The phrases that can (or should) cause fear in the heart of a personal insurance professional is when a client or prospect says:
“My home is in a trust” or “I own property in an LLC.”
The practice of clients obtaining a trust or forming an LLC is becoming quite common these days. In the “old days”, corporations belonged to “commercial” insurance and individuals to “personal” insurance. There have always been those “gray” situations that no one wants to insure like the insured who owns more than a “certain” number of single-family homes. Personal insurers consider it a business exposure and business insurers won’t touch them, so agents need to be creative. LLCs and trusts seem to be falling into another kind of gray area. Honestly, the contracts haven’t held up, so insurers have gotten creative.
LLC – An LLC is a limited liability company. It is a separate and distinct legal entity. Its owners are known as “members”. After the financial collapse of 2008, the real estate market crashed. Sadly, many people lost their homes. People with money quickly recognized that they could buy homes at a bargain price and benefited from an increased need for rental housing. Many of these individuals chose to form an LLC to purchase these homes because, in most circumstances, the members are not personally liable for the debts and liabilities of an LLC. Some insurers will write home fire policies with an LLC listed as the named insured, in some circumstances. This is a liability issue. Insurers are (and rightly) concerned about getting an adequate premium for exposure. If the LLC members are related, that is: brothers or father and daughter, etc. then some preferred carriers are willing to name the LLC as the designated insured. If the members are unrelated individuals, this would mean a significant increase in liability exposure, which most preferred insurers are unwilling to take on. (Insurers must price this exposure so that it can also be insured.) Therefore, it is important to understand who all the LLC members are and how they relate to each other in order to have that conversation with your insurer. .
Trusts: Let’s start our discussion of trusts with a few definitions that are important.
The “grantor” is the creator of the trust and has the legal authority to transfer ownership.
“Trustee” manages the assets or property of a third party beneficiary. The Trustee may also be the “Grantor”; but it could also be a spouse, adult child or third party of the beneficiary. They have a fiduciary responsibility to act in the best interest of the beneficiary.
The main purpose of creating a trust is to avoid “succession” that can delay the transfer of property to the 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 began many years ago, there was a “solution” that in most circumstances remains the way this situation is handled. Make the “owners” of the trust, usually the people who live in the home, be 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 trust’s liability to the premises of the residence (so what about vacant land owned by the trust?) It also gives the people living in the home CPL coverage and insurance coverage. contents.
There are only at least two problems with that. The trust is the legal owner of the property, not Mr. and Mrs. Herrero. If there is a claim, the check should be made payable to the trust that owns the property. The other problem is that the trust has a “Grantor”, “Trustee” and “Beneficiary”. They can be different people. The “additional insured” agreement assumes that the “Trustee” lives in the home. It does not cover these additional people.
You, as an insurance professional, must have a clear understanding of who lives in the home and what position they hold in the trust. I can only think of a preferred market that actually has an endorsement (Residence Held in Trust) that programs the name of the “Grantor” and the “Beneficiary”. It is assumed that the Trustee is named as the named insured along with the trust. It solves many of the problems that are not addressed by naming the trust as an additional insured. Again, it is assumed that the trustee lives in the house, so it may not be correct to use it in all situations as the trustee may be a third party, but it is at least a step in the right direction.
Preferred insurers must grapple with these contractual issues, and it appears agency insurance professionals will have to keep up the pressure on companies in order to ultimately adequately insure their clients.