Tom Kelly: Honesty and other drawbacks of a home-based business

Sometimes, it seems consumers get penalized for being honest.

For Bill King, 56, a genuine response to an insurance-related question sparked a chain of events that cost money and anxiety and brewed frustration and mistrust for the industry.

King is a communicator. He and his wife, Judy, 60, operate a home-based business that teaches individuals and couples how to conduct educational training sessions. So, when issues arise that need explanation and clarification, he knows the proper way to ask appropriate questions.

“I had never had a claim and had been paying premiums for years, thinking I was building some kind of working relationship,” King said. “Yet, in trying to update my policy and honestly answering questions, they cut me off without any consultation, negotiation or offer of any real temporary extension.”

About 16 months ago, the insurance carrier of King’s professional liability policy notified him that his premium was being increased 33 percent. This increase came despite his seven-year record of no claims and fully paid premiums.

“The reason given was that the insurance industry was going through hard times,” King said. “About a year later, the company gave me and my agent two weeks notice that they were withdrawing from the field of liability insurance. Therefore my policy would not be renewed. No referral was offered.”

King and his agent then scrambled to find new coverage. In the process, King remembered that he had added a professional liability rider on his homeowner’s policy years before. He telephoned the carrier to determine if his homeowner’s policy would still cover the educational enterprises.

“When the insurance company asked me how many people I was seeing in our home for business-related matters, I told them about 8-10 people a month,” King said. “They said the liability rider that I had purchased was only really designed to cover 1-2 people a month. I couldn’t believe it. Really, 1-2 people a month? Who would even think of adding a rider – or a company actually offering a rider – for 1-2 people a month?’’

Then came the stunner. The insurance company said it would not cover the business nor the home any longer. When King appealed his case (questioning the number of clients he was seeing professionally in his home) to the company’s district manager, King was told homeowner’s coverage was being denied because his home contained “knob and tube” wiring.

“I pointed out that it was the same wiring that was there when they first wrote us the policy,” King said. “The district manager referred me to the State Insurance Commissioner and to other local agents. They all told me about the high court settlements and the difficult time the insurance industry was going through.

“It didn’t seem to matter that I had an excellent credit rating, no claims, and had paid in full each year. I was being dropped, or non-renewed, by companies that I had been with for years.’’

None of the agents King contacted (including those representing the new liability carrier) could get homeowner underwriting despite the fact that he had by then signed a new general and professional liability policy for his work in the house. All cited the knob and tube as well as the business exposure.

“The bigger of the two problems – ‘problems’ I had for nearly 20 years when we licensed our business there – seemed to be the wiring, rather than the home business,” King said. “Since I did not want to move my business, I decided to take on the wiring upgrade.”

Electrical estimates and opinions varied widely ($8,000 to $15,000). This prompted King to get an electrical inspection to see what was actually required to meet local codes. It turned out that only 10 percent of the wiring was still in knob and tube.

The electrical upgrade to code will cost about King about $3,000 for the modest, clean, 1,814-square-foot home. He had to refinance the house to do the upgrade and the lender would not complete the refinance without funds being earmarked for the upgraded electrical package. This has become a common practice, especially given the more stringent, rigid, insurance underwriting guidelines.

“The electrical work was needed,” King said. “What was not needed was weeks of being told I could not insure my home because ‘the industry is going through hard times.’ ”

It makes you wonder … would this insurance snowball even have come down the hill if King had fudged on the number of clients entering his home for professional instruction?