In the past, there has been a growing number of Americans who have been transferring the personal ownership of their residential property to LLCs, trusts, limited liability partnerships (LLPs) and other asset protection entities. They have been doing this mainly for the tax benefits. However, this strategy has also been creating unintended gaps in the insurance coverage of the individuals carrying out the transfer of the ownership of the property, the people with the fiduciary duty to protect the entity’s interests, the entities and in some cases, the professional advisers who saw to the transaction.

Asking the Right Questions

To ensure that the involved parties are protected, there is one simple question that the underwriters have to ask: Does the entity owning the property present exposure to any business-related activities and that are not included in the homeowners filing? If yes, then the risk advisers need to understand the urgency to reach out to a commercial underwriter to come up with a coverage solution that will address the exposures on property and liability that are linked to the business-related activities of the entities. In most cases, when the entity was formed, there was no intention of using the residence for any business-related purposes and was created solely for personal residence only. To avoid exposure, risk advisers and underwriters should ask the following questions to get the proper assessment of risk:

  • Who will be occupying the property?
  • In what way will the property be put to use?
  • Are there other parties that possess an insurable interest alongside the entity owner and both from the perspective of Section I and Section II?
    Is there any other property owned by the entity?
  • Who are the parties to the LLC, trust, LLP, or other entities?

Risk Profile Common Among Entity-Owned Residences

  • Some of the things that one has to be aware of before setting up an entity is that:
  • A limited liability company, trust, or a limited partnership are formed for the sole reason of holding title to a family residence.
  • The family that is the beneficiary of the entity that owns the residence is the one that occupies the home.
  • The family occupants are closely related to the entity, that is, as trustees, grantors or as beneficiaries. In the case of a trust, they are managers, members, general partners, or limited partners if in an LLC or limited partnership.
  • The family retains the personal ownership of all the furnishings and other items at home.

There is no reason to believe that the transfer of residential houses ownership to entities will stop in the future. As such, underwriters should always be on the look for exposure on the parties involved.