Expert Commentary

Insuring Residences Owned by a Trust, LLC, or Other Entity

Especially over the past several decades, an increasing number of Americans are transferring personal ownership of residential property to trusts, limited liability corporations (LLCs), limited liability partnerships (LLPs), and other asset protection and tax-advantaged entities. While transferring residential property to entities can offer a number of benefits, doing so can also introduce harmful, unintended insurance coverage consequences for both the families transferring the property and the professional advisers who have assisted them.


Personal Risk Management
April 2021
Acknowledgment

Sincere thanks to Kimberly A. Lucarelli, CIC, CAPI, director, Personal Client Management, senior vice president, Oswald Companies, for her work on this article. Her contributions are invaluable.

Even though the coverage consequences have been closely examined in articles appearing in this column, many consumers, insurance practitioners, and other professionals remain confused over the issues involved and the solutions available to address them. This article seeks to build on the research and recommendations of previous articles by providing additional clarity and offering an insurance underwriter's view of these risks and how to extend coverage solutions to protect the different stakeholders having an insurable interest in entity-owned residential property.

Understanding the Underwriting Concerns

The insurers that are open to considering insuring entity-owned residences have identified the risk profiles they are and are not comfortable entertaining. Such insurers are usually comfortable with the most common reasons for titling a private residence to an entity: estate planning and/or tax benefits, to protect the owners' identity, and for asset protection purposes. Underwriters are also most comfortable when the property is occupied by individuals closely connected to the entity. Residences that are occasionally rented to others or occupied seasonally require much closer underwriting review.

As part of the application process, the questions that underwriters require clear answers to vary, though the list below is representative of what any entity applicant should be prepared to provide complete responses to.

  1. What is the legal name and all applicable verbiage of the entity?
  2. What is the mailing address of the entity?
  3. Is there a tax ID? If so, please provide it.
  4. What is the intent of the entity?
  5. Provide the names and occupations of the principal/beneficial owners and members.
    • If self-employed, please explain.
    • If other than family members, clarify relationship.
  6. If the entity is a trust:
    • Who is the trustee?
    • Who are the beneficiaries of the trust?
  7. Concerning the occupancy of the property:
    • What is the occupancy type (primary, seasonal, secondary, rental)?
    • Who are the occupants?
    • Is the property rented at any time during the year?
    • If so, how often and to whom?
    • Is there a permanent resident caretaker living on premises?
    • Is the property vacant during the year? If yes, how long?
  8. Does the entity engage in any form of business activity? If yes, please provide details.
  9. Does the entity operate on a for-profit basis? If yes:
    • How are profits generated?
    • What revenues are generated?
    • Is there a commercial insurance policy in place? If so, provide type of policy(ies) owner, effective dates, and limits.
  10. What, if any, other activity(ies) does the trust or LLC engage in?
  11. What other property/properties does the entity own? Please list all properties.
  12. Are there any other holdings?
  13. Does the entity have any employees? If yes:
    • How many?
    • What are their responsibilities?
    • How are they paid?
    • Are there any work comp policies in place?
    • How many hours worked?
  14. Are there any other policies that name the entity as an insured or an additional insured?
    If yes, list type, insurer name, limit, and effective dates.
  15. Should the entity be listed on the personal excess liability policy?

The Primary Underwriting and Coverage Concern: Third-Party Lawsuits

The broad liability protection provided by a homeowners policy is the greatest source of concern for underwriters, though often overlooked by those connected to the entity. As it concerns the need for liability protection, the individuals residing in the home, the entity that owns the home, and those who have a fiduciary duty of care to the entity can all be named in a lawsuit by a third party (see table). Consumers should be made aware that, although personal liability claims are not common, when liability claims do occur, they can result in substantial defense costs and even more costly settlements or judgments.

It is also essential to help consumers understand that insurers are concerned when an entity's activities create the potential for increased legal exposure that is beyond the scope of risks common to personal homeownership. Finally, it is important to explain that underwriters are only willing to protect the interests of the entity for claims arising at the residence premises and not also for claims arising away from the residence premises.

