INSURANCE LAW: THIRD PARTY COVERAGE IN TEXAS OVERVIEW OF THE HOMEOWNER S POLICY

INSURANCE LAW: THIRD PARTY COVERAGE IN TEXAS OVERVIEW OF THE HOMEOWNER S POLICY I. HOMEOWNER S FORM A (HO-A) This is commonly referred to as a dwelling policy. This form provides named-peril property-damage coverage. The named perils include: 1. Fire and lightening 2. Sudden and accidental damage from smoke 3. Windstorm, hurricane, and hail 4. Explosion 5. Aircraft and vehicles 6. Vandalism and malicious mischief 7. Riot and civil commotion 8. Theft The measure of loss for property damage is the lesser of actual cash value or cost to repair or replace, after deducting depreciation. There are two principal differences between the HO-A and HO-B: (1) Dwelling items are covered only for named perils rather than "all risk," and (2) there is no replacement cost coverage for dwelling items. A. SECTION l-perils INSURED AGAINST 1. COVERAGE A (DWELLING) AND COVERAGE B (PERSONAL PROPERTY) We insure against physical loss to the property described in Coverage A (Dwelling) and Coverage B (Personal Property) caused by a peril listed below, unless the loss is excluded in Section I Exclusion: This differs from the Homeowners Form B in that Dwelling items and unscheduled personal property are covered only for the listed named perils and subject to the specific limitations and exclusions shown for each peril. (The bolded comments were found in Texas Homeowners Policy Handbook, Fifth Edition, Texas Association of Insurance Agents, 1994.) 1. Fire and Lightning. This differs from the Homeowners Form B in that the common law exclusion of damage by a Afriendly@ fire would apply to the dwelling as well as personal property. 2. Sudden and Accidental Damage from Smoke. This peril does not cover loss caused by smog or by smoke from industrial or agricultural operations. 3. Windstorm, Hurricane and Hail. This peril does not cover: a. loss to the following: (1) cloth awnings, greenhouses and their contents, buildings or structures located wholly or partially over water and their contents. (2) radio and television towers, outside satellite dishes, masts and antennas, including lead-in wiring, wind chargers and windmills. b. loss caused by rain, snow, sand or dust, whether or not driven by wind, unless the direct force of wind or hail makes an opening in the roof or wall and the rain, snow, sand or dust enters through this opening and causes the damage.

This differs from the Homeowners Form B in that the Awind driven rain@ exclusion applies to dwelling items as well as personal property. 4. Explosion. This could apply in blasting or mining operations. 5. Aircraft and Vehicles. This peril does not cover loss caused by any vehicle owned or operated by an occupant of the residence premises. The vehicle causing damage must be owned or operated by someone other than an occupant of the premises. 6. Vandalism and Malicious Mischief. 7. Riot and Civil Commotion. 8. Theft, including attempted theft and loss of property from a known place when it is likely that the property has been stolen. This peril does not cover: a. personal property while away from the residence premises at any other residence owned by, rented to or occupied by an Insured, except while an Insured is temporarily living there. b. personal property while away from the residence premises and unattended in or on any motor vehicle or trailer, other than a public conveyance, unless all as doors, windows and other openings are closed and locked and there are visible marks of forcible entry. This differs from the Homeowners Form B in that a Alocked car@ warranty applies unless the vehicle is situated on residential premises or a parking lot where the attendant keeps the keys. Property is not unattended when the Insured has entrusted the keys of the vehicle to a custodian. c. building materials and supplies not on the residence premises. B. EXTENSIONS OF COVERAGE. 1. LOSS OF USE. If a loss caused by a Peril Insured Against under Section I makes the residence premises wholly or partially untenantable, we cover: a. additional living expense, maintaining any necessary and reasonable increase in living expense you incur so that your household can maintain its normal standard of living. b. fair rental value, meaning the fair rental value of that part of the residence premises usually rented to others by you, less any expenses that do not continue. The total limit of liability for all loss of use is 10% of The Coverage A (Dwelling) limit of liability. This is additional insurance and does not reduce the Coverage A (Dwelling) limit of liability. The deductible clause does not apply to loss of use coverage. This differs from the Homeowners Form B in that the limit for the extension is only 10% of the Coverage A amount in lieu of 20%. Payment will be for the reasonable time required to repair or replace the damaged property. If you permanently relocate, payment will be for the reasonable time required for your household to become settled. The periods of time for loss of use are not limited by expiration of this

II. policy. C. SECTION I - CONDITIONS 1. LOSS SETTLEMENT. Our limit of liability and payment for covered losses under Section I Property Coverage will not exceed the smallest of the following: a. the actual cash value at the time of the loss determined with proper deduction for depreciation; b. the cost to repair or replace the damaged property with material of like kind and quality, with proper deduction for depreciation; or c. the specified limit of liability of the policy. This differs from the Homeowners Form B in that losses to dwelling items and personal property are settled on an actual cash value basis. HOMEOWNERS FORM B This form, which provides broader coverage, is the most commonly used form in Texas. It provides all-risk dwelling coverage and thus is referred to as an all risk policy, but named-peril coverage for personal property on the premises. The named perils are the same as in the HO-A form, with the addition of: (A) collapse of building, (B) accidental discharge, leakage, or overflow of water or steam, (C) falling objects, and (D) freezing of household appliances. The measure of loss for personal property is the same as under the HO-A, but the dwelling coverage, the measure of loss is replacement cost, without deduction for depreciation. To recover replacement cost, however, the insured must complete the repairs in one year. Until then, the insurer owes only actual cash value. This form is the most common policy in the State of Texas. It provides "all-risk" coverage on the dwelling and other private structures on the premises. A. SECTION I - PROPERTY COVERAGE 1. COVERAGE A (DWELLING) We cover: 1. the dwelling on the residence premises shown on the declarations page including structures attached to the dwelling: a. while occupied by an insured as a dwelling; or b. if an Insured intends to occupy the dwelling within 60 days after the effective date of this policy. "Residence premises" means the residence premises shown on the declarations page. This includes the one or two family dwelling, including other structures, and grounds where you reside or intend to reside within 60 days after the effective date of this policy. "Insured" means you and residents of your household who are: a. your relatives; or b. other persons under the age of 21 and in the care of any person named above. The term "Dwelling" is not defined. An item must be "legally a part of the building" such that its removal would leave damage or an unfinished aspect to the property. The following items are generally considered to be part of the building: built-in appliances, hot water heaters, central air conditioning units, lighting fixtures and ceiling fans.

2. Other structures on the residence premises set apart from the dwelling by clear space. This includes structures connected to the dwelling by only a fence, utility line or similar connection. The total limit of liability for other structures is the limit of liability shown on the declaration page or 10% of the Coverage A (Dwelling) limit of liability, whichever is greater. This is additional insurance and does not reduce the Coverage A (Dwelling) limit of liability. We do not cover other structures: a. used for commercial, manufacturing or farming purposes; or This exclusion to the extension is clearly applicable to an insured who operates a business venture in an unattached structure. A problem arises with "gray area" activities such as hobbies with occasional sales performed in a separate work shop or garage. An agent must be alert for any unusual activities taking place on residential premises. AFarming" is another undefined and troublesome word, and not necessarily confined to a farming "business." Communication with the underwriters for their opinion in such situations is vital, and a conservative approach of covering such structures in another manner is recommended. b. wholly rented to any person, unless used solely as a private garage. With regard to structures rented to others, note the limiting effect of the word "wholly" and the exception allowing a private garage to be rented. An example of a covered structure would be a garage apartment where the insured uses the garage to park his autos and rents a finished portion of that structure to a resident tenant. 3. wall to wall carpeting attached to a building on the residence premises. 2. COVERAGE B (PERSONAL PROPERTY) We cover: 1. a. personal property owned, worn or used by an Insured while on the residence premises. This includes window or wall air conditioning units. b. at your request, property of others while the property is on the part of the residence premises occupied by an Insured. 2. a. personal property owned, worn or used by an Insured anywhere in the world. b. at your request, personal property of a residence employee when: (1) the property is away from the residence premises of the residence employee and in the control of the residence employee; and (2) while the residence employee is performing work for you.

