I am often asked questions about how a detached apartment/game room/pool house/guest house is covered under a homeowner’s policy. The answer is dependent on the policy language, the case law in the jurisdiction of the claim, and the specifics of the structure.

Recently the Idaho Supreme Court examined the issue in relation to a “bonus room” on top of a garage. In McFarland v. Liberty Insurance Corporation,1 the insureds owned a vacation property in Garden Valley, Idaho. The property had three separate structures on the property insured by Liberty a home, a detached garage with an upstairs “bonus room,” and a pump house containing a geothermal well.

A radiant heater in the bonus room failed causing geothermal water to pour out. A continuous flow of hot water soaked the walls and floors of the bonus room and the garage below. Because the property was unoccupied at the time, the McFarlands did not discover the running water for about two days. Upon discovery of this situation, the McFarlands promptly shut off the water and filed a claim with Liberty. Water damage destroyed both physical components of the garage structure (drywall, doors, overhead garage doors, plumbing and electrical components) as well as the McFarlands’ personal property (a queen bed, leather sofa, ping-pong table, desk, bookshelf, etc.).

After the McFarlands filed a claim, Liberty stated that the damage was covered under the policy. Without objection from Liberty, the McFarlands contracted with a water-remediation company for a remediation plan and equipment. Around three weeks after the McFarlands reported the damage, Liberty had paid $10,261.14 to the water-remediation company and $13,206.26 to the McFarlands. The McFarlands’ out-of-pocket costs for the remediation of the structural damage—not including personal property—was $30,075.91.

The policy provided two types of coverage for structures:

  1. “Dwelling Coverage” provided up to $188,500 in coverage for “the dwelling on the ‘residence premises’. . . including structures attached to the dwelling . . .” and
  2. “Other Structures Coverage” provided up to $22,350 for “other structures on the ‘residence premises’ set apart from the dwelling by clear space.”

Liberty paid out a total of $23,467.50 – the policy limits under the Other Structures Coverage. The insureds filed suit alleging various claims including breach of contract based on Liberty’s interpretation of the policy. The parties filed cross motions for summary judgment on the issue of whether the damage fell under the Dwelling Coverage or the Other Structures Coverage.

The court held that an ambiguity existed in the McFarlands’ policy because the policy failed to define the term “dwelling” and the term is reasonably subject to differing interpretations. The court focused on the fact that the term dwelling was not defined and pointed out that the policy demarcates the term’s possible meaning by reference and description. The Dwelling Coverage stated “[t]he dwelling on the ‘residence premises’ shown in the Declarations, including structures attached to the dwelling.” The policy defined “residence premises” as “[t]he one family dwelling, other structures, and grounds . . . where you reside and which is shown as the ‘residence premises’ in the Declarations.” But the Declarations did not contain a description of the dwelling or the residence premises, only the property’s street address.

After the court held that the term “dwelling” was ambiguous it construed the term in favor of the insureds based on prior case law stating that “[a]ny ambiguities should be resolved in favor of the insured, and where language may be given two meanings, one of which permits recovery while the other does not, the policy should be given the construction most favorable to the insured.”2

In this case the insureds bonus room above the garage was covered under the dwelling coverage of their policy due to the policy language.
1 McFarland v. Liberty Ins. Corp., Docket No. 45781 (Id. Jan. 30, 2019).
2 Cherry v. Coregis Ins. Co., 146 Idaho 882, 884, 204 P.3d 522, 524 (2009) (citing Foremost Ins. Co. v. Putzier, 102 Idaho 138, 142, 627 P.2d 317, 321 (1981)).

  • Jim Johnson

    It is hard to tell from the posting, but it seems Liberty may have dropped the ball a little on the initial handing of the claim and maybe even the initial writing of the
    policy. First, when the policy was issued, it may have been wise to of discussed the garage and upstairs bonus structure and offered some additional coverage limits for the those. Coverage limits for a detached structure can normally be doubled for a nominal amount.

    Second, the limits for the detached structure should have been clearly explained at the onset of the claim especially when there was only $22,350.00 worth of coverage. Maybe then, more care would have been taken by the insured’s in selecting a mitigation contractor. While I clearly believe in professional mitigation, as I am currently a water mitigation contractor; however, $10,261.00 appears to be a lot of money for just structure drying, as the contents handling was covered separately, It appears that just the floor and lower walls of the bonus room got wet, so most of the dry-out would have been the ceiling and walls of the garage.