HOMEOWNERS' INSURANCE: THE DEVIL RESIDES IN THE DETAILS
Reading and understanding all of the language in a homeowners' insurance policy are not formalities to be skipped over
while searching for the signature line. As with any contract, the fine print can have real and lasting consequences, and its
contents will control over any contradictory verbal assurances. Taking the time to understand the terms of their policies
might have headed off bad outcomes for homeowners in two recent cases.
Business Purposes Exclusion
Joan bought property consisting of a home, two barns, and other outbuildings. She also purchased a homeowners'
insurance policy that excluded coverage for any nondwelling structure that was rented out "unless used solely as a private
garage." Joan rented the barns to a commercial marina, which used them for winter storage of customers' boats. When one
of the barns collapsed due to snow and ice on its roof, Joan submitted a claim for loss of the barn.
The insurer denied coverage, prompting Joan to point out that the rental exclusion should not apply because the marina
was using the barn as a "private garage." Her point made sense as far as it went, but the insurer won because of a separate
exclusion from coverage for any nondwelling "used in whole or in part for business purposes." Joan's main occupation was
as a financial analyst, and she brought in only a few thousand dollars by renting out the barn. But all that was necessary for
the business purposes exclusion to apply was that the insured regularly engage in the conduct with an intent to profit.
It was significant for the court that, by failing to disclose her conduct, Joan had prevented the insurer from knowing the
risks it was insuring. The purpose of a business pursuits exclusion, after all, is to rule out coverage for a whole set of risks
and liabilities flowing from business activity. It did not matter that the damage to the barn was not caused by the boats that
were stored there for profit.
At the heart of another dispute over homeowners' insurance coverage was what turned out to be an erroneous assumption
by the homeowners that "residents of your household" meant any persons living on the same parcel of land, even if in a
different house from that occupied by the insureds. Ken and June lived in one house and their daughter and 10-year-old
grandson lived rent-free in another house that was only 20 feet away and had the same mailing address. The close-knit
family often shared meals and activities, and Ken and June regularly cared for their grandson.
When the grandson accidentally shot a playmate with a rifle, Ken and June submitted a claim under their homeowners'
policy, which covered "residents of your household who are your relatives." The insurance company succeeded in arguing
that it had no obligation to defend the grandson in a suit for his friend's injuries because he was not a resident of Ken's and
In legal terminology, a "household" is a collection of persons living together as a unit under one roof or within a single
"curtilage." "Curtilage" is a technical term for the area next to a house that is inside the same enclosure, is used for the
intimate activities of the house, and is protected from observation by passers-by. The house where the grandson lived did
not meet any of these criteria so as to make the grandson part of Ken's and June's "household." The four individuals in this
case probably constituted a household in many respects and for many purposes, but not in the context of interpreting the
homeowners' insurance policy.
The free-wheeling give and take in various online forums is leading to more defamation claims by individuals and
businesses. Given that so many online speakers are anonymous, however, Internet service providers sometimes become
trapped between the speaker and his offended subject. Before the alleged victim can seek redress, the perpetrator must be
identified, and providers often resist divulging such information. Courts are still in the early stages of setting rules for
these legal contests.
An electronics company brought an action in California against an anonymous individual who allegedly had trashed the
company's publicly traded stock on an Internet message board. Among other comments, the secretive critic had said that
the company produced "low tech crap" and that its president was manipulating stock prices. In its efforts to identify the
speaker, the company discovered that his online name was registered with a service provider with headquarters in Virginia.
When the plaintiff sought permission from a Virginia court to examine the provider's records, the request was met with
stiff resistance. The provider argued that it would infringe on the constitutional right to speak anonymously if it were
forced to reveal subscriber information. Citing the principle that the courts of one state generally should respect court
orders from a sister court, the Virginia court allowed the review of the provider's records. The right to free speech was not
an impediment to the court's ruling, as "the constitutional guarantees of free speech afford no more protection to the
speaker than they do to any other tortfeasor who employs words to commit a criminal or civil wrong."
Wounded by disparaging comments posted anonymously on an Internet message board, another company similarly sought
to unmask its detractors by forcing information from a provider. In that case, the court saw more merit in the free speech
defense raised by the provider, but it did not completely block the request for subscriber information. The court balanced
the right to speak anonymously with the right of the injured company to protect its proprietary interests and its reputation.
