Monday, August 31, 2009

College Students and Homeowners' Insurance Gaps

By Christopher J. Boggs, CPCU, ARM, ALCM
August 26, 2009

With kids settling back into the routine of the school year, parents now have time to review their insurance program to assure there are no newly-created gaps in coverage or limits. Of special interest, and the focus of this article, are college students (especially freshman away from home for the first time). Being away from home (the "residence premises") and at school can create unique exposures and possible gaps in protection.

Is the Student an "Insured" for Property and Liability?

Students who leave home to attend college may begin the semester as fully-protected "insureds," but can end the semester in a protection gap without property or liability protection extended from their parent's homeowners' policy. Status as a "full-time" student is the key to full insurance protection.

Insurance Services Office's (ISO's) standard homeowners' policy (HO 00 03) defines "insured" relative to a student to mean:

5. b. A student enrolled in school full time, as defined by the school, who was a resident of your household before moving out to attend school, provided the student is under the age of:
(1) 24 and your relative; or
(2) 21 and in your care or the care of a person described in a.(1) above

"Enrolled… full time" is the key. As long as the student who lives away from the residence premises meets the defined age requirement and is considered a full time student by the institution in question, he qualifies as an insured. However, if he drops a couple classes and falls below the institution's definition of "full time," a potential coverage gap is created.

I began the first semester of my freshman year with an 18-hour load. Early in the semester, I discovered I had taken on too much and that there were teachers (and classes) I just didn't like. The result - I ended the semester with 11 hours on my schedule. Twelve hours was considered full-time by the university; so, six weeks into my first semester I failed to meet the definition of a full-time student. My parents were not informed (at least not by me) that I no longer met "full-time" status; and even if they had been, I doubt, "what about his insurance protection" would have been the first thought across their minds.

If the student no longer meets the requirements contained in the definition, there may be a gap in both property and liability protection that is not discovered until after a loss or injury occurs.

Beyond the potential loss of insurance protection, there are exposures and losses unique to college students that are excluded simply by way of the policy language or created by the circumstances of the policy wording.

Property Protection Gap

Property of a full-time student kept in a dorm room is covered for all the same causes of loss as is the parent's personal property. However, there is a theft exclusion if the student was not at the location within the 60 days immediately prior to the loss. This exclusion would not likely apply during the winter break as it is less than 60 days. The only time this exclusion might apply is if the student leaves his personal property for the summer. If the semester ends in mid-May and the student does not return until classes begin in mid-August, theft coverage ceases sometime around the middle of July.

Students with a Trade

Two brothers in my dorm were trained barbers. Their dad was a barber and he had them attend barber school prior to or soon after beginning college just so they had a trade they could practice to earn money while in school. Every evening, the "barber" brothers would set up chairs at both ends of the hall and guys would line up to get a haircut (starting at about 7 going non-stop to about 11). At $5 per cut, these guys made a killing; and for us students it was cheaper than any cut in town. To top it off, they were good barbers.

Does this enterprise meet the definition of a "business" as defined in the homeowners' policy? The answer depends on the jurisdiction as there are state-specific endorsements that alter the definition, but likely this is a business by definition. As such, any liability arising out of the business' activities is excluded.

Possible Solutions

Two of these three gap-potential issues could be solved with a Contents Broad Form policy (HO 00 04, aka Renters' policy); and the last could be fixed by use of one of several endorsements. Rather than depending on the student's status as "full-time," checking the calendar to find the last time the student was at his dorm or self-insuring a potential "business" exposure, simply insure the exposures on the student's own policy with applicable endorsements.

Eligibility for an HO-4 is not limited to apartments, rental houses or other such residence facilities. Since coverage is based on the contents (the stuff), an HO-4 can be written to cover the insured's stuff and liability anyplace he lives - whether it be in an apartment, in the spare room over a body shop or a dorm room. The advantage of providing the student his own coverage is that he is protected for property and (more importantly) liability losses almost regardless of the surrounding circumstances and anything that happens is not on the parent's insurance. Further, the agent develops a relationship with the soon-to-be independent homebuyer, car owner and family man (or woman).

Contents coverage (the HO-4) is so cheap in relation to the coverage it provides that most parents should likely be willing to provide the protection once the possible gaps and parental advantages are explained. And for students older than the age limits allowed in the policy language, an HO-4 is essentially required.

The business exposure will require one more step, the attachment of an endorsement to either the parent's homeowners' policy or the student's contents policy if purchased (HO 00 04). If an HO-4 is purchased, the Permitted Incidental Occupancies (HO 04 42) endorsement needs to be attached to the HO-4 to extend the liability protection necessary to cover the business exposure plus provide coverage for the "tools of the trade." However, if the parents choose to forego the purchase of a separate student policy, the Permitted Incidental Occupancies - Other Residences (HO 24 43) needs to be attached to their policy, listing the location of the work (be careful not to get too specific).

Both business-exposure endorsements extend liability protection to cover general liability exposures and losses arising out of the named operation. But there are two limitations that must be known:


Coverage is provided on the named premises only. If the insured leaves the premises, coverage ceases; and

As hinted to, this is coverage for general liability losses only. There is no coverage for any sort of professional liability losses. In the case of the barbers, there is no barbers' professional liability coverage provided by either endorsement.

Short of attaching a home-based business endorsement or a BOP (both with proper endorsements), these business limitations cannot be overcome with standard homeowner policy endorsements.

College Student Conclusion

Agents cannot possibly know everything that goes on in the lives of their clients; but they can notify their clients of gaps and gap-closers. If the insured's auto policy is written by the agency, the ages of every household member should be in the files. If any household members have reached college age, send a note to the client explaining that college students create unique insurance exposures that should be addressed.

Notifying a client with this potential exposure accomplishes three objectives: 1) gives the agent the opportunity to close any coverage gaps to which their client may be exposed; 2) keeps the agent's name (and person) in front of the client - building relationships and loyalty; and 3) the negative-positive that such notification can be very useful in defending against any errors and omissions claim arising out of an uncovered loss.

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