TECHNICAL INFO
INSURABLE INTERESTS : WHO & WHAT
As a reminder , the contract language used in homeowners insurance policies was developed when people , not entities , owned homes . As a result , the definition of named insured was carefully crafted to protect the interests of a very specific group of people . Following is a common definition of who is insured by a homeowners policy :
Insured means you and residents of your household who are your relatives , or other persons under the age of 21 and in the care of any person mentioned above .
This definition of an insured has been tested many times in court to determine who is and is not eligible to receive the benefits of coverage provided by a homeowners insurance policy . Regardless of the actual ownership interest in the property at the time of loss , there are no known instances in which a court has required an unendorsed homeowners policy to provide coverage to any party other than those defined as insured by the insurance contract .
To avoid potentially disastrous gaps in coverage , proper planning efforts can ensure insurance policies are structured to protect the interests of all parties who have an insurable interest in the event of a property or liability claim . This requires protecting the interests of people and entities , for example : the trust ( including those individuals acting as a beneficiary , trustee , grantor ), the LLC ( and those individuals acting as members ), the family limited partnership ( FLP ) ( and those individuals who are managing partners and limited partners ), along with the individual ( s ) who occupy and / or have personal possessions located at the residence .
Protecting the insurable interests of all parties who have a risk of loss connected to an entity-owned personal residence requires careful planning and execution . Consider this example of a claim for which coverage was denied : An extended family owned a large property consisting of 140 acres , which was divided into 15 different sublets . Some of the lots were owned by family members , and others were owned by LLCs controlled by family members . The property was divided for mixed use , and portions of the property were covered by a commercial policy and others by a homeowners insurance policy .
A fatality to an employee of one of the family members occurred on a residential property while the employee was landscaping the property . The LLCs with ownership interests were not listed as named insureds on either the commercial or homeowners policies . Suits were filed against the family and the LLC that owned the property where the injury occurred . Though the family ’ s personal assets were protected by their homeowners policy , they were forced to retain counsel to defend the LLC , as it was not covered by the homeowners policy .
Given the circumstances of the claim , a long period of litigation followed . Assets from both the family who formed the LLC and the LLC ( the entity ’ s equity in the property ) were required to pay the substantial legal fees and an undisclosed judgment .
OFTEN OVERLOOKED : SECTION II
As the above referenced claim illustrates , while the very broad liability coverage provided by a homeowners insurance policy serves as a critical form of asset protection , Section II coverage is often overlooked . Homeowners policies not only provide protection against many forms of suits alleging bodily injury or property damage associated with a residence premises , but liability protection is also extended for covered acts arising away from the home . Additionally , regardless of the merits of such legal actions , the liability protection provided by a homeowners policy also obligates the insurer to provide insured parties with a legal defense for covered losses . Naturally , having access to this important coverage depends entirely on how the policy has been structured .
MAY / JUNE 2023
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