Perhaps the most surprising aspect of a recent decision by the Hawaii Federal District Court is that the insurer agreed to defend under a homeowner’s policy, albeit under a reservation of rights.

     In Allstate Ins. Co. v. Sylvester, 2008 U.S. Dist. LEXIS 42386 (D. Haw. May 21, 2008), the insured husband and wife operated a hotel-like business by renting out their beach front house. Instead of a commercial general liability policy, the insureds purchased a homeowner’s policy from Allstate.  The policy covered liability for bodily injury arising from an occurrence, but excluded coverage for bodily injury arising out of the business activities of an insured person.

     A guest fell as she entered her rented room, suffering a fractured hip.  When the insureds’ business was sued in state court, Allstate agreed to defend pursuant to a reservation of rights.  Allstate then filed a coverage action in federal district court.

     Judge Mollway determined there was no duty to defend nor indemnify.  First, the husband and wife were the insureds under the homeowner’s policy, not their business.  Second, the policy expressly excluded claims arising from a business.  The insureds further argued Allstate was estopped from denying coverage because it knew about the rental business and assured the insureds there was coverage under the policy.  The court rejected this argument as well because even if the insureds were led to believe they were "covered" by the homeowner’s policy, this would not be the same as being covered for liability arising out of a business.