The result was a compromise of sorts: The company could gain access to the speakers' identities only if it first showed to
the court's satisfaction that it could make out a plausible defamation case against them. This meant exactly identifying the
offending statements and demonstrating how they harmed the plaintiff. In this case, the critics remained safely in the dark
because the company could not substantiate its claims that the comments adversely affected its stock price and its hiring
AGE DISCRIMINATION IN EMPLOYMENT
The combined effects of an aging population and a sluggish economy have led to an increase in lawsuits alleging age bias
in the workplace. The Age Discrimination in Employment Act (ADEA) prohibits age discrimination in the employment of
persons who are at least 40 years old. The ADEA covers most private employers of 20 or more persons. It forbids age
discrimination in advertising for employment, hiring, compensation, discharges, and other terms or conditions of
employment. Retaliation against a person who opposes a practice made unlawful by the ADEA or who participates in a
proceeding brought under the ADEA is a separate violation.
The ADEA takes into account that sometimes there is a correlation between age and the ability to fulfill the requirements
of a job, and that even older workers must comply with employers' rules and requirements that have nothing to do with
age. An employer does not violate the ADEA if it takes an otherwise prohibited action where age is a "bona fide
occupational qualification" necessary to the operation of a particular business. Nor is it a violation to differentiate among
employees based on reasonable factors other than age or to fire or discipline an employee for good cause.
Before suing in court, an aggrieved person first must allege unlawful discrimination in a charge filed with the Equal
Employment Opportunity Commission (EEOC) and then wait 60 days to allow the EEOC an opportunity to resolve the
dispute informally before taking further legal action. Court remedies include injunctions (court orders stopping a
discriminatory practice), compelled employment, promotions, reinstatement with back pay and lost benefits, and an award
for attorney's fees and costs of bringing the suit. If a court finds that an employer's violation of the ADEA was willful, it
may also award liquidated damages equal to the out-of-pocket monetary losses of the plaintiff.
It is not essential to an ADEA lawsuit that there be a "smoking gun" in the plaintiff's favor in the form of derogatory
age-based comments about older employees. In fact, remarks of that kind will not support liability if they have no
connection to the challenged employment decision. In a recent lawsuit brought by an on-air television reporter who was
fired, a boss's comment that "old people should die" was an insignificant stray remark because it was made about the boss's
own father. On the other hand, it was very helpful to the plaintiff's case that the same boss had stated repeatedly that she
wanted to "go with a younger look" and she did not like having an older man appearing on the news.
Employers sometimes select older workers to be terminated as a money-saving measure, given their generally higher
compensation and perhaps their being close to vested retirement benefits. There is no ADEA violation in a decision that
treats employees differently because of something other than age, such as money. An employer will not be liable under the
ADEA for terminating an employee solely to prevent his pension benefits from vesting. (That conduct might very well
violate ERISA, however.) Such a scenario is distinguishable from situations in which employers face ADEA liability
because they have made decisions based on the stereotype that productivity and competence always decline with old age.
BE CAREFUL WHAT YOU FAX
The Telephone Consumer Protection Act (TCPA) prohibits any person within the United States from using a telephone
facsimile machine to send an unsolicited advertisement to a person with whom the sender does not have an existing
business relationship. A prior business relationship will be treated as consent to a faxed advertisement unless the recipient
withdraws that consent.
Court remedies under the TCPA should command the attention of any company giving thought to a fax advertising blitz
directed at potential customers. A person receiving an unsolicited fax may bring an action to prohibit violations of the
TCPA and for actual damages, or statutory damages of $500 per violation. For a willful or knowing violation, a court has
the discretion to triple the amount of statutory damages. Actual damages may amount to cents per page and the costs of
tied-up telephone lines. Statutory damages, however, could reach into the millions for a "blast-faxed" advertising
campaign with hundreds or thousands of faxes, with each transmission considered a separate violation.
Not only can the cost of TCPA violations be steep, but in some cases that cost may be extracted from the personal assets of
corporate officers, not just the business itself. In one case, the officers and sole shareholders of a small advertising service
were found to be personally responsible for statutory damages based upon nearly a million unlawful faxes a month, over
They were personally liable not simply because they held particular offices and sat on the board of directors, but because
they actively oversaw and directed the unlawful conduct. With good reason to believe that their actions violated the TCPA,
the individual defendants had persisted, as the court put it, "with their eyes and pocketbooks wide open."
THE MARITAL DEDUCTION: A VALUABLE ESTATE PLANNING TOOL
The federal estate tax marital deduction is one of the most important estate planning tools available to a married couple.
The basic marital deduction rule is that, upon the death of the first spouse, the value of any interest in property passing to
the surviving spouse is deducted from the decedent spouse's gross estate. This means that the amount passing to the
surviving spouse escapes taxation in the decedent spouse's estate.
