When Is The Rental Of My House A Business Use So As To Preclude Coverage For Losses?

In a recent case,¹ a federal appeals court ruled that the insureds’ rental of their house to a good friend for two-and-a-half years constituted a “business purpose” for which coverage for a loss was properly denied by the insurer under the relevant homeowners insurance policy.

In this case, the insureds vacated and began renting their home in Michigan in 2014 after a job promotion made them move to Ohio to conduct corporate training for an indefinite time. The insureds then rented their Michigan home to a good friend under a one-year lease, and thereafter on a month-to-month basis. The insureds subsequently visited their Michigan home one time before a fire significantly damaged it in December of 2016.

After the fire, the insureds made an insurance claim with their insurer. The homeowners insurance policy covered fire damage, but denied coverage over any portion of the home used for “business purposes.” The policy defined “business purposes” as “property rented or held for rental by you.” The policy also contained an exception that provided, “Rental of the premises is not considered business when: A. it is rented occasionally for use as a residence[.]”

After the insurer denied the claim, the insureds filed suit. The insurer maintained the insureds were not using their Michigan home as a private residence, but instead for an uncovered business purpose because an uninterrupted, two-and-a-half-year lease cannot be construed as “on occasion” or “from time to time.” The insureds claimed that the rental of their Michigan home was “occasional” because “occasion” has been defined by Merriam-Webster as “a favorable opportunity or circumstance … a state of affairs that provides a ground or reason … a need arising from a particular circumstance.” Thus, the insureds argued that their decision to relocate to Ohio provided a ground or reason for the rental of their Michigan home.

The court ultimately ruled that the continuous occupancy of the insureds’ home by the renter for an uninterrupted two-and-a-half years constituted an uncovered business purpose, and that the property did not qualify under the exception for an “occasional” rental of the premises. In ruling so, the court noted that other jurisdictions have held that similar long-term rental agreements were not “occasional.” Rather, “occasional” refers to rentals occurring now and then, such as vacation rentals.
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¹ Kelly v. Metro. Grp. Prop. & Cas. Ins. Co., No. 19-1326, 2020 WL 1845869 (6th Cir. Apr. 13, 2020).