Affluent families and individuals, working with legal and financial advisors, are increasingly holding property through trusts, limited liability corporations (LLCs), and other entities. Typically, this creates a legal separation between themselves and the property for privacy, tax or other reasons, but if the insurance professional is not made aware of the setup, these entities, and the individuals connected with them, may not be properly protected. Unfortunately, miscommunication with insurance professionals is also happening more regularly.
Take a client of ours, a California homeowner, who, transferred the ownership of their home to an LLC after we initially obtained coverage and failed to inform us about the switch during annual reviews. This became an issue when they were held responsible for a workers’ compensation claim stemming from a renovation, in which a worker said they were injured at the house and the contractor hadn’t maintained adequate insurance. While we initially reassured the client that their homeowner’s policy would step in and cover their liability if the contractor could not, it became much more complicated once we learned about the LLC. Since they hadn’t told us about the new structure, it wasn't named in their insurance policy, and the carrier did not have to cover claims against it.
In most cases, insuring a home held in a trust or LLC isn't any more expensive than if you owned it directly. But it is necessary to work with your insurance advisor to make sure that there are no gaps in the coverage for either the property or yourself.
What makes this a bit complex is that homeowners policies insure more than the home itself. They also cover the furniture and contents of the home, your property away from home, and your liability for a wide range of claims anywhere in the world.
Generally, you can provide all this coverage in a single policy. You might be the "named insured," and the LLC or trust would be an "additional insured." Or it could be the other way around. Occasionally, you and the entity may each need separate policies – but a qualified broker will be able to coordinate the policies appropriately. Also, you want to make sure there is sufficient personal excess liability (umbrella) coverage that applies both to you and the entity.
From an insurance point of view, the exact structure you pick often depends on the nature of the other policies you own. Also, you can't put the entity on your personal insurance if it is a commercial operating entity. For example, a farm, ranch, or any other enterprise with employees needs a commercial policy.
Essentially you may want to make sure that all these coverages are in place:
For the LLC or trust
- Damage to the structure and property.
- Liability associated with the property, such as improper maintenance on your property.
For you and your family
- Lost or damage to your personal property.
- Broad worldwide liability coverage.
Your lawyers and financial advisors may have some additional advice depending on the reasons you established the trust or LLC. For example, sometimes clients are advised not to pay certain premiums from their personal accounts and rather to use accounts owned by the legal entity. And speaking of bank accounts, never deposit the proceeds from a claim by a trust or LLC into your personal account. That can cause complications you want to avoid with your insurance carrier and possibly the IRS.
Of course, when paperwork mistakes are made, we do what we can to set things right. At first, with our California client, the family had to hire its own lawyer to deal with the workers' compensation claim while we negotiated with the insurance carrier on their behalf. Eventually, we were able to get the carrier to agree to backdate coverage of the LLC, and they started paying the legal bills. Thankfully a good ending, but an important lesson for others who are considering holding a property in a trust or LLC.