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This proceeding arose upon a request for hearing made by Fritz & Beverly Jipson to contest the pending nonrenewal of homeowners insurance coverage provided to them by York Insurance Company of Maine. On June 10, 2002, the insurer mailed a notice of nonrenewal effective August 28, 2002 on Custom-Pac policy number YMKB15800, citing “the insurability of this risk is threatened due to the business conducted on the premises. The insured is currently operating a day care business on the insured premises substantially increasing our liability exposure” as the grounds for nonrenewal.1 Pursuant to 24-A M.R.S.A. §§ 3051 and 3054, York Insurance Company of Maine provided the insured with proper notice and the insured's hearing request was timely.

A hearing in this matter was held on August 6, 2002 with Connie Mayette sitting as designated hearing officer, pursuant to 24-A M.R.S.A. §§ 210 and 3054. The purpose of the hearing was limited to establishing the existence of proof or evidence given by the insurer to support its reason for policy nonrenewal. Staff representing York Insurance Company of Maine appeared at the hearing. Fritz Jipson represented himself at the hearing.

FINDINGS OF FACT

1. The Jipsons have insured their home with York Insurance Company or its predecessors since 1988. The company in its current organization has written the coverage since 1996, obtaining it in a “book roll” from the York conversion.2 The company has no application from the insured.
2. Mrs. Jipson has operated a daycare in the home since 1974.
3. Since at least 1996, the York homeowners policy has contained an endorsement that amends the policy to provide coverage for “Permitted Incidental Occupancies,” and lists “Nursery” as the permitted occupancy.

ANALYSIS AND CONCLUSION OF LAW

Title 24-A M.R.S.A. § 3051 states that the reason for nonrenewal must be a good faith reason rationally related to the insurability of the property, and 24-A M.R.S.A. § 3054 requires the insurer to establish the proof or evidence of their reason for nonrenewal.

Linda Gallant-Beever, Assistant Vice President of Personal Lines, and John Paris, Personal Lines Specialist in Risk Control, appeared on behalf of the insurer. Ms. Gallant-Beever testified that the company discovered the daycare exposure during the re-underwriting process for renewal, as a result of a telephone survey. She submitted a copy of the Mueller APV Report dated 4/18/2002 [EXHIBIT 3] showing Mrs. Jipson as a self-employed daycare provider.

Although the company’s notice cited “the insurability of this risk is threatened due to the business conducted on the premises. The insured is currently operating a day care business on the insured premises substantially increasing our liability exposure” as the reason for nonrenewal, the arguments provided at the hearing to support the proposed action focused primarily on the perceived risk associated with the company’s duty to defend an exposure for which the policy does not provide indemnification. No evidence was submitted to suggest that such a suit or claim had ever been brought under the policy in question. Ms. Gallant-Beever provided an example of a claim York paid for losses arising out of a daycare business when there was a dispute between the daycare liability insurer and the homeowners insurer, but she did not submit any documentary evidence of the claim. She testified that the claim did not go to court.

Ms. Gallant-Beever submitted a section of a computer printout for an unrelated homeowners policy for which York has paid a significant amount of expenses for litigation on an excluded exposure. The claim description indicates “alleged disposal of hazardous and toxic substances at insureds premises allegedly caused plaintiffs bodily injury.” The claim appears to encompass 23 separate claimants. Ms. Gallant-Beever testified that the policy contains a clear pollution exclusion, but the company still had to defend the claims, and had incurred defense costs over $600,000 to date.

Additionally, she submitted a copy of a Maine Law Court case demonstrating exposure related to the “duty to defend,” Elliott v. Hanover Insurance Company, 711 A.2d 1310, (Me. 1998). In that case, the insured operated a scrap metal business on premises and was insured on a homeowners policy apparently providing similar coverage as the policy in question. Both policies contain a “business pursuits” exclusion which states that personal liability coverage and medical payments to others do not apply to bodily injury or property damage arising out of or in connection with a business engaged in by an insured. The claimant, Elliott, had come to the premises to sell the insured some scrap metal, and was injured by molten metal lying in the driveway. In that case, the Court concluded that Hanover, the homeowners insurer, must defend the insured if the allegations made are within the risk insured against. Therefore, as the homeowners policy provides coverage for bodily injury or property damage to others, the insurer may be required to defend a suit even if the policy contract excludes the particular exposure giving rise to the loss.