Residences that are owned for investment purposes to be resold or held as rental properties (very common reasons for titling property to an LLC) often represent a higher risk for liability claims. Entities that engage in for-profit activities, employ others, and/or are part of a laddered configuration that connects them to other entities also present a series of additional considerations for underwriters. Of these more challenging risk profiles, entities formed to buy and sell properties for investment purposes and entities that are also engaged in business activities are viewed by insurers as inconsistent with the intent of their personal homeowners filing and are often deemed unacceptable. When traditional homeowners insurers are unwilling to entertain such risks, surplus lines insurers with the ability to modify coverage and rate structure to better fit a nontraditional risk profile are available to provide a customized coverage solution to offset the increased risk.

Summarizing the Key Coverage Issues

Remarkably, it remains fairly common to see insurance practitioners and other professionals providing ill-informed recommendations that homeowners policies should be issued with the entity as the named insured. The glib rationale that the entity owns the home fails to recognize a number of unacceptable outcomes. As all insurance practitioners should know, homeowner policies provide six coverage parts. Although precise coverage needs can vary based on lifestyle considerations, the following characteristics outline the risk profile that is most common among residences owned by an entity.

  • A trust, LLC, or limited partnership (LP) is formed for the sole purpose of holding title to a residence.
  • Individuals who are benefitting from the entity that owns the residence occupy the home, whether as full-time or seasonal residents.
  • The occupants are often closely connected to the entity—as grantors, trustees, and beneficiaries, in the case of a trust, or as managers, general partners, members, or limited partners, in the case of an LLC or LP.
  • The individual occupants retain their personal ownership of the furnishings and other contents of the home.

The table below identifies the insurable interests for each party for the six coverage parts of a homeowners policy for the above most common profile for residences owned by an entity.

Coverage Part

Parties with Insurable Interest

A. Dwelling

B. Other Structures

C. Contents

D. Additional Living Expenses

E. Liability




F. Medical Payments

Entity (Trust, LLC, LLP, etc.)

Entity (Trust, LLC, LLP, etc.)

Individuals Residing in the Home

Individuals Residing in the Home

Entity (Trust, LLC, etc.)
and Those Representing the Entity (Trustee,
LLC Member, or Partner of an LLP)
and Individuals Residing in the Home

Entity (Trust, LLC, etc.)
and Those Representing the Entity (Trustee,
LLC Member, or Partner of an LLP)
and Individuals Residing in the Home


A quick review of this table makes it clear that requesting a homeowners policy to be issued with the entity as the named insured exposes others who have an insurable interest to a range of uncovered losses. In summary, entity-owned residential properties require a modified coverage solution that properly protects the insurable interests not only for the entity but for those individuals who can be exposed to uncovered losses if their interests are not properly protected. Before examining the coverage solutions that are available to accomplish this, let's first understand the specific challenges facing the insurers who are willing to underwrite this class of business.

Current Best Practices in Structuring Coverage

While the net impact of how certain insurers are willing to structure coverage to protect the insurable interests of all parties has not appreciably changed over the last decade, an evolution of sorts has occurred over the past 5-plus years that is worth examining. The select group of insurers dedicated to serving the needs of financially successful individuals has the most frequent opportunity to entertain such risks, and many have adjusted the approach they use to protect the interests of both individuals and entities.

As all insurance practitioners know, the contract language in personal insurance policies was written to protect the interests of individuals and not trusts, LLCs, or other entities. While this distinction strikes many consumers as immaterial, the inconvenient reality of personal policies is that unendorsed homeowners policies provide no protection for the interests of any entity—until recently, that is.

While extending coverage to an entity has traditionally required an endorsement to be added to the policy that modified contractual language, some insurers have decided to adjust the definitions sections of their standard unendorsed policy to automatically broaden their definition of an "insured" and include certain forms of protection to an entity owner and their legal representatives. A careful review of how the coverage is and is not being broadened by a changed definition is just as important as when reviewing the language used to craft a policy endorsement.

Consider the following two examples.

"Insured" means you or a "family member." "Insured" also means any entity created by you for the sole purpose of owning all or part of a "residence premises," vehicle or "watercraft" covered under this policy. As respects SECTION III – LIABILITY COVERAGE, an "insured" also includes any individual or other legal entity given permission by you, a "family member" or an entity created by you for the sole purpose of owning a vehicle or a "watercraft" covered under this policy, to use a vehicle or "watercraft" covered under this policy with respect to their legal responsibility arising out of its use.