Our total limit of liability under 2.a. and 2.b. above is 10% of the Coverage B (Personal Property limit of liability or $1000, whichever is greater. This is additional insurance and does not reduce the Coverage B (Personal Property) limit of liability. Students supported by the insured are generally considered to still be members of the insured's household and would have full coverage under this extension while residing in an apartment or dormitory. SPECIAL LIMITS OF LIABILITY. These limits do not increase the Coverage B (Personal Property) limit of liability. The special limit for each numbered category below is the total limit for each loss for all property in that category. The types of property listed here are covered only up to the amounts shown in each paragraph. The deductible, if any, would apply to the total amount of loss before application of these limitations. These limited amounts are cumulative in the event a single loss involves more than one category of property. Endorsements are available to provide increased limits on these items. If an endorsement is attached, the total limit desired is shown in the Declarations and an additional premium is charged for the amount of increase. 1. Money/Bank Cards. $100 on money or numismatic property or loss by theft or unauthorized use of bank fund transfer cards registered to an insured. Use HO-112 for an increased limit up to $500. Coin collections have generally been considered "money or numismatic property" and should be scheduled on HO-160 for full coverage. 2. Bullion/Valuable Papers. $500 on gold or silver bullion, manuscripts, notes, securities, stamps, philatelic property, accounts, bills, deeds, evidences of debt, letters of credit, passports, documents, transportation or other tickets. Use HO-113 for an increased limit up to $1,000. Stamp collections can be scheduled on HO-160 for full coverage. 3. Jewelry/Watches/Furs. $500 for loss by theft of gems, watches, jewelry or furs. This limitation applies to loss caused only by theft (meaning any act of stealing). Use HO-110 for an increased limit up to $5,000. Full coverage for actual values and "all-risk" coverage is available by scheduling on HO-160. 4. Business Personal Property. $2,500 on business property or farm and ranch property. We do not cover any business property or farm and ranch property: a. that consists of samples or articles for sale or delivery; or b. if the property is away from the residence premises. This limitation clarifies that there is limited on premises coverage for business property except samples or inventory items. Use HO-111 for an increased limit of $5,000. Use HO-126 for full "all risk" coverage on computers, including business computers. Use HO-125 to provide off-

premises coverage to physicians, surgeons and dentists on property pertaining to their profession. The following section specifies the types of property that are provided no coverage at all under Coverage B. 3. PROPERTY NOT COVERED. We do not cover: 1. articles separately described and specifically insured by this or other insurance. This exclusion prevents recovery under Coverage B for any item which is specifically insured. Typical items to which this might apply are watercraft, recreational vehicles and items scheduled on HO160. 2. animals or birds. 3. motor or engine propelled vehicles or machines designed for movement on land, including attached machinery or equipment. However, we do cover such vehicles which are not subject to motor vehicle registration and are: a. devices and equipment for assisting the handicapped. b. power mowers. c. golf carts. d. vehicles or machines used for recreational purposes while located on the residence premises. e. farm equipment not designed for use principally on public roads. 2. trailers, semi-trailers or mobile homes. However, we do cover: a. trailers and semi-trailers that are designed for use principally off public roads. b. boat trailers while on the residence premises. Off-road trailers, such as the kind which would be towed behind a power mower or farm tractor and travel trailers, are covered either on-or off premises, subject to the business property limitation and the 10% off-premises limitation. Boat trailers are covered only on premises. 4. aircraft meaning any device used or designed for flight, except model or hobby aircraft not used or designed to carry people or cargo. 6. watercraft, including outboard motors and furnishings or equipment. We do cover watercraft, including outboard motors and furnishings or equipment, while located on land on the residence premises. 7. property of roomers or tenants 8. property usually rented to others off the residence premises. B. SECTION ICPERILS INSURED AGAINST 1. COVERAGE A (DWELLING) We insure against all risks of physical loss to the property described in Section I Property Coverage, Coverage A (Dwelling) unless the loss is excluded in Section I Exclusions.

2. COVERAGE B (PERSONAL PROPERTY) We insure against physical loss to the property described in Section I Property Coverage, Coverage B (Personal Property) caused by a peril listed below, unless the loss is excluded in Section I Exclusions. Coverage B items (unscheduled personal property) are covered only for the following named perils. The burden of proof is on the insured to apply one of these perils in order to successfully make a claim. Once the peril causing loss has been identified, the company may still apply one of the exclusions or limitations to the claim. The perils of fire, lightning, windstorm, hurricane, hail, explosion, aircraft and vehicles are not defined and have no limitations other than exclusions which might apply. The insured will have the broadest possible interpretation available. 1. Fire and Lightening. Fire and Lightning: Loss by fire is understood to include damage caused by firefighters. None of the exclusions apply to ensuing loss caused by fire. The peril of fire would be subject to the common law exclusion of damage by a "friendly" fire (one which is confined to the space for which it was intended). This applies to personal property only. 2. Sudden and Accidental Damage from Smoke. Smoke: The smoke damage must be sudden and accidental. Exclusion A1.b." removes coverage for smoke from industrial or agricultural operations. Some common sources of covered smoke claims include improper use of fireplaces and faulty operation of heating or cooking units. 3. Windstorm, Hurricane and Hall. Windstorm. Hurricane and Hail: A popular legal definition of windstorm is "a wind of sufficient violence to be capable of inflicting damage either by its own unaided action or by projecting some object." Refer to the discussion of exclusion "1.c.@ for limitations of these perils. The hurricane peril does not include damage by flood or tidal water; refer to exclusion A1.i.." These perils are eliminated by attaching endorsement HO-140. 4. Explosion Explosion: Without definition, this cause of loss can apply to anything that can reasonably be described as an explosion in any sense of the word. None of the exclusions apply to ensuing loss caused by explosion. 5. Aircraft and Vehicles. Aircraft and Vehicles: The aircraft peril would include objects falling from an aircraft. The most obvious example of a covered vehicle loss would be damage caused by a vehicle crashing through the house. A liberal interpretation would also cover personal property damaged while being carried in a vehicle or being run over by a vehicle, and there are many such successful claims on record. There is no exclusion of damage caused by a vehicle owned or operated by an insured.

6. Vandalism and Malicious Mischief. 7. Riot and Civil Commotion. Vandalism and Malicious Mischief: This peril suggests an element of intentional destruction with wanton disregard for the property rights of others. 8. Collapse of Building or any part of the building. Collapse of Building: This peril has been the source of much disagreement and litigation over the years. In fact, one state's Supreme Court cited the numerous cases as evidence that ambiguity exists and resolved a case in favor of the insured. The current controversy concerning AConcurrent causation" is not treated in the Texas homeowners policy so problems relating to collapse following flood or earth movement will continue. Refer to exclusions "l.f.," l.g.," and "1.h.."Cnone of these apply to ensuing loss caused by collapse. 9. Accidental Discharge, Leakage or Overflow of Water or Steam from within a plumbing, heating or air conditioning system or household appliance. A loss resulting from this peril includes the cost of tearing out and replacing any part of the building necessary to repair or replace the system or appliance. But this does not include loss to the system or appliance from which the water or steam escaped. Exclusions 1.a. through 1.h. under Section I Exclusions do not apply to loss caused by this peril. Accidental Discharge: There is no requirement that the discharge, leakage or overflow be sudden, therefore allowing coverage for constant or repeated seepage over a period of time. It is clear that the expenses relating to getting at the faulty system, pipes or appliance are considered a covered part of any accidental water discharge loss. The exception prevents the application of certain exclusions when the proximate cause of loss is discharge. 10. Falling Objects. This peril does not include loss to property contained in a building unless the roof or outside wall of the building is first damaged by the falling object. Falling Objects: The object must fall from some source outside the building. 11. Freezing of household appliances. Freezing: The damage to the domestic appliance by freezing is covered as well as any ensuing loss. Refer to exclusion "1.j." for a limitation. 12. Theft, including attempted theft and loss of property from a known place when it is likely that the property has been stolen. Theft: The language eases the insured's burden of proof in theft claims when circumstantial evidence is strong enough to establish theft as a reasonable explanation of the loss. Exclusion "1.d." removes theft coverage on property at a secondary residence and on building materials and supplies away from the described premises. C. SECTION ICEXCLUSIONS

1. The following exclusions apply to loss to property described under Coverage A (Dwelling) or Coverage B (Personal Property), but they do not apply to an ensuing loss caused by fire, smoke or explosion. These exclusions apply both to the all-risk coverage on the Dwelling as well as the named perils coverage on Unscheduled Personal Property, unless otherwise noted. None of the exclusions in Paragraph 1. apply to fire, smoke or explosion. a. We do not cover loss to electrical devices or wiring caused by electricity other than lightning. Damage caused by electrical shorts or surges is not covered unless the electrical disturbance was caused by the natural forces of lightning, either on-premises or off-premises. As mentioned previously, for appliances and devices and wiring which come under the all-risk building coverage, the insurance company must prove that lightning did not cause or contribute to the loss, while for personal property items, the insured must prove that lightning did the damage. b. We do not cover loss caused by smog or by smoke from industrial or agricultural operations. The word "operations" is important. It is not the intent of this exclusion to prevent recovery for damage caused by smoke from a "hostile" fire at a farm or factory premises. The policy will exclude damage from smoke emanating from operations which produce smoke as a normal part of the agricultural or industrial process. c. We do not cover loss caused by windstorm, hurricane or hail to: (1) cloth awnings, greenhouses and their contents, buildings or structures located wholly or partially over water and their contents. Use endorsements HO-121 and HO-122 to provide windstorm, hurricane and hail coverage on cloth awnings and greenhouses, respectively. Any building or structure built over water could be written as specific items on a Dwelling Policy. If the principal dwelling is built over water, a homeowner s policy should not be written at all. In the case of a dwelling built on the land with an attached structure such as a dock or boat house built over the water, a "gray" area exists and the insurance company should be consulted in advance for an opinion as to whether or not they will provide coverage on a Homeowners and what portion will require coverage on a separate policy. (2) radio and television towers, outside satellite dishes, masts and antennas, including lead-in wiring, wind chargers and windmills. Endorsement HO-120 is available to cover these

