Before counting the number of bodies in each unit, we need to go back to the definition of insured location. “Insured location” is defined as the “residence premises”, which is defined as the one family dwelling and grounds where the insured resides and is shown in the declaration. It also includes a 2 family dwelling as long as the insured lives in one of the units. In your situation neither fits, so the dwelling is not a “residence premises”. Going to the remainder of the “insured location” definition, the dwelling isn't an other premises used by the insured as a residence, it isn't a premises used in connection with 4.a. and b., it's not a premises not owned by someone else but where an insured is living, and it's not vacant land, land where a dwelling is being built, or cemetery plots. So while the property in question may be listed on the declaration as insured property, it's not an “insured location” or “residence premises”, and in order for coverage E to apply, the occurrence must have happened on the “insured location”. Technically it didn't, so there's no coverage.

For reference, the exception for the exclusion is referring to a situation where the renters are subletting a room to other boarders. For example, the insured rents a single-family unit to Joe and his family, Mary and Lisa. Joe then takes in 3 roomers – Matt, Frank, and Lou. Because Joe, the tenant, has taken in more than 3 roomer/boarders, there is no coverage since this has violated the exception to the exclusion.