LLC’s and Trusts: To Insure Properly or Not

A prospect or client saying these phrases can cause fear in an insurance professional.

“My home is in trust” or “I own properties within an LLC.”

Clients are increasingly able to obtain a trust or form an LLC. In the old days, corporations were in “Commercial” and individuals in “Personal”. There are always those “gray” situations that neither party wants to insure, such as an insured who has more than one family home. It is a commercial exposure that personal insurers view as a risk, so agents need to be creative. Trusts and LLCs are falling into another gray area. In truth, contracts are not keeping up with modern times so insurers have had to get creative.

LLCs: An LLC can be described as a Limited Liability Company. It is an independent legal entity. The owners of the entity are called “members”. The bottom fell out the real estate market after the 2008 financial crash. Many people lost their homes. People who had the money realized that they could buy houses at a discount and were able to rent out their homes. These people formed an LLC to buy these dwellings. In most cases, the LLC members are not responsible for any liabilities or debts. In certain circumstances, insurers may issue dwelling fire policies to an LLC named as the insured. This is a matter of liability. This is a liability issue. If members of the LLC have a close relationship, such as brothers, fathers and daughters, etc. Some preferred carriers will name the LLC as insured. This would result in a significant increase of liability exposure for members who are not related. Most preferred insurers will not take this on. This exposure must be priced by insurance companies so that it can be covered. It is therefore important to know the identities of all members of an LLC and their relationships so that you can have a discussion with your underwriter.

Trusts: Let’s start our discussion about trusts by defining some key terms.

The trust’s creator is called “Grantor”. He has the legal authority and power to transfer property.

The assets and property of a third-party beneficiary are managed by the “Trustee”. The Trustee could also be called the “Grantor”, but they could also be a spouse or adult child, or any other third-party to the beneficiary. They are responsible for acting in the best interests of the beneficiary.

A trust’s main purpose is to avoid probate, which can delay the transfer of property to heirs and cost up to 5% of its value. It also opens up the records to the public. It is easy to see the benefits of setting up a trust, especially if there are large assets that need to be protected and kept private. A trust is created and the primary residence is transferred to it. The trust is an independent legal entity.

There was an “solution” when the question of naming trusts as named insureds first emerged many years ago. This is still the case in most cases. Name the “owners”, usually Mr. and Mrs. Smith, the named insured, and add the trust to the list as an “additional insurance.” This would limit the trust’s liability to the residence premises. What about vacant land owned by trusts? It provides contents and CPL coverage to the residents of the home.

This has at most two problems. Legally, the trust is the owner of the property. Mr. Smith and Mrs. Smith are not. The trust should pay the check if there is a claim. Another issue is whether the trust has a “Grantor”, a “Trustee”, and a “Beneficiary”. These could be different people. The “additional insured arrangement” assumes that the “Trustee is currently living in the home. These additional people are not covered by the policy.

As an Insurance Professional, you must understand who lives in the home and their role in the trust. Only one preferred market has an endorsement (Residence Held In Trust), which schedules the names of the “Grantor”, and the “Beneficiary”. It assumes that the Trustee is named as an additional insured in addition to the trust. This resolves many issues that were not addressed by adding the trust to the list of insureds. It assumes that the trustee lives in the house. Although it may not be appropriate in all situations, it is at least a step in the right direction.

These issues need to be dealt with by preferred insurers. Agency Insurance Professionals will have to continue to put pressure on carriers to insure clients correctly.