excluded items for a specific amount of insurance, including damage by windstorm, hurricane and hail, for an additional charge. See discussion in the endorsement section. (3) personal property contained in a building unless direct force of wind or hail makes an opening in a roof or wall and rain, snow, sand or dust enters through this opening and causes the damage. This is commonly called the "wind-driven-rain exclusion" and is applicable only to personal property, not items considered part of the Dwelling. There is no significance to the fact that this exclusion is shown here instead of as a limitation to the windstorm, hurricane and hail peril for unscheduled personal property. It has no application to the all-risk coverage provided on the Dwelling. There is no requirement for damage to the exterior of the dwelling, nor that the opening made by the wind or hail be permanent in order for damage to be covered. The force of the wind can raise shingles or eaves or separate doors or windows from their casings, blow water through such an opening and there should be coverage even if the opening closes to its normal position when the wind stops. d. We do not cover loss of the following property by theft, including attempted theft and loss of property from a known place when it is likely that the property has been stolen: (1) personal property while away from the residence premises at any other residence owned by, rented to or occupied by an Insured, except while an Insured is temporarily living there. This exclusion is to property in a secondary residence during those periods when the residence is not in use. The insured is not required to be physically present in the residence at the time of the loss, but must be ATemporarily residing" there. The exclusion does not apply to property used by a dependent student living away from home in an apartment or dormitory, with the possible exception of property left unattended at such a location for an extended period such as summer vacation. There is enough "gray area" in this exclusion to cause a problem whenever it is applied to a claim situation. The best solution to avoid a controversy is to purchase specific coverage on property at a secondary residence. (2) building materials and supplies not on the residence premises. The focus of this exclusion is on construction materials at

an off-premises building site. If the insured is constructing a private structure elsewhere and wants theft coverage, an All-risk" builders risk policy will be needed. e. We do not cover loss to machinery, appliances and mechanical devices caused by mechanical breakdown. This exclusion focuses only on damage to devices caused by mechanical breakdown, not any ensuing damage to other property that may result from the breakdown. f. We do not cover loss caused by: (1) wear and tear, deterioration or loss caused by any quality in property that causes it to damage or destroy itself. (2) Rust, rot, mold or other fungi. (3) dampness of atmosphere, extremes of temperature. (4) contamination. (5) rats, mice, termites, moths or other insects. These types of excluded perils represent no risk of loss as they are certain to happen over a period of time unless controlled with reasonable care. However, any ensuing loss as a result of accidental water discharge, fire, smoke, explosion, collapse or glass breakage is not excluded. We do cover ensuing loss caused by collapse of building or any part of the building, water damage or breakage of glass which is part of the building if the loss would otherwise be covered under this policy. g. We do not cover loss caused by animals or birds owned or kept by an Insured or occupant of the residence premises. The limitation of this exclusion to animals and birds owned or kept by residents of the household is significant since damage caused by other animals is clearly intended to be covered, with the exception of "rats and mice" specified in Exclusion Af". We do cover ensuing loss caused by collapse of building or any part of the building, water damage or breakage of glass which is part of the building if the loss would otherwise be covered under this policy. h. We do not cover loss under Coverage A (Dwelling) caused by settling, cracking, bulging, shrinkage, or expansion of foundations, walls, floors, ceilings, roof structures, walks, drives, curbs, fences, retaining walls or swimming pools. This exclusion is limited to dwelling items and the exception paragraph following makes it clear that ensuing loss by accidental water discharge, collapse and glass breakage are covered. We do cover ensuing loss caused by collapse of building or any part of the building, water damage or breakage of glass which is part of the building if the loss would otherwise be covered under this

policy. i. We do not cover loss caused by or resulting from flood, surface water, waves, tidal water or tidal waves, overflow of streams or other bodies of water or spray from any of these whether or not driven by wind. We do cover an ensuing loss by theft or attempted theft or any act or attempted act of stealing. j. We do not cover loss caused by or resulting from freezing while the building is unoccupied unless you have used reasonable care to: (1) maintain heat in the building; or (2) shut off the water supply and drain plumbing, heating and air conditioning systems of water. The key words in this exclusion are Aunoccupied" and "reasonable care." They are subject to the broadest possible interpretation in favor of the insured. Courts have ruled that there is a practical distinction between "unoccupancy" and Temporary absence" of the inhabitants with emphasis on the intent of the insured to return, more than the duration of the absence. k. We do not cover loss caused by earthquake, landslide or earth movement. Like the flood exclusion, there are enough court decisions regarding the earth movement exclusion to warrant a controversy anytime it is applied to a claim situation. The key point, with regard to the all-risk coverage for dwelling items, is that the burden of proof is on the company to prove that any damage was an independent result solely of an earth movement. Ensuing loss by fire, smoke or explosion is covered. 2. GOVERNMENTAL ACTION. We do not cover loss caused by the destruction of property by order of governmental authority. But we do cover loss caused by acts of destruction ordered by governmental authority taken at the time of a fire to prevent its spread, if the fire would be covered under this policy. An example of an excluded loss would be damage caused by law enforcement authorities in order to gain access to the premises if illegal activity is suspected. 3. BUILDING LAWS We do not cover loss caused by or resulting from the enforcement of any ordinance or law regulating the construction, repair or demolition of a building or structure. No allowance can be made in the loss adjustment process for the effect of building laws which might increase the cost to repair or replace damage. One example might be a requirement to replace roofing with a heavier grade of shingles; in such a case, the company would be liable only for the cost of replacing the roof with the same grade of shingles as was damaged. At the

present time, there are no standard endorsements available to the homeowners policy to cover these additional exposures. 4. WAR DAMAGE We do not cover loss resulting directly or indirectly from war. This includes undeclared war, civil war, insurrection, rebellion, revolution, warlike act by military personnel, destruction or seizure or use for a military purpose, and any consequence of these. Discharge of a nuclear weapon will be deemed a warlike act even if accidental. 5. NUCLEAR DAMAGE. We do not cover loss resulting directly or indirectly from nuclear reaction, radiation or radioactive contamination, all whether controlled or uncontrolled or however caused. We cover direct loss by fire resulting from nuclear reaction, radiation or radioactive contamination. D. SECTION I - DEDUCTIBLE DEDUCTIBLE CLAUSE 1CWINDSTORM, HURRICANE, HAIL OR WIND DRIVEN RAINC The amount shown on the declarations page for Deductible Clause 1 will be deducted from the combined amount of each loss under Coverage A (Dwelling) and Coverage B (Personal Property) that results from windstorm, hurricane, hail or wind driven rain. DEDUCTIBLE CLAUSE 2CALL OTHER PERILSC The amount shown on the declarations page for Deductible Clause 2 will be deducted from the combined amount of each loss under Coverage A (Dwelling) and Coverage B (Personal Property), unless the loss results from windstorm, hurricane, hail or wind driven rain. If a single event causes loss by windstorm, hurricane, hail or wind driven rain and loss by lightning, only the larger deductible will apply. Separate deductible amounts should be shown on the declarations page for Deductible Clause #1 and Deductible Clause #2. The standard deductible is 1% of the amount of insurance shown for Coverage A (Dwelling) but lesser deductible amounts are available for an additional premium. Deductible #1 applies to the aggregate loss under the policy when caused by windstorm, hurricane, hail and/or wind-driven-rain. The total loss to all insured property is computed (i.e., described dwelling, personal property, outbuildings, extensions) and the deductible is taken one time. Deductible #2 is taken in the same manner for all other types of losses except the perils listed in Clause #1. If a single storm causes lightning damage as well as loss caused by one of the four Clause # 1 perils, only the greater of the two deductibles will apply. E. EXTENSIONS OF COVERAGE These extensions of coverage broaden the policy to cover losses which would not be covered by the basic policy, due to limitations and exclusions. Each extension specifically states (1) if the broader coverage will increase the limit of liability, and (2) if the deductible clause does not apply. 1. DEBRIS REMOVAL. We will pay your expense for the removal from the residence premises of: Debris removal - the cost of removing debris which results from a covered loss to insured property. a. debris of covered property if a Peril Insured Against causes the loss.

b. a tree that has damaged covered property if a Peril Insured Against causes the tree to fall. Tree removal - the cost of removing a tree from the premises if its falling has damaged any covered property and the falling was caused by a covered peril as respects the damaged property. This can be a peril other than one for which the value of the tree would be covered, as provided for under Extension of Coverage #4. This does not increase the limit of liability that applies to the damaged property. These extensions are not payable in addition to the limit of liability, but are included as a part of the loss within the limit. In either extension, if no insured property is damaged, the removal clause is not applicable. 2. LOSS OF USE. If a loss caused by a Peril Insured Against Section I makes the residence premises wholly or partially untenantable, we cover: a. additional living expense, meaning any necessary and reasonable increase in living expense you incur so that your household can maintain its normal standard of living. b. fair rental value, meaning the fair rental value of that part of the residence premises usually rented to others by you, less any expenses that do not continue. The total limit of liability for all loss of use is 20% of the Coverage A (Dwelling) limit of liability. This is additional insurance and does not reduce the Coverage A (Dwelling) limit of liability. The deductible clause does not apply to loss of use coverage. Payment will be for the reasonable time required to repair or replace the damaged property. If you permanently relocate, payment will be for the reasonable time required for your household to become settled. The period of time for loss of use are not limited by expiration of this policy. The two conditions for activation of this extension are (i) there must be actual direct physical damage to insured property which is covered by the policy, and (ii) the insured must incur an increase in living expenses or lose rental income as a direct result of the damage. The damaged property does not have to be the described dwelling, but could be one of the outbuildings covered on the extension or could even be personal property items, such as might occur if lightning caused electrical damage to all of the appliances. There is no coverage under this extension if the insured chooses to leave due to an off-premises power failure nor due to the threat of damage, such as an adjacent fire or impending hurricane. The limit for this extension is 20% of the Coverage A amount and is payable in addition to all other payable claims. The benefits of this extension are payable until the damaged property is repaired or

