and Casualty Insurance Solutions for Entity Owners
Plugging the Holes in Asset Protection Plans
Tim O’Brien and Michael
JUNE 2008 -
An increasing number of Americans are transferring personal ownership
of residential property to trusts, limited liability corporations
(LLC), limited liability partnerships (LLP), and other entities
designed to protect assets or take advantage of favorable tax treatment.
Although transferring residential and other real property to an
entity can provide numerous benefits, it might also result in an
unintended lapse in insurance coverage for both the families transferring
the property and their professional advisors. Although it is impossible
to document with precision how many trusts and other entities are
created each year for asset-protection or tax-advantaged purposes,
a review of IRS records verifies past and projected growth in fiduciary
tax filings (Exhibit
Property and Casualty Insurance 101’
been published on the proper use, design, and implementation of
the tax and asset-protection benefits available to individuals
who transfer residential property to entities. This article focuses
on the need to properly structure the insurance policy that is
used to protect the majority of residential properties—the
common homeowner insurance policy.
policy is a legal contract in which one party agrees to indemnify
another party against certain risks in exchange for an agreed-upon
sum of money. Many advisors operate under the logical but false
premise that the common homeowner insurance policy covers the
actual home. In fact, the party that receives the benefit of coverage
is the named insured.
language used in homeowner policies was developed when people,
not entities, owned homes. As a result, the definition of “insured”
was carefully crafted to protect the interests of a very specific
group of people. Although definitions used by carriers can vary
in subtle ways, the insurance industry’s leading supplier
of statistical, actuarial, underwriting, and policy language,
the Insurance Services Office (ISO), uses the following language
in its commonly adopted broad-form homeowners policy to define
means you and residents of your household who are:
b. other persons under the age of 21 and in the care of any
person named above.
includes the named insured and spouse if a resident of the same
of “insured” has been tested many times in court to
determine who is eligible to receive the benefits of coverage
provided by a homeowner insurance policy. Regardless of the actual
ownership interest in the property at the time of loss, in no
known instance has a court required an unendorsed homeowner policy
to provide coverage to any party other than those defined by the
background, one can see that when residential property is transferred
from a person to an entity, the insurance policy that protected
the individual owners is not structured to protect the new entity
owner of the property. When asset protection is among the primary
reasons for transferring the property, the resulting absence of
insurance protection is an especially problematic unintended consequence.
Form of Asset Protection: Liability Insurance
often overlooked, the very broad liability coverage provided by
a homeowner insurance policy serves as a critical form of asset
protection. Indeed, homeowner policies not only provide protection
against many forms of suits alleging bodily injury or property
damage associated with residential premises, but protection is
also extended to the named insured for acts arising away from
the home. In addition, regardless of the merits of such legal
actions, the liability protection provided by a homeowner policy
obligates an insurance carrier to provide the insured with a legal
defense for covered losses.
to other causes of loss, liability losses occur with far less
frequency than those that result in damage to the home (Exhibit
2). Because liability losses have a low overall impact on
total loss costs, carriers apply only a small charge for the liability
coverage on a homeowner policy. Liability claims are infrequent,
but the costs to settle the few losses that do occur can be high.
Compounding this concern is the fact that carriers find it challenging
to understand and underwrite the true purpose and scope of all
entities that own residential property. Consider,
for example, the situation in which an entity that owns a residence
is named in a lawsuit alleging damages sustained far away from
the insured home. The broad liability coverage provided by a homeowner
policy may obligate the insurance carrier to pay defense costs
and related damages. Given this potential for severe losses, insurance
carriers have not been eager to provide liability coverage to
entities, which may present a far greater exposure to lawsuits
Hidden Gaps in Coverage
potentially disastrous gaps in coverage, individuals and their
advisors must take steps to ensure that insurance policies are
structured to protect the interests of all parties that have an
insurable interest (i.e., something to lose) in the event of a
property or liability claim. This may include a number of different
individuals and entities, such as a trust (including beneficiaries,
trustees, and grantors); an LLC (and its members); and a family
limited partnership (FLP, and its managing partners and limited
partners); as well as the individuals who occupy the residence.
the insurable interests of all parties that have a risk of loss
connected to a residence requires considerable expertise. Consider
the following example of an actual claim that occurred in the
southeastern United States, for which coverage was denied: An
extended family owned a large property consisting of 140 acres,
divided into 15 different sublets. Some lots were owned by family
members, others were owned by LLCs controlled by family members.
