Opinion ID: 1600
Heading Depth: 2
Heading Rank: 1

Heading: Business Pursuits Exclusion

Text: Safeco contends it is not required to provide coverage because the incident in question arose out of a business pursuit of the insured. To defeat the exclusion, Mr. Hilderbrand argues that AEP had ceased to be a business pursuit under the policy before the accident. In his view, the Billingsleys' care of the animals had become more akin to a hobby, and therefore the exclusion should not apply. To apply the business pursuits exclusion, Kansas courts adopted a test overwhelmingly followed by other state courts. Krings v. Safeco Ins. Co., 6 Kan. App.2d 391, 628 P.2d 1071, 1074 (1981). To constitute a business pursuit, there must be two elements: first, continuity, and secondly, the profit motive.  Id. (emphasis added). See also Appleman on Insurance § 4501.10, n. 4 (in general, business pursuits exception requires continuity consisting of customary engagement or stated occupation and profit motive requiring that activity be shown as a means of livelihood, gainful employment, means of earning a living, procuring subsistence or profit, commercial transactions or engagements). As to the first element, there must be a customary engagement or a stated occupation. The second element requires a showing of such activity as a means of livelihood, gainful employment, means of earning a living, procuring subsistence or profit, commercial transactions or engagements. Krings, 628 P.2d at 1074; see also Beck, 929 P.2d at 166.
Kansas case law provides an instructive application of the continuity element. In Krings v. Safeco Insurance Co., the insured was sued in his capacity as an officer on the board of a savings and loan association. 628 P.2d at 1073. As an officer, he received a small fee for each board meeting attended. He also invested a significant amount of his own money in company stock. Id. The court concluded on these facts that the insured's service as an officer was a regular activity engaged in with a profit motive and therefore a business pursuit that was excluded from coverage. Id. at 1074. And in AMCO Insurance Co. v. Beck , the court addressed the situation of a high-schooler who babysat for two or three days each week while on summer vacation. The court concluded the high-schooler's activity satisfied the element of continuity. 929 P.2d at 170. The activities of the Billingsleys in operating AEP meet the continuity requirement. During the period in question, Doug held himself out to be a professional animal trainer. AEP paid his salary, and the extensive training he received indicates that this was more than a mere hobby or occasional pursuit. Also, although certain aspects of the business, such as magic shows or photo shoots, only occurred sporadically, the ownership and maintenance of the exotic animals continued uninterrupted from the establishment of the Sanctuary, through AEP's founding, and up until Haley's death. Further, from the time AEP was created, Doug continually attempted to arrange animal performances. While these attempts were largely unsuccessful, they are themselves evidence that the operation of AEP was a customary engagement. Beck, 929 P.2d at 170. Mr. Hilderbrand suggests that by the time of the accident, the Billingsleys' business activities were part-time, and therefore do not qualify as business pursuits. As Krings and Beck attest, however, Kansas has rejected such a narrow interpretation of what constitutes a business pursuit. See 628 P.2d at 1074; 929 P.2d at 170. In short, the activities of the Billingsleys in operating AEP show the engagement in a business over time, including at the time of the accident. The district court correctly concluded the operation of AEP satisfied the continuity element.
Turning to the element of profit motive, Mr. Hilderbrand contends that the business must generate an actual profit capable of supporting one's livelihood. He points to Beck, where the Kansas Supreme Court held that [s]upplemental income derived from part-time activities may satisfy the profit motive element. However,... the income must be capable of significantly supplementing one's livelihood or subsistence and contributing to one's living requirements. 929 P.2d at 170 (emphasis in original). Mr. Hilderbrand argues the Billingsleys never made enough money from these business activities to meet the profit motive element. We disagree with his reading of Kansas law. The Beck court explained that the case really boils down to whether [the insured's] babysitting services were more like occasional babysitting[, which does not qualify as a business pursuit,] or more like professional day care[, which does qualify as a business pursuit.] Id. at 169. While the court did focus on the amount of income derived in deciding this question, its inquiry did not end there. Additional relevant factors bolstered the court's determination: the insured's hourly wage was well below the minimum wage; she was not a licensed daycare provider; she did not advertise her services; and she was a full-time student on summer break. Id. at 170-71. The court felt its conclusion that part-time babysitting did not qualify as a business pursuit was consistent with the fact a reasonable person would not believe that babysitting was the trade, profession, or occupation of this 15-year-old child. Id. at 171. Reviewing the facts of this case, it is clear that the Billingsleys operated AEP with a profit motive, even if no actual profit ever materialized. Their intent in creating the company was to generate enough income to sustain the Lost Creek Sanctuary. Further, the Billingsleys had obtained both state and federal licenses for their business, and Doug was actively involved in advertising and promoting AEP's services. Moreover, the SBA loan, which would eventually need to be repaid, shows that the Billingsleys expected AEP to return a profit at some point. In addition, Doug held himself out as a professional animal trainer. R. at 154. Finally, AEP filed tax returns during the period in question, and the Billingsleys wrote off the business losses of the partnership in their own personal tax returns. See, e.g., Republic Ins. Co. v. Piper, 517 F.Supp. 1103, 1106 (D.Colo.1981) (personal tax returns claiming business losses important in finding that babysitting services were a business of the insured). Accordingly, based on reasoning and analysis similar to that applied in Beck, the district court correctly concluded the Billingsleys operated AEP with a profit motive. If we adopted Mr. Hilderbrand's interpretation of this case, homeowners insurance policies in Kansas could cover any business pursuit that was in the end unprofitable. The analysis is not so narrowly focused. For instance, other cases applying the same two-prong test readily acknowledge that profit motive, not actual profit, makes a pursuit a business pursuit. Grain Dealers Mut. Ins. Co. v. Farmers Alliance Mut. Ins. Co., 298 F.3d 1178, 1183 (10th Cir.2002) (emphasis added) (quoting Wiley v. Travelers Ins. Co., 534 P.2d 1293, 1295 (Okla.1974)). Based on our reading of Kansas law, one need not show actual profit to satisfy the profit motive element.