replaced or the insured moves into new permanent quarters, and are not limited by policy expiration. 3. REASONABLE REPAIRS. If a Peril Insured Against causes the loss, we will pay the reasonable cost you incur for necessary repairs made solely to protect covered property from further damage. This coverage does not increase the limit of liability that applies to the property being repaired. This extension makes it clear that any expenses incurred as a result of the conditions imposed by YOUR DUTIES AFTER LOSS are covered. 4. TREES, SHRUBS, PLANTS AND LAWNS. We cover trees, shrubs, plants and lawns, on the residence premises, only for loss caused by the following Perils Insured Against: Fire or Lightning, Explosion, Aircraft, Vehicles not owned or operated by a resident of the residence premises, Vandalism and Malicious Mischief, Riot and Civil Commotion and Theft or attempted theft. The maximum limit of liability for this coverage is 5% of the Coverage A (Dwelling) limit of liability. We will not pay more than $250 for any one tree, shrub or plant, including the cost of removal. We do not cover property grown for business purposes. This is not additional insurance and does not increase the Coverage A (Dwelling) limit of liability. The deductible clause does not apply to trees, shrubs, plants and lawns. This extension does not provide an additional amount of insurance; the limit of 5% of the Coverage A amount is included within that amount. There is coverage for named perils only, and windstorm, hurricane or hail damage is not included, nor is damage caused by a vehicle which is owned or operated by an occupant of the premises. The $250 per item sub-limit does not apply to the lawn. The focus of the extension is for plants growing in the ground outdoors; indoor potted plants should be treated as items of unscheduled personal property. There is no deductible for loss payable under this extension. 5. PROPERTY REMOVED. We pay for expense and damage incurred in the removal of covered property from an Insured location endangered by a Peril Insured Against. This coverage exists on a pro rata basis for 30 days at each location to which such property is removed for preservation. This is not additional insurance and does not increase the Coverage B (Personal Property) limit of liability. This clause supersedes the 10% limitation and would provide the full amount of Coverage B limit at any location to which covered property is moved to escape damage by a covered peril. The clause also furnishes additional coverage for the peril of "damage by removal" which is essentially an all risk, no-exclusion grant of protection for this limited situation. In addition, the insured will be reimbursed for any reasonable expenses related to the move. 6. CONSEQUENTIAL LOSS. We insure: a. property contained in a building on the residence premises against loss due to change in temperature as a direct result of physical

damage to the dwelling, caused by a Peril Insured Against. The deductible clause does not apply to this coverage. b. property contained in a building on the residence premises against a loss due to change in temperature as a direct result of physical damage to any power, heating or cooling equipment (including connections and supply pipes) not contained in or on the dwelling, caused by a Peril Insured Against. The total limit of liability for the coverage described in 6.b. above is $500. This is not additional insurance and does not increase the Coverage B (Personal Property) limit of liability. These two extensions cover the "consequential loss" of property (such as food) due to a temperature change as a result of damage to a building or equipment on the premises of the described dwelling or to off-premises power distribution apparatus. The damage must be caused by a peril covered by the Homeowners policy. If the source of the loss is off-premises, a limit of $500 applies to the claim, and the deductible applies. 7. AUTOMATIC REMOVAL. If you move from the residence premises shown on the declarations page to another location within the United States to be occupied as your principal residence, we cover: a. the personal property under Coverage B (Personal Property) at each location in the proportion that the value at each location bears to the total value of all the personal property covered under Coverage B (Personal Property). b. property in transit up to 10% of the Coverage B (Personal Property) limit, or liability of $1,000, whichever is greater. We provide coverage for only 30 days from the date the removal begins. This extension applies only if the insured is moving to a new principal residence anywhere is the U.S. The 10% off-premises limitation does not apply except while the property is in transit. If another policy covering unscheduled personal property is in effect at the new location, the "Other Insurance" clause would apply if both policies cover the same loss. Should the total value of property at both locations exceed the amount of insurance for Coverage B. The amount available to cover a loss at either location would be limited to a percentage of Coverage B based on the proportion of value at the location where the loss occurs compared to the total value. This following formula illustrates this provision: value at location available limit -------------------- x coverage B limit total value This extension is active only for 30 days beginning with the date of removal from the described dwelling. F. SECTION I - CONDITIONS

1. Insurable Interest and Limit Liability. Even if more than one person has an insurable interest in the property covered, we will not be liable in any one loss: a. to the Insured for more than the amount of the Insured's interest at the time of loss; or b. for more than the applicable limit of liability. Each time there is a loss to any building insured under Coverage A (Dwelling), the amount of insurance applicable to that building for loss by fire will be reduced by the amount of the loss. As repairs are made, the amount of insurance will be reinstated up to the limit of liability shown on the declarations page. This provision applies only to real property. If a fire occurs before damages can be repaired from a previous loss, the amount of insurance available to cover the fire loss is reduced by the amount of the previous loss. Art. 6.13. Policy a Liquidated Demand. A fire insurance policy, in case of a total loss by fire of property insured, shall be held and considered to be a liquidated demand against the company for the full amount of such policy. The provisions of the article shall not apply to personal property. This "valued policy" clause is required in all Texas property policies by the Texas Insurance Code and applies only to real property which suffers a total loss by the peril of fire. The Coverage A limit is payable in such a case without regard to any question of over insurance. The only reduction allowed would be the value of previous damage which has not been repaired, as provided for in the above clause. 2. Residential Community Property Clause. This policy, subject to all other terms and conditions, when covering residential community property, as defined by state law, shall remain in full force and effect as to the interest of each spouse covered, irrespective of divorce or change of ownership between the spouses unless excluded by endorsement attached to this policy until the expiration of the policy or until canceled in accordance with the terms and conditions of this policy. This clause is required by the Texas Insurance Code. In the event that only one spouse is shown as the named insured, coverage would continue for the other spouse in the event of divorce and establishment of separate households. This applies to the Dwelling and Personal Property, subject otherwise to all conditions, exclusions and limitations. It does not apply to the liability coverage provided by Section II. This entire clause can be deleted by attaching HO-142. 3. Duties After Loss. The insured must comply with these conditions in order to effect settlement of any claim. a. Your Duties After Loss. In case of a loss to covered property caused by a peril insured against, you must: (1) give prompt written notice to us of the facts relating to the claim. (2) notify the police in case of a loss by theft. (3) (a) protect the property from further damage. Permission is given here to make temporary repairs in order to prevent further damage. Any expenses incurred in doing so should be reimbursed. (b) make reasonable and necessary repairs to protect the

property. (c) keep an accurate record of repair expenses. (4) furnish a complete inventory of damaged personal property showing the quantity, description and amount of loss. Attach all bills, receipts and related documents which you have that justify the figures in the inventory. (5) as often as we reasonably require: (a) provide us access to the damaged property. (b) provide us with pertinent records and documents we request and permit us to make copies. (c) submit to examination under oath and sign and swear to it. (6) send to us, if we request, your signed sworn proof of loss within 91 days of our request on a standard form supplied by us. We must request a signed sworn proof of loss within 15 days after we receive your written notice, or we waive our right to require a proof of loss. Such waiver will not waive our other rights under this policy. (a) This proof of loss shall state, to the best of your knowledge and belief: (i) the time and cause of loss. (ii) the interest of the Insured and all others in the property involved including all liens on the property. (iii) other insurance which may cover the loss. (iv) the actual cash value of each item of property and the amount of loss to each item. (b) If you elect to make claim under the Replacement Cost Coverage of this policy, this proof of loss shall also state, to the best of your knowledge and belief: (i) the replacement cost of the described dwelling. (ii) the replacement cost of any other building on which loss is claimed. (iii) the full cost of repair or replacement of loss without deduction for depreciation. a. Our Duties After Loss (1) Within 15 days after we receive your written notice of claim, we must: (a) (b) (c) acknowledge receipt of the claim. If our acknowledgment of the claim is not in writing, we will keep a record of the date, method and content of our acknowledgment. begin any investigation of the claim. specify the information you must provide in accordance with "Your Duties After Loss" (item 3.a. above). We may request more information, if during the investigation of the claim such additional information is necessary. (2) After we receive the information we request, we must notify you in writing whether the claim will be paid or has been denied or

whether more information is needed: (a) within 15 business days; or (b) within 30 days if we have reason to believe the loss resulted from arson. (3) If we do not approve payment of your claim or require more time for processing your claim, we must: (a) give the reasons for denying your claim, or (b) give the reasons we require more time to process your claim. But, we must either approve or deny your claim within 45 days after requesting more time. 4. Loss Settlement. Covered property losses are settled as follows: a. Our limit of liability and payment for covered losses to personal property, wall to wall carpeting, cloth awnings and fences will not exceed the smallest of the following: (1) the actual cash value at the time of the loss determined with proper deduction for depreciation; (2) the cost to repair or replace the damaged property with material of like kind and quality, with proper deduction for depreciation; or Paragraph "a." establishes an actual cash value or depreciated basis for loss to Personal property. Limited replacement cost coverage is obtained by attaching HO-101. (3) the specified limit of liability of the policy. b. Our limit of liability for covered losses to dwelling and other structure(s) under Coverage A (Dwelling), except wall to wall carpeting, cloth awnings and fences, will be at replacement cost settlement subject to the following: (1) If, at the time of loss, the Coverage A (Dwelling) limit of liability is 80% or more of the full replacement cost of the dwelling, we will pay the repair or replacement cost of the damaged building structure(s), without deduction for depreciation. (2) If, at the time of loss, the Coverage A (dwelling) limit of liability is less than 80% of the full replacement cost of the dwelling, we will pay only a proportionate share of the full replacement cost of the damaged building structure(s). Our share is equal to: Replacement Cost of the Loss x Coverage A (Dwelling) Limit of Liability 80% of Replacement Cost of the Dwelling. Paragraph "b." provides replacement cost coverage on dwelling items, specifically excluding wall-towall carpeting, cloth awnings and fences. The amount of insurance on the described dwelling must represent at least 80% of the dwelling's replacement cost (disregarding items below the surface of the ground) at the time of the loss. If this condition is not met, the claim amount may be reduced by a percentage determined by the ratio of the amount of

