How to Avoid Disastrous Gaps in Coverage
For successful individuals and families, placing the ownership of assets into trusts and LLCs can be a useful tool for estate planning, privacy, tax, or other reasons. It is not uncommon for residential property to be transferred to one of these entities in order to take advantage of the protections afforded.
However, there are important insurance implications associated with the transfer of residential property to a trust or LLC. It is critical to protect the interests of the entity, but unless insurance policies are structured properly, serious gaps in coverage can exist. Without appropriate insurance protection, the assets can be placed at risk.
Coverage Gap Scenario – Damage to Property
A couple, on the advice or their attorney, transfers the ownership of their home to a trust. They do not notify their insurance carrier and continue to insure the home in their individual names. A fire damages a large portion of the home. The claims adjustor requests a copy of the deed to verify ownership and discovers that the home is owned by a trust that is not named in the policy. The couple, named as individuals, has no insurable interest in the home. Coverage is denied.
Coverage Gap Scenario – Liability Claim
A family forms an LLC for the ownership of land on which they plan to eventually build a vacation home. One of the family members asks his insurance carrier about liability insurance for the property, failing to mention the LLC. He is told that the property can be added to his existing homeowners policy for liability coverage. Later, a person is injured on the property and a lawsuit is filed. The insurance company learns that the property is not owned by the policyholder, but by an LLC. The LLC is not a covered entity under the policy. Therefore, coverage does not apply.
How to Insure a Home Owned by a Trust or LLC
Frequently, when ownership of a home is transferred to a trust or LLC, the home is occupied by individuals closely connected to the entity such as grantors, trustees, beneficiaries, members, or partners. The individuals often retain personal ownership of the personal belongings within the home. In these situations, even though the home is owned by an entity, it is still often possible to obtain a personal homeowners or dwelling policy since the use and occupancy of the home is the same as it would be if it were owned by an individual. (If there are business activities conducted on the premises, a commercial policy would be necessary to address these exposures.)
Generally, there are two main methods to cover the trust or LLC:
The Trust or LLC as Named Insured
One of the advantages of establishing a trust or LLC is the separation it provides between the entity and the beneficial owners. If the insurance policy lists the entity as the Named Insured, it is consistent with the ownership of the property. If the premium payments are made by the entity, it further emphasizes the separation. Also, any claims payments would be payable to the trust or LLC. The policy should afford coverage for the dwelling, other structures, and liability.
The individual occupants of the home would need to purchase a renters policy to cover their personal belongings and their personal liability.
The Trust or LLC as Additional Insured
Some insurance companies are willing to list the individuals (beneficial owners who occupy the home) as the Named Insureds, and the trust or LLC as an “Additional Insured” or “Additional Interest.” This eliminates the need for two separate policies. The trust or LLC is covered for its interest in the property and for premises liability.
One possible drawback is that the separation between the individuals and the entity is not as clearly defined as it would be with two separate policies.
Excess (Umbrella) Liability to Protect the Trust or LLC
If an injury occurs on the property, a lawsuit can be filed against the entity/owner as well as the individuals who reside there. Securing higher liability coverage can be accomplished by obtaining an umbrella policy. A separate policy can be obtained for the trust or LLC, or the trust or LLC can be added as an additional insured under the individual’s policy.
Other Property Exposures
In the management of assets, other types of property can be placed into trusts or LLCs including jewelry, art, watercraft, and automobiles. This should be discussed with a knowledgeable insurance advisor and addressed similarly, with the trust or LLC as a named insured or additional insured in the insurance policies.
Discussing the Trust or LLC with an Insurance Advisor
Insurance companies have their own unique guidelines when it comes to affording coverage to trusts or LLCs. Certain companies that specialize in insurance for successful individuals and families tend to offer a wider variety of solutions and a greater degree of flexibility. For example, if a trust or LLC employs domestic staff to maintain a residence, a workers compensation or employment practices liability policy might be needed for the entity, which some of these companies can provide.
Most insurance companies will ask some of these questions when underwriting the exposure:
- Who are the parties to the trust or LLC?
- Does the entity own any other property?
- Does the entity conduct any business activities or generate income?
- Who will occupy the property and how will it be used?
- Was the entity formed solely for the ownership of the property?
Remember that a Trust or LLC is a separate entity and its insurance exposures need to be addressed separately and in addition to those of the beneficial owners. In some instances, personal insurance policies can be modified to include these entities. In other situations, a commercial insurance policy might be needed. Talk with your financial advisor, attorney, and insurance advisor to decide on the best methods to properly protect your assets.