There is no limitation on the value of property that can qualify for the marital deduction. By transferring sufficient assets to
the surviving spouse in the proper manner, estate tax liability upon the first spouse's death can be completely avoided.
At first view, the estate tax marital deduction may seem to be a government giveaway. It is not. The advantage afforded is
not the total avoidance of estate tax on the transferred property but, rather, the deferral of such tax. The marital deduction
requires that the transfer of assets to the surviving spouse be made in such a way that those assets are exposed to estate tax
liability in the surviving spouse's estate.
The obvious advantage of deferring the estate tax liability is that the surviving spouse will have the use of the tax dollars
that would otherwise have been paid to satisfy the tax liability of the first spouse's estate. The deferral of tax liability also
postpones the possible need to sell off assets that the surviving spouse might wish to preserve in order to obtain funds to
satisfy the tax liability.
Transfer by Will
A key decision is the selection of the type of transfer to be made to the surviving spouse. The simplest form of transfer that
qualifies is the outright transfer of assets by will. The problem with such a transfer is that it saddles the surviving spouse
with the responsibility of managing the assets and also exposes him or her to possible pressures from relatives, creditors,
or charities to transfer the property for their benefit.
Transfer by Trust
The marital deduction law permits, with no loss of the deduction, the transfer to the surviving spouse in trust. There are
two basic types of trusts that have become the standard means for taking advantage of the deduction without burdening the
surviving spouse with the problems of outright ownership of the first spouse's estate.
The first type of trust is known as a "power of appointment trust." The property is placed in trust under the will, giving the
surviving spouse a life interest in the income generated by the trust and a power to give the assets in question to anyone,
including to himself or herself or to his or her estate. This power can be restricted so as to be exercisable by the surviving
spouse only by will and still qualify for the marital deduction.
The second type of trust, rather than giving the surviving spouse the power to ultimately dispose of the assets, permits the
decedent spouse to designate the ultimate recipients of the property qualifying for the marital deduction. This trust is
known as the Qualified Terminable Interest Property (QTIP) trust. The surviving spouse must receive a lifetime income
interest in the property. No one other than the surviving spouse may have any rights in the trust assets during the surviving
spouse's lifetime. The decedent spouse's personal representative must elect QTIP treatment on the estate return. The crucial
feature of the QTIP trust is that the decedent spouse retains the ability to control the course of ownership of the assets
qualifying for the marital deduction.
Coordination with the Lifetime Credit
It has become standard estate planning practice to coordinate the estate tax marital deduction with the unified credit
against the estate tax. The unified credit against the federal estate tax allows an individual to pass a certain amount of
assets free from estate tax liability regardless of the identity of the recipients. For decedents who have died in 2002 or who
die in 2003, that amount is $1 million; for decedents dying in 2004 and 2005, the amount is $1,500,000; for those dying in
2006 to 2008, the amount that can pass tax-free is $2,000,000; and for 2009, the amount is $3,500,000. In a will, the
amount allowed to pass tax-free is normally transferred under what is known as a "credit shelter" or "by-pass" trust. Then,
the transfer under the marital deduction rules is made so as to prevent the taxation of the remaining assets.
Clearly, in the case of a married couple owning sufficient assets to make estate taxation a possibility, estate planning must
take into account the marital deduction rules and the associated tax savings. Given the complex nature of the many rules
involved, you should always seek the guidance of a qualified attorney for any estate planning needs.
As a sales representative for a computer software company, Richard received an annual salary and sales commissions as
determined by a compensation plan that was part of his contract. There was a specific formula for how commissions were
to be calculated, but language in the plan gave the company broad authority to make a final decision about compensation
and to change the plan at any time. For sales commissions, in particular, the employer reserved the right to review any
transaction generating a commission beyond a salesman's annual quota and to determine the "appropriate treatment" of it.
When Richard scored an especially large sale, the company decided that its "appropriate treatment" was to cap Richard's
commission at an amount that was less than he expected under the usual formula. The company's position was that the
large commission expected by Richard was not justified because it arose from a single transaction on which Richard had
not done as much work as he claimed, and because he had only been employed by the company for eight months. Richard
quit and sued for breach of contract.
A federal court ruled in favor of the employer. The language in the compensation plan was broad, but it was not
ambiguous. The whole thrust of the document was to leave determination of the commissions to the employer's discretion,
notwithstanding that the plan identified some forms of appropriate treatment of commissions.
When a contract leaves a decision up to one party's discretion, it is nearly unassailable in court. A court may intervene if
that party is guilty of fraud, bad faith, or a grossly mistaken exercise of judgment, but Richard did not make those
arguments. Despite the fact that it was arguably unfair, the court ruled that such a decision was "out of our reach."