Exposure requires underwriting care
By Roy C. McCormick
The great number of young, two-income families … [as well as] general economic conditions have sparked an increase in home business activities—one being babysitting for fee.
Financial reasons have made it necessary for many people, including grandmothers and others with background experience in caring for children, to move into the home babysitting industry. It is likely that they lack knowledge of both the risks and homeowners policy provisions that apply to these activities. Insurance agents and companies can serve their insureds well by explaining the exposures and insurance needs.
Commercial day care centers present a different insurance situation. They are classified in commercial lines manuals and are assigned a class code for commercial general liability insurance. Specialty companies skilled in the underwriting of such risks may be utilized.
Our immediate concern is with limited home day care activity and homeowners insurance. The great number of young, two-income families has opened up income opportunities for care of their young children during working hours. In most communities there has been a substantial increase in the number of people providing such day care in their homes.
In addition, general economic conditions have sparked an increase in home business activities—one being babysitting for fee. Many people turn to childcare for additional income in the face of rising costs of food, housing, fuel, health care insurance and other necessities. Some may engage in it as an interim source of income when they lose a longtime job because of downsizing.
Insurance professionals would be well advised to check the provisions of homeowners policies with respect to liability insurance. In general, Section II excludes claims for bodily injury or property damage arising out of or in connection with “business” conducted from an insured location or engaged in by an insured.
Homeowners policies, including those drafted by the Insurance Services Office and the American Association of Insurance Services, define “business” to include an activity engaged in for money or other compensation. It does not include: home day care services for which no compensation is received other than mutual exchange of such services, or the rendering of home day care services to an insured’s relative.
Court decisions at the state appellate and Supreme Court level underscore that basic personal liability coverage in a homeowners policy does not extend to babysitting that is a means of livelihood.
A 1981 Kansas Appeals Court decision—Krings v. Safeco Insurance Company of America—provided precedent-setting guidelines with its holding that: “A business pursuit is constituted of two elements: continuity and profit motive. As to the first, there must be a customary engagement or a stated occupation; as to the latter, there must be shown to be such activity as a means of livelihood, gainful employment, procuring substance or profit, commercial transactions or engagements.”
In 1987 (Haley, Appellant v. Allstate Insurance Company, Appellee, New Hampshire Supreme Court. No, 86-508, July 22, 1987.), the New Hampshire Supreme Court provided solid guidelines for determining that babysitting for profit is not basically covered by homeowners personal liability insurance. An insured had been caring for five children, five days a week on a regular fee basis to earn extra money. A small boy in her care was bitten outside the house by a dog.
The babysitter reported the incident promptly to her homeowners insurer, which denied coverage contending that the “business pursuits” exclusion was clearly applicable. The New Hampshire Supreme Court concluded that “a reasonable person would normally consider the provision of day care on a regular basis for profit to be a business pursuit rather than a non-business activity.” The court affirmed the judgment of the trial court in favor of the insurance company and against the insured. The policy was held not applicable to the claim.
Other cases addressed by the higher courts include: Watkins v. Brown, No. CA 142S4, Court of Appeals of Ohio, 1994, holding that babysitting for a fee, of one child whose leg was broken while under care, was a business; Rocky Mountain Casualty Company v. St. Martin et al., Washington Court of Appeals, December 1990, holding that babysitting on a regular basis for compensation was not covered; and Mid-Century Insurance Company of America v. Virginia Williams, Tennessee Court of Appeals, January 11, 2005, which was resolved in favor of the insurer. A childcare arrangement with an ongoing weekly payment was judged a regular business activity. One of several children cared for by the insured drowned in a bathtub while in her care.
Endorsements are designed for most babysitter “businesses” that are conducted at home. An optional homeowners policy endorsement is available for limited day care facilities on the premises used by those who provide childcare for a fee. Acceptance of the risk and the premium are contingent on the number of persons receiving day care services and information about the structure in which the services are conducted. The current ISO endorsement is HO 04 97; the AAIS endorsement is ML I57. Various insurers have designed their own endorsements.
To summarize, protection for such occurrences is available from numerous insurers by endorsement of homeowners policies for a reasonable premium for most such “businesses” that are conducted at home for a fee. Applications for homeowners insurance invariably make inquiry about business conducted at home. Necessary underwriting data would be provided for work such as office operation that may or may not involve customers coming to the house, beautician services, woodworking, etc. But an applicant who takes care of one or two children regularly for a fee may not think in terms of business activity.
It is important to inquire specifically about babysitting, not only when a new policy is to be written but also at renewal time. It is a growing activity and may have been started in the interim. *
Roy C. McCormick is a contributing editor with The Rough Notes Company.