Additionally, Ms. Gallant-Beever submitted two cases involving Allstate Insurance Company homeowners policies involving daycares. The Virginia Supreme Court in one case ruled the contract was ambiguous, and therefore found the claim to be within the scope of the homeowners policy for indemnity. The Illinois Supreme Court in the second case ruled that Allstate had no duty to defend or indemnify on behalf of the parents, but reversed the lower court ruling and remanded for further proceedings to determine the status of coverage for the daughter. In that case, the teenage daughter worked part-time for pay in her mother’s daycare, and a child under the daughter’s supervision drowned in the pool. The exclusion for business activities on the policy stated that “business” did not include the “occasional or part-time activities of an insured who is under 21 years of age.” The court concluded that the provision was ambiguous and that the policy provided coverage for the daughter’s negligence.

The third case submitted concerns a claim involving a West American Insurance Company homeowners policy in Ohio. A child being cared for overnight (after regular daycare hours) was scalded in the bathtub, and the court determined that the care was outside of the insured’s normal business and was being offered as part of a personal friendship without payment being received. Ms. Gallant-Beever argued that this demonstrated the homeowners policy could be held responsible if something happened while a parent was running late and came in at 5:02 p.m. She stated it could be determined to be a personal exposure, but emphasized again that duty to defend is the biggest problem.

John Paris, Personal Lines Specialist in Risk Control for York, offered his perspective from a claim background. He testified that he has seen many cases the company had to defend when there is no coverage under the policy, as the company has the duty to defend because of the way the homeowners contract reads. He stated that it represents substantial amounts of money, and with the accusations on daycares out there today, the company has to defend whether the accusations are true or not. There was no evidence to support the company’s repeated references to accusations against daycares, or the “hype” in the media.

Ms. Gallant-Beever testified the daycare exposure is above and beyond the rate charged. She referenced a market available through the New England Excess Exchange which covers the home and business both on one policy. She stated that this group has the technical expertise for daycares and can set a rate for them.

Mr. Jipson argued that none of company’s issues have anything to do with his wife’s personal daycare. He stated that it has been his wife’s livelihood since 1974 and that they have been with York, and subsequently Commercial Union, since 1988 with no claims problems. Ms. Gallant-Beever stated that the policy was new to Commercial Union in 1996, and that they had obtained it as part of the business from the York Mutual conversion.

Mr. Jipson stated that they have a commercial general liability policy through the Adult and Children’s Alliance and submitted a certificate of insurance showing coverage with American Equity Insurance Company. He stated that they have maintained this policy for the past five or six years. The certificate he provided is for a policy period 6/23/01 to 6/23/02. Mr. Jipson indicated at the hearing that the policy is still in force.

Ms. Gallant-Beever stated that even with a general liability policy in force, there could be loopholes and exclusions and again cited the fear of getting caught up in the allegations of molestation often referenced in the media. She further cited disputes between carriers over who will pay when two different companies are involved, and she stated that the company would never know if the commercial policy had been cancelled for some reason. While she indicated this nonrenewal action was partly because York does not write the general liability, she also stated that she was not offering to write it. She stated her belief that York’s commercial lines department is also avoiding daycares due to the hype in the media about “sexual molestation in the churches.” She stated that York’s guidelines for personal lines show that they do not write daycare exposures at all for new business, and will nonrenew those for which York writes both coverages if there is a dog, pool, trampoline, or other attractive nuisance. No evidence was provided to suggest that the Jipsons have any of these elements on their property.

Mr. Jipson testified that the policy says there is a daycare; that he has been paying for it all along; and that the company has known about it all along. He pointed out the notation on the policy for declarations for Form No. CH 044204921 which states “Permitted occupancy – nursery” and for which an additional premium is charged. The endorsement states “For an additional premium, we cover the business described in the Declarations and conducted by an insured on the residence premises…” It amends the business pursuits exclusion found in the policy, stating “this exclusion does not apply to the necessary or incidental use of the premises to conduct the business described in the Declarations,” (i.e. “Permitted occupancy – Nursery”).

Ms. Gallant-Beever testified that the underwriter must have issued that endorsement not really knowing what was there, and that the company only discovered there was a daycare when they received the Mueller APV report. She argued that the endorsement is not to cover a business, just for incidental occupancy, like an office in the home. She stated that to cover a daycare the company would use a different form stating there is Section II coverage, whereas the daycare exclusion form #23 states there is NO Section II coverage. She appeared to be referencing the ISO Form HO 23 61 04/91 which clarifies that a daycare is considered a business and is subject to the business exclusion in the policy. She added that there would be an additional charge, of perhaps $200, and reiterated that they no longer offer this coverage (the daycare coverage endorsement) due to the hype in the media. She further stated that the company is finding a lot of things in re-underwriting that are not written correctly. Finally, she indicated that she had believed the endorsement on this policy was for a greenhouse. Mr. Jipson asserted that there is no greenhouse.