insurance carried compared to the amount of insurance required. The claim amount will never be less than that based on an actual cash value basis. The formula is demonstrated as follows: Cov. A amount amount recoverable -------------------------- x RC loss 80% of dwelling RC Amount recoverable ACV loss WHICHEVER IS MORE (3) If, at the time of loss, the actual cash value of the damaged building structure(s) is greater than the replacement cost determined under (1) or (2) above, we will pay the actual cash value up to the applicable limit of liability. In determining the amount of insurance required to equal 80% of the full replacement cost of the dwelling, do not include the value of excavations, underground pipes, and wiring and foundations which are below the surface of the ground. The fact that the 80% requirement allows the valuation to disregard the value of items below the ground in no way excludes them from coverage; these items are still subject to replacement cost recovery if they are damaged. We will pay only the actual cash value of the damaged building structure(s) until repair or replacement is completed. Repair or replacement must be completed within 365 days after loss unless you request in writing that this time limit be extended for an additional 180 days. Upon completion of repairs or replacement, we will pay the additional amount claimed under replacement cost coverage, but our payment will not exceed the smallest of the following: (1) the limit of liability under this policy applicable to the damaged or destroyed building structure(s); (2) the cost to repair or replace that part of the building structure(s) damaged, with material of like kind and quality and for the same use and occupancy on the same premises; or (3) the amount actually and necessarily spent to repair or replace the damaged building structure(s). A second condition for replacement cost coverage is that the repairs or replacement must actually be completed within 365 days (can be extended for 180 more days if the insured makes a written request to the company). In practice, many insurance companies may require two proofs of loss, one for the amount of ACV loss and another for the additional amount payable for replacement cost. The ACV claim is payable immediately but the replacement cost increment is not paid until the company inspects or proof of repair or OR

replacement is furnished. A controversial question concerns Acosmetic losses" where materials available to replace damaged property do not match existing undamaged materials, to the detriment of the overall value of the property. The problem is handled differently by insurance companies, with no universal conclusion within the industry. In the absence of a limiting provision in the policy, many are of the customary opinion that the insured is entitled to the benefit of the doubt. 5. Loss to a Pair or Set. In case of loss to an item which is part of a pair or set, the measure of loss shall be a reasonable and fair proportion of the total value of the pair or set. The importance of the item will be considered in assessing the loss. Such loss will not be considered a total loss of the pair or set. 6. Salvage Rights. If we notify you that we will pay your claim or part of your claim, the notice must also state whether we will or will not take all or any part of the damaged property. We must bear the expense of our salvage rights. 7. Appraisal. If you and we fail to agree on the actual cash value, amount of loss or the cost of repair or replacement either can make a written demand for appraisal. Each will then select a competent, independent appraiser and notify the other of the appraiser's identity within 20 days of receipt of the written demand. The two appraisers will choose an umpire. If they cannot agree upon an umpire within 15 days, you or we may request that the choice be made by a judge of a district court of a judicial district where the loss occurred. The two appraisers will then set the amount of loss, stating separately the actual cash value and loss to each item. If you or we request that they do so, the appraisers will also set: a. the full replacement cost of the dwelling. b. the full replacement cost of any other building upon which loss is claimed. These appraisal procedures apply only when the insured and the company are unable to agree on the value of the loss, not when there is a question of whether there is coverage for a particular loss. The appraisal decision resulting from these procedures is binding on both parties. c. the full cost of repair or replacement of loss to such building, without deduction for depreciation. If the appraisers fail to agree, they will submit their differences to the umpire. An itemized decision agreed to by any two of these three and filed with us will set the amount of the loss. Such award shall be binding on you and us. Each party will pay its own appraiser and bear the other expenses of the appraisal and umpire equally. 8. Loss Payment. a. If we notify you that we will pay your claim, or part of your claim, we must pay within 5 business days after we notify you. b. If payment of your claim or part of your claim requires the performance of an act by you, we must pay within 5 business days after the date you perform the act. 9. Catastrophe Claims. If a claim results from a weather related catastrophe or a major natural disaster, each claim handling deadline shown under the Duties After Loss and Loss

Payment provisions is extended for an additional 15 days. Catastrophe or Major Natural Disaster means a weather related event which: a. is declared a disaster under the Texas Disaster Act of 1975; or b. is determined to be a catastrophe by the State Board of Insurance. 10. Other Insurance-Section I. Other insurance is permitted on property covered by this policy, but other insurance covering the dwelling is not permitted. If a loss covered by this policy is also covered by other insurance, we will pay only the proportion of the loss that the limit of liability that applies under this policy bears to the total amount of insurance covering the loss. Property items, except for the described dwelling, can be provided other insurance, but paragraph "a" of Property Not Covered excludes coverage entirely under Section I if there is separately described and specifically insured property. The second sentence outlines the recovery for loss in the event that the homeowners and another policy or policies would apply to the same property. 11. Suit Against Us. No suit or action can be brought unless the policy provisions have been complied with. Action brought against us must be started within two years and one day after the cause of action accrues. 12. Abandonment of Property. There can be no abandonment of property to us. 13. Vacancy. If the Insured moves from the dwelling and a substantial part of the personal property is removed from that dwelling, the dwelling will be considered vacant. Coverage that applies under Coverage A (Dwelling) will be suspended effective 60 days after the dwelling becomes vacant. This coverage will remain suspended during such vacancy. This vacancy exclusion becomes operative when both of two conditions are met: (i) the insured ceases to reside in the described dwelling, and (ii) a substantial part of the unscheduled personal property is removed from the described dwelling. When these two conditions exist, all perils and dwelling coverages under Section I are suspended after 60 days whether the vacancy situation contributes to the loss or not. It is obvious that the phrase "substantial part" is subject to interpretation and as such, the insured would receive the most favorable interpretation possible. 14. Mortgage Clause (without contribution). a. the word Amortgagee@, includes trustee. b. We will pay for any covered loss of or damage to buildings or structures to the mortgagee shown on the declarations page as interests appear. c. The mortgagee has the right to receive loss payment even if the mortgagee has started foreclosure or similar action on the building or structure. d. If we deny your claim because of your acts or because you have failed to comply with the terms of this policy, the mortgagee has the right to receive loss payment if the mortgagee: (1) at our request, pays any premiums due under this policy, if you have failed to do so. (2) submits a signed, sworn statement of loss within 91 days after receiving notice from us of your failure to do so. (3) has notified us of any change in ownership, occupancy or

substantial change in risk known to the mortgagee. All of the terms of this policy will then apply directly to the mortgagee. Failure of the mortgagee to comply with d.(1), d.(2) or d.(3) above shall void this policy as to the interest of the mortgagee. Any policy provisions that would void the coverage, such as vacancy or nonresidential occupancy, do not apply as respects the insurable interest of a mortgagee or trustee, unless they were aware of such condition prior to a loss and failed to notify the company. If the insured fails to render a proof of loss as required, the company must give the mortgagee an opportunity to do so. e. If we pay the mortgagee for any loss or damage and deny payment to you because of your acts or because you have failed to comply with the terms of this policy: (1) the mortgagee's rights under the mortgage will be transferred to us to the extent of the amount we pay. (2) the mortgagee's right to recover the full amount of the mortgagee's claim will not be impaired. At our option, we may pay to the mortgagee the whole principal on the mortgage plus any accrued interest. In this event, your mortgage and note will be transferred to us and you will pay your remaining mortgage debt to us. f. If this policy is canceled, we will give the mortgagee specifically named on the declarations page written notice of cancellation. If we cancel the policy, we will give the mortgagee the same number of days notice of cancellation we give to you. If you cancel the policy, we will give the mortgagee notice of cancellation to be effective on the date stated in the notice. The date of cancellation cannot be before the 10th day after the date we mail the notice. We will not give notice of cancellation to any successor or assignee of the mortgagee named in this policy. g. If the property described under Coverage A (Dwelling) is foreclosed upon under the deed of trust, the mortgagee may cancel this policy of insurance and will be entitled to any unearned premiums from this policy. The mortgagee must credit any unearned premium against any deficiency owed by the borrower and return any unearned premium not so credited to the borrower. The unearned premium will be figured using the customary short rate procedures. In the event of foreclosure, the mortgagee has a right to request cancellation of the entire policy and is entitled to receive the return premium. h. If we elect not to renew this policy, the mortgagee specifically named on the declarations page will be given 30 days written notice of the nonrenewal. 15. No Benefit to Bailee. We will not recognize any assignment or grant any coverage for the benefit of a person or organization holding, storing or moving property for a fee.