"Insured" means "you" and:

  1. "Your" "resident relatives":
  2. "Your" Living Trust(s) (also know as Inter Vivos Trusts) including any natural person named as executor, administrator, or trustee of "your" estate or living trust, but only:
    1. If recognized under applicable state law as a legal entity with the capacity to sue or be sued in a court having jurisdiction;
    2. While acting within the scope of their duties as such; and
    3. With respect to property held at "your" living trust or estate:
      1. Which is specifically scheduled and insured in Section I of this policy; or
      2. For which insurance coverage is provided under Section II of this policy; and
  3. Under Section II only:
    1. Any person or organization legally responsible for animals or watercraft that are covered by this policy and which are owned by "you" or a "resident relative". However, "insured" does not include persons or organizations using or having custody of these animals or watercraft:
      1. For "business" purposes; or
      2. Without permission of the owner; and
    2. With respect to the operations of a "motor vehicle" to which this policy applies:
    1. Persons engaged in "your" or a "resident relatives" employ; and
    2. Other persons using the vehicle on an "insured location" with "your" consent.

    Under both Section I and II, when the word an immediately precedes the word "insured", the word an "insured" together mean one or more "insureds."

Other insurers take the same approach to extending coverage to an entity by broadening the definition of insured person but elect to do so by adding an actual endorsement to the policy (which can be easier to gain regulatory approval in many states), as shown in the following example.

INSURED PERSON ENDORSEMENT
With respect to coverage provided by this endorsement, all provisions and conditions of the policy apply unless they are changed by this endorsement. PART I- DEFINITIONS, is amended to include the following:
The following entity is included as an Insured Person with respects to your house and other permanent structures located at the following address:

Name of Entity:
Residence Address:

Furthermore, if the Insured Person is a limited liability corporation, the members and managers of the limited liability corporation are also Insured Person(s). If the Insured Person is a trust, the trustees are also Insured Person(s).
PART III – LIABILITY, section A. Insuring Agreement is amended to include the following:

Additionally, we will pay damages an Insured Person is legally obligated to pay for personal injury and property damage caused by an occurrence covered by this policy unless stated otherwise or an exclusion applies. Coverage for the Insured Person listed above only applies to an occurrence arising out of the ownership of the named residence listed on this Insured Person Endorsement.

It remains a practice among some insurers to require a more comprehensive policy endorsement that goes far beyond simply changing the definition of "insured person" to adjust the intent of coverage. For example, some insurers use the Insurance Services Office, Inc. (ISO), form 2010 endorsement 14-3522 09/14. Those insurers that rely on ISO policy forms may consider adopting that approach.

Conclusion

Especially among those with significant assets to protect, the growth of residential properties owned by entities, especially LLCs, continues. In the many instances when the home is being occupied as a traditional residence, quality homeowners coverage to protect the interests of the entity owner, occupants, and those who are obligated to serve the entity is becoming increasingly accessible. Given the increasing availability of coverage solutions from a growing number of insurers, other insurers that have refrained from not offering a solution should consider adopting one of the easy-to-implement remedies available to entertain these otherwise traditional residential risks.

It is also essential to explain to consumers that any business-related activity by an entity owner, either at the insured location or elsewhere, creates an unacceptable personal liability exposure and will most likely require placing coverage for the property as a commercial risk.

When field underwriting entity-owned residential properties, risk advisers should take care to avoid making any assumptions, be prepared to obtain accurate answers to the necessary underwriting questions, and carefully identify all of the parties requiring protection. Finally, as was clear from the coverage solutions provided, the subtle yet consequential coverage differences demonstrate why it is essential that risk advisers carefully examine the insuring agreement and any prescribed endorsements to identify who and what are being afforded which coverage parts. As always, the devil is in the details.


Opinions expressed in Expert Commentary articles are those of the author and are not necessarily held by the author's employer or IRMI. Expert Commentary articles and other IRMI Online content do not purport to provide legal, accounting, or other professional advice or opinion. If such advice is needed, consult with your attorney, accountant, or other qualified adviser.

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