The Superintendent of Insurance has jurisdiction over this matter pursuant to 24-A M.R.S.A. § 3054. York Insurance Company of Maine bears the burden of proof for establishing that its stated grounds for policy nonrenewal exist. Based on the evidence presented at the hearing, the Superintendent hereby concludes that York Insurance Company of Maine has not established adequate grounds for policy nonrenewal.

The company’s stated reason for nonrenewal was the substantial increase in its liability exposure due to the daycare. Based on all of the evidence at the hearing, from the time it was first written by Commercial Union it appears that nothing has changed with respect to the property and the risk assumed under the policy. Since at least 1996, the company has provided coverage for a “nursery” on the premises and collected additional premium for such coverage. According to the testimony at the hearing, the insureds have never filed a claim under the policy, nor has a third-party claim ever been filed. No evidence was offered to suggest any physical changes in the property.

In addition, the testimony focused on the duty to defend an exposure that the policy does not cover. In this case, the policy appears to specifically cover the exposure, for an additional premium. Many references were made to the “hype in the media,” “accusations against daycares,” and “sexual molestation in the churches,” but no evidence was provided of any claims arising out of these issues.

The claims issues arising in other states with Allstate policies involved ambiguities in the contract wording which is different from York’s policies. In addition, many of the claims cited involved occurrences that are routine exposures in homes that do not have daycares (i.e. exposures relating to swimming pools, dogs and injuries to a friend’s child). There was no evidence to indicate that these types of exposures occur more frequently in a daycare home than in a non-daycare home. Furthermore, a home without a daycare would likely not have additional liability insurance as is the case here. The company did not offer any evidence to demonstrate that homes with daycares have higher loss ratios when compared to homes without daycares.

Representatives from the company surmised that the underwriter who issued the endorsement for a nursery must have made a mistake and did not know that a nursery is a daycare. On the other hand, the company’s testimony confirmed that York has historically covered homes with daycares but has recently decided to stop insuring such risks. Company testimony indicates that such risks no longer meet the company’s underwriting guidelines. It appears, therefore, that the only change that has occurred since the policy was first written is in the underwriting guidelines of the company.

While an insurer is free to change its underwriting guidelines with respect to the acceptance of new business (as long as such guidelines are not unfairly discriminatory), the nonrenewal of homeowners policies is governed by 24-A, M.R.S.A. § 3051. In order to nonrenew an existing policy, the company must offer proof or evidence to show that its stated reason is a good faith reason rationally related to the insurability of the property. If a company could satisfy this standard merely by amending its underwriting standards, then the Maine Property Insurance Cancellation Control Act would provide little or no extra protection for renewal policies versus new business. In this case, the company’s stated reason is that the existence of the daycare substantially increases its liability exposure. The company did not provide sufficient evidence to establish that its current exposure is any different from what it has historically assumed under previous policies covering the same property.

INDEX OF RECORD:

ORDER AND NOTICE OF APPEAL RIGHTS

The intended nonrenewal is not approved. York Insurance Company of Maine is directed to renew policy # YMBK15800 on the same terms as the expiring policy.

This Decision and Order is a final agency action within the meaning of the Maine Administrative Procedure Act. It is appealable to the Superior Court in the manner provided in Title 24-A M.R.S.A. § 236 and M.R. Civ. P. 80C. Any party to the hearing may initiate an appeal within 30 days after receipt of this notice. Any nonparty whose interests are substantially and directly affected may initiate an appeal within 40 days of the effective date of this Decision and Order.

1 Although the policy being nonrenewed contains coverages for both homeowners insurance and automobile insurance, the company’s notice indicated that it was only seeking to nonrenew the homeowners coverage and was willing to renew the automobile coverage under a separate policy.
2 In 1996, Commercial Union Insurance Company merged with York Mutual of Maine, and renamed the merged entity Commercial Union York Insurance Company. At the time of the merger, policies previously written with York Mutual converted upon renewal to Commercial Union York’s forms and rates. In 2001, the company was renamed again, becoming York Insurance Company of Maine, part of the OneBeacon Insurance Group.

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