III. LIABILITY COVERAGE PROVISIONS A. Liability Coverage The HO-B form also provides general-liability coverage. 1. Insuring Agreement. The insuring agreement states: If a claim is made or a suit is brought against an insured for damages because of bodily injury or property damage caused by an occurrence to which this coverage applies, we will: a. pay up to our limit of liability for the damages for which the insured is legally liable. b. provide a defense at our expense by counsel of our choice even if the suit is groundless, false or fraudulent. We may investigate and settle any claim or suit that we decide is appropriate. 2. Duty to Defend. As with most general-liability forms, the insurer s duty to defend is triggered by a potentially covered allegation. (See, e.g., Terra Int l, Inc. v. Commonwealth Lloyd s Ins. Co., 829 S.W.2d 270, 271 (Tex.App. C Dallas 1992, writ denied). Thus, in general terms, the question is whether the petition alleges potentially covered bodily injury or property damage caused by an occurrence. The insured will typically purchase liability insurance to protect themselves against any potential claims and in order to obtain a defense for these claims. The insurance contract contains an obligation of the insurer to defend its insured once notice is received by the insurer of a covered claim. (See Members Insurance Company vs. Branscomb, 803 S.W.2d 462, (Tex. App. - Dallas, 1991, no writ). In Texas, whether an insurer must defend its insured is determined exclusively by reviewing the adverse pleadings and assuming all allegations therein to be true. The rule in Texas is commonly referred to as the Acomplaint allegation@ rule. This rule of strict construction was first recognized in a supreme court opinion, Heyden Newport Chemical Corp. v. Southern General Insurance Co., 387 S.W.2d 22 (Tex. 1965). In that case, the applicable policy insured any person while using an automobile of the insured and any person or organization legally responsible for the use thereof. Plaintiff alleged that the driver of the offending vehicle was an agent of the insured. The allegations were within the coverage afforded by the policy of insurance. After these allegations were made, however, the insured notified his insurer that the driver was not in fact his agent at any relevant time. The insured, therefore, refused to further defend the lawsuit based upon that information. The Texas Supreme Court, however, stated that the Plaintiff s allegations in its petition controlled the determination of when the duty to defend arose. The court held: We think that in determining the duty of the liability insurance company to defend the lawsuit, the allegations of the complaint should be considered in light of policy provisions without reference to truth or falsity of such allegations and without reference to whether the parties know or believe the true facts to be, and without reference to a legal determination thereof. Id. at 24. In conjunction with the Acomplaint allegation rule,@ Texas courts, following the criteria set forth in the Heyden case, have additionally applied the concept referred to as the Afour corners@ rule whereby the duty to defend is determined by looking only to the allegations within the four corners of the Plaintiff s complaint. In so doing, courts will not consider evidence contrary to the allegations. The four corner s rule, then, is clearly a mechanical one and the guiding principal for its application was also set forth in the Heyden opinion as follows: The court is limited to a consideration of the allegations and the insurance policy in

determining an insurer s duty to defend. We wish to point out that in considering such allegations, a liberal interpretation of their meaning should be indulged. Id at 27. See also Argonaut S.W. Insurance Co. v. Maupin, 500 S.W.2d 633, 635 (Tex. 1973). Consequently, only in a situation where the allegations in Plaintiff s pleadings clearly fall outside the scope of policy coverage, will there be no duty to defend on behalf of the insurer. Courts have been quite liberal in holding that an insurer has a duty to defend in situations where some of the allegations are covered by the policy while others are not. If the Plaintiff s petition includes at least one allegation that is potentially covered under the insurance policy, the insurance company has a duty to defend against any and all causes of action brought pursuant to that petition. (Miller s Mutual Insurance Co. v. Texoma Directional Drilling Co., Inc., 622 S.W.2d 899 (Tex. Civ. App. - Fort Worth, 1981, no writ). The insurer s duty to defend can also arise even if the Plaintiff has pled certain acts which clearly fall outside the policy coverage, so long as the Plaintiff has pled alternatively any cause of action which is covered under the insurance policy. (Superior Insurance Co. v. Jenkins, 358 S.W.2d 243 (Tex. Civ. App. - Eastland, 1962, writ ref d n.r.e.) While the complaint allegation and four corner s rules are determinative of an insurer s duty to defend, those rules and the cases cited above dealt with policies containing mandatory defense obligations. When a lawsuit is filed, the insurer must fulfill its contractual obligations by hiring an attorney to defend the claim against its insured. (See Ranger County Mutual Insurance Company vs. Guin, 723 S.W.2d 656 (Tex. 1987). 3. Bodily Injury. The policy defines Abodily injury@ to mean Abodily harm, sickness or disease. This includes required care, loss of services and death that results.@ One common question has been whether mental anguish constitutes a bodily injury. Federal Courts in Texas have held that it does not. (Travelers Indem. Co. of Rhode Island v. Holloway, 17 F.3d 113, 115 (5 th Cir. 1994); American States Ins. Co. v. Hanson Industries, 873 F.Supp. 17, 26-27 (S.D. Tex. 1995); Union Mut. Ins. Cos. of Providence v. Stotts, 837 F.Supp. 814, 817 (N.D. Tex. 1993). But the Austin Court of Appeals recently held that a mental-anguish allegation does trigger a duty to defend, because mental anguish can be accompanied by physical manifestations that do constitute bodily injury. (Trinity Univ. Ins. Co. v. Cowan, 1995 WL 480531 at *5-6 (Tex. App. - Austin, Aug. 16, 1995, n.w.h.). The court declined to rule whether a claim of pure mental anguish (unaccompanied by physical manifestations) would trigger a duty to defend. Id. 4. Property Damage. The policy defines Aproperty damage@ to mean Ainjury to, destruction of or loss of use of property.@ Most liability forms speak in terms of injury to or loss of use of Atangible property.@ Under these forms, an allegation of purely economic damage does not constitute Aproperty damage.@ (See e.g. Houston Petroleum Co. v. Highlands Ins. Co., 830 S.W.2d 153 156 (Tex. App. - Houston [1 st Dist.] 1990, writ denied). An open question is whether the omission of the word Atangible@ in the definition of Aproperty damage@ in the HO-B somehow creates coverage for economic loss. 5. Defamation. Texas courts have held that in certain cases the allegations of slander or defamation along with claims of mental anguish trigger the duty to defend and possibly the duty to indemnify. However, one must pay caution to the culpable mental status i.e. if the defamation was intentional it will probably be excluded whereas if it is alleged that the act was done negligently it will more likely be covered. The pleadings must include factual allegations which trigger coverage under the policy and also must obligate the insurance company to pay the judgment awarded against the employer. Defamation claims fall under the Apersonal-injury@ coverage in many general-liability policies. Thus, defamation claims C not being claims for bodily injury or property damage C do not fall under the HO-B form. But the insured can buy

personal-injury coverage with endorsement HO-201, which covers certain claims for defamation, false arrest, malicious prosecution, invasion of privacy, wrongful eviction, and wrongful entry. 6. Occurrence. The policy defines Aoccurrence@ to mean Aan accident, including exposure to conditions, which results in bodily injury or property damage during the policy period.@ The Texas Supreme Court has held that the term Aaccident@ includes Anegligent acts of the insured causing damage which is undersigned and unexpected.@ (Massachusetts Bonding & Ins. Co. v. Orkin Exterminating Co., 416 S.W.2d 396, 400 (Tex. 1967). Under this definition, intentional conduct is not an Aoccurrence,@ even if the resulting damage was unexpected or unforeseen. (Argonaut Southwest Ins. Co. v. Maupin, 500 S.W.2d 633, 635 (Tex. 1973). But in the recent Cowan decision, the Austin Court of Appeals held that Aan occurrence takes place where the resulting injury or damage was unexpected or unintended, regardless of whether the policyholder s acts were intentional.@ (Trinity Univ. Ins. Co. v. Cowan, 1995 WL 480531 at *4 (Tex. App. - Austin, Aug. 16, 1995, n.w.h.). Paragraph II, III and IV were summarized from exerpts in Homeowners Insurance: What it covers; What it doesn t. Scott Stolley, University of Houston Law Foundation, 1995. 7. During the Policy Term. The occurrence definition requires that the occurrence result in damage during the policy term. Thus, Ano liability exists on the part of the insurer unless the property damage manifests itself, or becomes apparent, during the policy period.@ (Dorchester Devel. Corp. v Safeco Ins. Co., 737 S.W.2d 380, 383 (Tex. App. - Dallas 1987, no writ). Coverage is not triggered just because the wrongful act or causative negligence occurred during the policy term. Id. 8. Additional Coverages. The liability section also provides some additional coverages. b. Medical Payments (Coverage D). This coverage provides what is essentially no-fault coverage for certain medical expenses. The insuring language reads: COVERAGE D (Medical Payments to Others) We will pay the necessary medical expenses incurred or medically determined within three years from the date of an accident causing bodily injury. Medical expenses means reasonable charges for medical, surgical, x-ray, dental, ambulance, hospital, professional nursing, prosthetic devices and funeral services. This coverage does not apply to you or regular residents of your household. This coverage does apply to residence employees. As to others, this coverage applies only: 1. to a person on the insured location with the permission of an insured. 2. to a person off the insured location, if the bodily injury: a. arises out of a condition on the insured location or the ways immediately adjoining. b. is caused by the activities of an insured. c. is caused by a residence employee in the course of the residence employees employment by an insured. d. is caused by an animal owned by or in the care of an insured. b. Claim Expenses. The policy will also pay for certain claim and litigation expenses, as follows:

