; and York would have a heightened exposure to a duty to defend claims arising on the property covered by its homeowner’s policy, even if those claims arose from the on-premises business activity.

Thus, the high court ruled that York met its burden to establish there was a rational basis for its decision not to renew.

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