The phrases that can strike fear (or should) in the heart of a personal insurance professional is when a client or prospect says:
“My home is in a trust” or “I own properties in an LLC.”
The practice of clients obtaining a trust or forming an LLC is becoming quite commonplace these days. In the “old days,” corporations belonged in “Commercial” insurance and individuals in “Personal” insurance. There have always been those “gray” situations that neither wants to insure such as the insured who owns more than a “certain” number of single family dwellings. Personal insurers consider it a commercial exposure and commercial insurers won’t touch them so agents have to get creative. LLC’s and Trusts seem to be falling into another type of gray area. Honestly, contracts have not kept up so insurers have become creative.
LLC’s: An LLC is a Limited Liability Company. It is a separate and distinct legal entity. It’s owners are known as “members.” After the financial collapse in 2008, the bottom fell out of the real estate market. Sadly, many people lost their homes. People with money quickly recognized that they could pick up dwellings at a bargain and benefited from an increased need for rental dwellings. Many of these folks opted to form an LLC to purchase these dwellings because under most circumstances, members are not personally liable for debts and liabilities of an LLC. Some insurers will issue dwelling fire policies with an LLC listed as the named insured- in some circumstances. This is a liability issue. Insurers are concerned (and rightly so) with getting an adequate premium for the exposure. If the members of the LLC are relatives ie: brothers or father and daughter, etc. then some preferred carriers are willing to name the LLC as the named insured. If the members are unrelated individuals then this would be a significant increase in liability exposure, which most preferred insurers are not willing to take on. (Insurers need to price for this exposure so it can be insured as well.) Therefore, it is important to understand who all the members of the LLC are and how they are related to each other to be able to have that discussion with your underwriter.
Trusts: Let’s begin our discussion of trusts with a few definitions that are important.
“Grantor” is the creator of the trust and has the legal authority to transfer property.
“Trustee” handles the assets or property for a third-party beneficiary. The Trustee may also be the “Grantor;” but could also be a spouse, adult child or third-party to the beneficiary. They have a fiduciary responsibility to act in the best interest of the beneficiary.
The main purpose in setting up a trust is to avoid “probate” which can delay passing property to heirs, costs up to 5% of the value of the estate and opens the records to the public. The benefits of forming a trust are understandable especially when there are substantial assets to protect and keep private. When a trust is formed and a primary residence is transferred to the trust, the owner of the property is now the trust, which is a separate legal entity.
When the issue of naming a trust as the named insured first started many years ago, there was a “solution” which in most circumstances still is the fashion in which this situation is handled. Make the “owners” of the trust who are usually the folks that live in the home the named insured ie: Mr. and Mrs. Smith and list the trust as an “additional insured.” The argument was that doing it this way limited the liability of the trust to the residence premises (so what about vacant land owned by the trust?) It also gives the individuals living in the home CPL coverage and contents coverage.
There are only at least two problems with that. The trust legally owns the property- not Mr. and Mrs. Smith. If there is a claim- the check should be made payable to the trust who owns the property. The other issue is that the trust has a “Grantor”, “Trustee” and “Beneficiary”. These may be different people. The “additional insured” arrangement assumes that the “Trustee” is living in the home. It gives no coverage to these additional individuals.
You as the Insurance Professional need to clearly understand who is living in the home and what position they play in the trust. I can think of only one preferred market who actually has an endorsement (Residence Held In Trust) who schedules the name of the “Grantor” and “Beneficiary”. It assumes the Trustee is named as a named insured along with the trust. It resolves many of the issues not dealt with by naming the trust as an additional insured. Again- it assumes the trustee lives in the house so may not be correct to use in every situation as the trustee may be a third-party, but at least it is a step in the right direction.
Preferred insurers need to deal with these contract issues and it appears that Agency Insurance Professionals are going to have to keep the pressure on the carriers to be able to ultimately insure their clients properly.