1. expenses we incur and costs taxed against an insured in any suit we defend. 2. premiums on bonds required in a suit we defend but not for bond amounts more than the limit of liability for Coverage C (Personal Liability). We need not apply for or furnish any bond. 3. reasonable expenses incurred by an insured at our request, including actual loss of earnings (but not loss of other income) up to $50 per day, for assisting us in the investigation or defense of a claim or suit. 4. interest on the entire judgment which accrues after entry of the judgment and before we pay or tender, or deposit in court that part of the judgment which does not exceed the limit of liability that applies. c. Emergency Medical Expenses. The policy will pay for certain emergency medical expenses, as follows: Imperative Medical Expenses to Others. We pay expenses incurred by an insured for immediate medical and surgical relief to others if imperative at the time of the accident. d. Damage to Others' Property. Finally, the property covers certain property of others, essentially on a no-fault basis: 1. Damage to Property of Others. We pay replacement cost up to $500 per occurrence for property damage to property of others caused by an insured. 2. We do not pay for property damage: a. caused intentionally by an insured who is 13 years of age or older. b. to property owned by an insured. c. to property owned by or rented to a tenant of an insured or a resident in your household. d. arising out of: (1) a business engaged in by an insured. (2) any act or omission in connection with a premises owned, rented or controlled by an insured, other than the insured location. (3) the ownership, maintenance, use, loading or unloading of aircraft, watercraft or motor vehicles or all other motorized land conveyances. This exclusion does not apply to any motorized land conveyance designed for recreational use off public roads, not subject to motor vehicle registration and not owned by an insured. V. EXCLUSIONS The liability coverage is subject to certain exclusions. But if the loss was concurrently

caused by both an excluded cause and a covered cause, the loss is covered. (Warrilow v. Norrell, 791 S.W.2d 515, 525-528 (Tex. App. - Corpus Christi 1989, writ denied). A. Intentional Injury. The policy does not cover injury intentionally caused by or at the direction of the insured. This can apply to several types of conduct. Courts have recognized the purpose of an intentional injury exclusion is to prevent the extension of a license to engage in malicious acts. (See Health Care & Retirement v. St. Paul Fire & Marine, 621 F.Supp. 155 160 (S.D.W.Va. 1985). In Greater Palm Beach Symphony v. Hughes, the policy expressly provided coverage for libel and slander unless the insured's act was committed or directed with intent to cause damage. (Greater Palm Beach Symphony v. Hughes, 441 So.2d 1171 (Fla. Ct. App. 1983). The policy language was construed by the court to exclude actual malice but not legal malice. Hence, in the absence of an allegation and jury finding of malicious intent, coverage should be provided. In other words, coverage exists in the event that there is a jury finding that the insured s defamatory statements when made negligently. Further, two federal courts presented with the question of whether certain allegations of conduct came within this exclusion, strictly construed the provision as worded in the policy. (See Federal Insurance Co. v. Cablevision Systems Dvelopment Co., 637 F.Supp. 1568 (E.D.N.Y. 1986); Health Care & Retirement, 621 F.Supp at 155). These courts utilized a very literal and restricted interpretation upon each word in the provision. They utilized a two step analysis and concluded that to deny coverage, it must be shown that the insured intentionally made the false statement and that he knew the statement was false at the time it was made. This, by definition, is malice. (See Gertz v. Robert Welch, Inc., 418 U.S. 323 (1974); see also, Outlet Company v. Security Group, 693 S.W.2d 621, 627 (Tex. App. - San Antonio 1985, writ ref d n.r.e.). Malice, in the context of libel and slander law is defined as "knowledge of the falsity of a statement or reckless disregard for its truth." (See New York Times Co. v. Sullivan 376 U.S. 254, 84 S.Ct. 710, 11 L.Ed 2d 686 (1964)). Accordingly, a finding of malice; may or may not place the libelous statement within or without the exclusion detailed above. If malice constitutes actual knowledge of the falsity of the statement, then it would probably be regarded as being intentional and within the exclusion. If, however, malice is merely a reckless disregard for the truth, then it is arguable that the conduct would not be within the exclusion as a reckless disregard for the truth involves a culpable mental state somewhat less than that of intentional conduct. An exclusion of coverage in an insurance policy for intentionally caused acts by or at the direction of the insured has been held to be valid. (See National Life & Accident Insurance Co. v. Knapp, 430 S.W.2d 84 (Tex. Civ. App. - Houston, 1968, writ ref d n.r.e.). A pleading alleging anything less than an intentional act, however, will result in the duty to defend. Intentional acts have been defined as conduct which the insured knew or should have known would naturally conclude in the suffering of damages. County Gas Co. v. General Accident Fire & Life Assurance Corp., 56 S.W.2d 1088, 1089 (Tex. Civ. App. - El Paso 1933, writ ref d n.r.e.). The leading case in this area, Argonaut Southwest Insurance Co. v. Maupin, concludes that where acts are voluntary and intentional and injury is the natural result of the act, the result was not caused by accident, even though the precise result may have been unexpected, unforeseen, and unintended. (Argonaut Southwest Insurance Co. v. Maupin, 500 S.W.2d 633 (Tex. 1973)). Where an insured

engages in intentional arts which achieve an intended goal, resulting damages, both expected and unexpected, are not accidental. While Maupin concerned an "occurrence" based policy, we nevertheless think the opinion is illustrative of the manner in which the Texas Supreme Court has decided the question of intentional versus non-intentional acts vis-a-vis an insurance policy. Examples of Intentional Conduct: 1. Transmission of Sexual Disease. In a case where the insured transmitted herpes to the plaintiff, the court held that this exclusion did not apply, because although the insured intended to have intercourse, he did not intend to transmit herpes. State Farm Fire & Cas. Co. v. S.S., 858 S.W.2d 375, 377-378 (Tex. 1993). The court indicated that the exclusion would apply if the insured knew that a herpes infection was substantially certain to result. Id. at 378. But the court refused to infer intent as a matter of law. Id. at 379-380. 2. Assault and Battery. This exclusion applies to assault and battery. E.g., Natioal Union Fire Ins. Co. v. Bourn, 441 S.W.2d 592, 596 (Tex. Civ. App. - Fort Worth 1969, writ ref d n.r.e.). Gilliland v. Employers Liabl. Assur. Corp., 417 S.W.2d 921, 922-923 (Tex. Civ. App. - El Paso 1967, writ ref d n.r.e.). 3. Intentional Conduct by a Minor. This exclusion applies only to the insured who intentionally caused the damage. Thus, for example, where a father is sued for his statutory liability for intentional conduct by his minor son, the exclusion does not apply to the father. Walker v. Lumbermens Mut. Cas. Co. 491 S.W.2d 696, 698-699 (Tex. Civ. App. - Eastland 1973, no writ). 4. Sexual Molestation. This exclusion applies to sexual molestation of a child, because intent to injure is inferred as a matter of law. E.G., Government Employees Ins. Co. v. McGinty, 832 F.Supp. 1092, 1094 (W.D.Tex. 1993), aff d, 37 F.3d 633 (5 th Cir. 1994) (unpublished opinion); Allen v. Automobile Ins. Co. of Hartford, 892 S.W.2d 198, 199 (Tex. App. - Houston [14 th Dist.] 1994, no writ); State Farm Fire & Cas. Co. v. Gandy, 880 S.W.2d 129, 139-140 (Tex. App. - Texarkana 1994, writ granted); Maaych v. Trinity Lloyds Ins. Co., 850 S.W.2d 193, 196 (Tex.. App. - Dallas 1992, no writ). The exclusion even applies to related negligence allegations, such as a claim that the insured negligently failed to obtain treatment for pedophilia. Commercial Union Ins. Co. v. Roberts, 7 F.3d 86, 89-90 (5 th Cir. 1993); Allstate Ins. Co. v. Mauldin, 869 F.Supp. 478, 480 (W.D. Tex. 1994). B. Business Pursuits. The policy excludes coverage for damage "arising out of or in connection with a business engaged in by an insured. But this exclusion does not apply to activities which are ordinarily incidental to non-business pursuits." The policy defines "business" to include "trade, profession or occupation." The term Abusiness@ is defined in the homeowner's policy to include trade, profession or occupation. The business pursuits exclusion has generally been held to exclude coverage for those activities not essential to the named insured and which would otherwise require specialized underwriting and alternative premium rating. The