The property was divided for mixed use. Portions of the property
were covered by a commercial policy, others by a homeowner policy.
One family member’s employee died while landscaping a residential
property. The LLCs with ownership interests were not listed as
named insureds on either the commercial or homeowner policies.
Suits were filed against the family and the LLC that owned the
property where the fatality occurred. Although the family’s
personal assets were protected by the homeowner policy, the family
had to retain counsel to defend the LLC, because it was not covered
by the homeowner policy. A long period of litigation followed,
and the family that formed the LLC was required to pay substantial
legal fees, as well as an undisclosed judgment against the LLC.
precise coverage needs vary widely based on many factors (especially
the use of the residence), the following characteristics outline
the most common risk profiles when residences are owned by an
- An entity
is established to replace the private ownership of a personal
- The family
that has transferred ownership of the residence to the new entity
continues to reside there;
- A family
retains personal ownership of the household possessions in the
- The family
occupants are often closely connected to the entity (as trustees,
grantors, or beneficiaries of a trust, or as members of an LLC).
3 identifies the insurable interests of each party for this
common risk profile.
Solutions and Other Pitfalls
industry offers no universal approach to address the protection
needs of residential properties owned by all kinds of entities.
ISO, which assists most insurance carriers in developing policy
language, makes the Residence Held In Trust HO 05 43
endorsement available to carriers that use its services. This
endorsement is not intended to address the coverage needs of entities
other than trusts; it is not available from all carriers; and
it deems certain residential properties to be ineligible. Furthermore,
even in instances where this endorsement offers an ideal solution,
it is used so infrequently that many insurance agents neglect
to recommend it. The lack of a well-focused and standardized approach
to effectively address the coverage needs of all parties presents
a real dilemma.
meet the protection needs of each party, an experienced independent
insurance agent or broker can access effective coverage solutions
through carriers with experience writing customized policies for
entity-owned personal residences. Exhibit
4 provides a sample of one carrier’s “additional
insured” contract endorsement. Carefully crafted solutions
such as this enable experienced insurance professionals to structure
coverage to properly protect the insurable interests of each party
as described in the common risk profile.
common pitfall when structuring coverage for entity-owned residential
property is issuing a homeowner policy with the entity as the
named insured. Although commonly prescribed, such “solutions”
often neglect the needs of one or more parties. In this instance,
those residing in the home would have no insurance protection
for liability claims filed by third parties, first-party losses
to their personal possessions, or additional living expenses should
they need to live elsewhere due to a loss.
pitfall is neglecting to add the new entity as an additional insured
to a personal excess (umbrella) liability policy. Like a homeowner
policy, personal excess liability policies cover individuals,
not entities. Coverage for the entity must be properly endorsed
so that an entity can receive the benefits of this important form
of liability coverage.
structuring coverage that effectively protects all parties with
an insurable interest requires a thorough understanding of each
situation. To secure the risk-specific coverage particular individuals
need, advisors should encourage them to seek specialized assistance
from insurance professionals with expertise in entity-owned residential
properties. The following are important questions to examine before
deciding how coverage should be structured to protect all parties
with an insurable interest:
- Who will
occupy the residence?
- Is any
business conducted at the premises?
- Has the
trust, LLC, or other entity been created for purposes other
than owning the residence?
the entity own other real property?
- Who are
the parties to the trust, LLC, or other entity?
- Do other
forms of liability protection cover the property?
Property and Casualty Expertise into Wealth Advisory Process
homeowner policies can represent a hidden danger to entities that
own real property but lack access to specialized property and
casualty expertise. Finding professionals with the needed expertise
can be difficult because the insurance industry has become very
specialized. Compounding this challenge is the fact that insurance
agents often view an invitation to provide risk advisory assistance
as an opportunity to sell insurance, regardless of whether new
coverage is needed. Meanwhile, it can be dangerous to assume that
clients’ current property and casualty insurance agents
are properly addressing their risk-management needs. While developing
a relationship with an insurance professional who can provide
substantive and objective risk management advice requires research,
doing so can yield significant benefits. Accountants who provide
clients with access to prequalified third-party risk-management
specialists are providing an extra level of client service that
can help to positively differentiate their advice.
O’Brien is the director, private client services
for Cook, Hall & Hyde, Inc., of East Hampton and Melville, N.Y.,
and Fair Lawn, N.J.
Michael Markiewicz, CPA, CFP, is director of business
management and family services at Marks Paneth & Shron LLP,
New York, Woodbury, and Tarrytown, N.Y.