PROPERLY INSURING RESIDENCES OWNED BY A TRUST , LLC , or OTHER ENTITY written by IRMI
The confusion that can occur when properly structuring coverage for residential property owned by a “ What ” – a trust , limited liability corporation ( LLC ) or other entity – and not a “ Who ” ( a person ) is reminiscent of the legendary “ Who ’ s on First ” routine by Abbott and Costello . For those who have not seen it , search it on YouTube !
Especially over the past 2 decades , an increasing number of Americans are transferring personal ownership of residential property to trusts , LLCs , limited liability partnerships ( LLPs ) and other assetprotection or tax-advantaged entities ( hereafter collectively referred to as “ entity ” or “ entities ”). While transferring real property to an entity can offer a number of benefits , this strategy can also create significant unintended gaps in insurance coverage for the individuals transferring ownership of the property , the entities , those with a fiduciary duty to protect the interests of the entity , and potentially even the professional advisers who have assisted in the transaction .
While all insurance practitioners realize the importance of examining who is regarded as an “ insured ” by a homeowners policy , many consumers and non-insurance professionals fail to understand that an entity is a “ what ,” and therefore is ineligible to receive coverage as a “ you , your , or as a family member ” on an unendorsed homeowners policy . This article will provide guidance on the issues and solutions to be considered when structuring coverage to protect all parties with an insurable interest in an entity-owned residential property .
FOCUS ON THE RIGHT QUESTIONS
An LLC , limited partnership , or trust ( there are many different trusts ) can be formed to own residential property as a means to secure tax advantages , for estate planning purposes , privacy reasons , to shield assets from creditors and litigants , or any combination of these objectives . Insurance underwriters who do not interact with policyholders seem all too comfortable requiring agents and brokers to provide often superfluous details explaining “ why ” the entity has been structured as it is , rather than focusing on the insurance implications of the arrangement .
The question that has the greatest underwriting impact is actually a simple one : Does the entity that owns the property present any exposure to businessrelated activities that are not contemplated by the home owners filing ? If the answer is yes , risk advisers should understand the need to approach commercial underwriters for a coverage solution to address the property and liability exposures specific to the entities business-related activities . Far more frequently , however , the entity has no intention whatsoever of using the residence for business-related purposes , nor was it formed for any reasons other than to own the personal residence . In the many instances in which an entity owned home is simply intended for use as a personal residence by those individuals for whom it was formed , underwriters and risk advisers should collect answers to the following additional questions to properly assess each risk and help structure coverage that reflects the specific exposure :
• Who will occupy the property ?
• How will the property be used ?
• In addition to the entity owner , what other parties have an insurable interest , both from a Section I and Section II perspective ?
• Does the entity own other real property ?
• Who are the parties to the trust , LLC , LLP , or other entity ?
16 KANSAS INSURANCE AGENT & BROKER