goal of excluding coverage in this fashion is to maintain premium rates at a reasonable level on homeowner's policies. See Frasier, The Business Pursuits Exclusion and Persoal Liability Insurance Policy 572 Insurance Law Journal 519, 520 (1970). Our inquiry must first be directed to precisely what is included within the phrase Abusiness pursuit.@ An extensive and in depth search of Texas case law has revealed no cases that would easily answer this question. While several opinions inferentially discuss the concept, and they will be discussed herein, we nevertheless, had to avail ourselves of opinions from other jurisdiction to determine if there was a trend in interpreting this phrase. Our review of these cases has revealed a predictable result; that is, a generally accepted majority view and a minority view. The majority view was most succinctly stated in Riverside Insurance Co. v. Kolonich, 329 N.W.2d 528 (Mich. App. 1982). In that opinion, the Michigan Court of Appeals stated that a business pursuit contemplated: A customary and continuous or regular activity engaged in by the insured for the purpose of earning a profit or livelihood. Id at 530. Thus, a "business pursuit" is really a combination of two elements, that is continuity and profit motive. These elements are, in the majority view, both necessary to result in a conclusion of a business pursuit. ( See e.g., Pullen v. Cincinnati Insurance Co., 400 So.3d 393 (Ala. Civ. App. 1981); Industrial Indemnity Co. V. Gattel, 674 P.2d 869 (Ariz. Ct. App. 1983); Southern Guaranty Insurance Co. V. Duncan, 206 N.E.2d 672 (Ga. Ct. App. 1983); Country Mutual Insurance Co. V. Watson, 274 N.E.2d 136 (Ill. App. Ct. 1971); Krings v. Safeco Insurance Co., 628 P.2d 1071 (Kan. Ct. App. 1981); Edwards v. Trahan, 168 So.2d 365 (La. Ct. App. 1964); Home Insurance Co. V. Aurigemma, 257 N.Y.S.2d 980 (N.Y. App. Div. 1965); Camden Fire Insurance Association v. Johnson, 294 S.E.2d 116 (W.Va. 1982).) The minority view is probably best illustrated in the case of Salerno v. Western Casualty & Surety Co., 336 F.2d 14 (8 th Cir. 1964). In that case, the court, in interpreting Missouri law, stated as follows: "Business Pursuits@... is a very comprehensive term. It can only be construed as embracing everything about which a person may be engaged where profit is a motive. Id at 19. Under the minority view, therefore, any activity that is motivated by profit may be considered a business pursuit. See e.q., State Fire & Casualty Co. v. Drasin, 199 Cal. Rptr. 749 (Ct. App. 1984); Saha v. Aetna Casualty & Surety Co., 427 So.2d 316 (Fla. Dist. Ct. App. 1983); Berler v. Exprloyer s Insurance of Wausau, 271 N.W.2d 603 (Wisc. 1978). As we previously mentioned, there are only two Texas cases that even discuss the issue of a business pursuits exclusions. Neither of them directly define business pursuits, or for that matter, give an indication which, if either, of the majority or minority view would be adopted in this state. The two cases are Nicholson v. First Preferred Insurance Co., 618 S.W.2d 560 (Tex. Civ. App. - Amarillo 1981, no writ) and Gilliland v. Employer's Liability Assurance Corp.. 417 S.W.2d 921 (Tex. Civ. App. - El Paso 1967, writ ref d n.r.e.). In Gilliland, the insured was sued for damages for personal injuries suffered by a vegetable peddler allegedly assaulted on the insured's business premises. Judgment was rendered against the insured solely on the jury finding of assault and battery. The insured instituted an action against Employer's seeking to recount damages for Employer s failure

to defend the insured in the original lawsuit or to pay any part of the judgment entered therein. The homeowner s policy at issue in that case, similar to the policy at issue in this case, excluded coverage for intentional injuries and coverage for any business pursuits of the insured except activities ordinarily incident to non-business pursuits. The trial court held, as a matter of law, that the injuries to the vegetable peddler occurred within the definition of "business pursuits" and that since the judgment was predicated on a jury finding of battery, there could be no coverage under the policy in question. The opinion would seem to indicate that the appellate court predicated its opinion on the fact that there was an intentional act that was tied to a business pursuit and that these two exclusions, together, resulted in a finding of no coverage. Unfortunately for us, the court did not discuss the factors it took into account in determining the business pursuits issue. Since the intentional injury aspect of the case may have been dispositive, the language with regard to business pursuits could at best be described as dicta and of little if any effect. In Nicholson, Nicholson and his wife sued First Preferred under their homeowner's policy seeking to recover damages for the loss of their dwellings its contents and a drag race car, all said damages resulting from a fire to the welling. Trial was to the court and the court rendered a judgment that the Nicholsons recover under the policy or some of the contents lost in the fire, but not for the drag race car. Both Nicholson and the insurance company appealed the trial court's judgment. The first issue decided by the appellate court was whether the dragster was a motor vehicle, which question was answered in the affirmative. Since there was an exclusion in the policy with respect to coverage for motor vehicles, the appellate court affirmed the trial court's decision that the insured could not recover for the dragster. The carrier, in its appeal, had also raised the contenttion that since the insureds represented that there were no business pursuits being conducted on the premises, the policy was void and of no effect and extended no coverage for the reason that the drag race car was a Abusiness pursuit@ conducted on the premises. The appellate court held that although the evidence indeed revealed the insured's had maintained the car on the premises with the expectation of someday winning prize money, the testimony of the insureds nevertheless indicated that they were not in the commercial business of racing and that the car was mainly a hobby. The testimony further revealed that the insured did not work on the automobiles of others in his garage in exchange for payment. The court held that these facts fell short of conclusively establishing that the insureds had pursued a business on the premises in contravention of the policy declarations. Accordingly, the carrier's contention in this regard was overruled and the trial court's judgment was affirmed. Unfortunately, as with Gilliland, the Nicholson case provides little assistance with regard to which of the two views Texas would adopt if presented with this question. The fact that the insureds were not engaged in the commercial business of racing might lead one to believe that the court of appeals would lean towards the majority view, That is, the lack of a continuous or regular business activity would result in a holding that there was no "business pursuit." The appellate court, however, also took note that the insureds testified that they had not yet made any money racing nor had they been paid for working on anyone else s car in their garage. It is not clear whether had the carrier established that the insureds had derived any profit from the race car in any manner that the court would then have held the activity to constitute a business pursuit, essentially adopting the

minority view that a business pursuit is one motivated by profit only. Unfortunately, there is no Texas case which has defined or construed the term Abusiness pursuit@ with respect to insurance policies and the exclusionary language contained therein. A number of states have addressed this question with differing results. A majority of state courts which have interpreted this term have found to mean a continuing activity conducted for profit which the insured does as his means of livelihood and/or support. A Minority of state courts which have interpreted this term have found it to mean a continuing activity conducted for profit which the insured does as his means of livelihood and/or support. A minority of state courts which have addressed the question have, on the other hand, held that any activity whatsoever which has profit as its motivation constitutes a business pursuit. It is unknown as this time what interpretation the Texas appellate courts would place upon this term and which view our courts would adopt or adhere to. Examples of Business Pursuits: 1. Assault. This exclusion applies, for example, to an assault committed by the insured on the insured's business premises. Gilliland v. Employers Liab. Assur. Coop., 417 S.W.2d 921, 922-923 (Tex. Civ. App. - El Paso 1967, writ ref d n.r.e.) 2. Child Care. Depending on the circumstances, this exclusion can apply to injury to a child when the insured operates a daycare in the insured dwelling. Burt v. Aetna Cas. & Sur. Co., 720 F.Supp. 82, 85 (N.D.Tex. 1989). On the other hand, the Texas Supreme Court refused to apply this exclusion in another daycare case. The child drowned in a small puddle after crawling through a hole in a fence. The court held that the phrase "ordinarily incident to non-business pursuits is ambiguous and could be construed to include the failure to maintain a fence at the insured's home. State Farm Fire & Cas. Co. v. Reed, 873 S.W.2d 698, 701 (Tex. 1993). 3. Hobbies. If the conduct constitutes a hobby, this exclusion does not apply. United Services Auto. Ass'n v. Pennington, 810 S.W.2d 777, 782 (Tex.App.--San Antonio 1991, writ denied) (sufficient evidence to support a finding that raising a horse that injured the plaintiff was a hobby); Nicholson v. First Preferred Ins. Co., 618 S.W.2d 560, 564 (Tex.Civ.App.--Amarillo 1981, no writ) (dragster was a hobby). In distinguishing between a business pursuit and a hobby, the Pennington court held that a business pursuit has two elements: (1) continuity or regularity of the activity, and (2) a profit motive, usually as a means of livelihood, gainful employment, earning a living, procuring subsistence or financial gain, a commercial transaction or engagement. Pennington, 810 S.W.2d at 780. C. Rental Property. The policy excludes injury arising out of the rental or holding for rental of certain premises. D. Auto Liability. The policy excludes injury arising out of the ownership, maintenance, operation, use, loading, or unloading of most motor vehicles. a. Exceptions. Liability arising out of the use of certain vehicles is not excluded.

Such vehicles include golf carts, certain recreational vehicles, and vehicles used exclusively on the premises.

b. Negligent Entrustment. A claimant cannot avoid this exclusion by alleging negligent entrustment. Fidelity & Guar. Ins. Underwriters, Inc. v. McManus, 633 S.W.2d 787, 788-789 (Tex. 1982). Such liability arises out of the ownership, use, or operation of a motor vehicle. E. Negligent Entrustment. This provision excludes liability for negligent entrustment or supervision concerning motor vehicles, watercraft, or aircraft. F. War Damage. G. Transmission of Sexual Disease. The policy now has a specific exclusion for the transmission of disease through sexual contact. H. Worker s Comp. The policy excludes coverage for bodily injury to any person eligible to receive benefits provided by an insured under the worker's compensation laws. I. Contractual Liability. The policy excludes coverage a. liability under any contract or agreement. However, this exclusion does not apply to written contracts: (1) that directly relate to the ownership, maintenance or use of an insured location; or (2) where the liability of others is assumed by an insured; unless excluded elsewhere in this policy. J. Insured Property. The policy excludes liability coverage for damage to property owned by, rented to, occupied by, used by, or in the care of an insured, except for property-damage caused by fire, smoke, or explosion. K. Bodily Injury to an Insured. The policy excludes liability coverage for bodily injury to the named insured, or to residents of the named insured's household who are the named insured's relatives or under 21 and in the care of an insured.