Property Insurance Owned By a Trust or LLC

Note: We can only service insurance policies in the following states: New Jersey, Connecticut, Pennsylvania, and New York.

Trusts and limited liability corporations (LLCs) are becoming more common as they’re a good option for those looking to transfer legal ownership of their properties and better manage their wealth as a whole. Properties held in a trust or LLC can be anything from a personal home, rental property, or vacation home.

Benefits of using a trust or LLC for homeowners and property ownership include reduced liability, fewer taxes, smoother probate processes, and easier transfer of assets from one individual to another and between generations.

However, if you don’t have insurance that appropriately represents your trust or LLC for a given property, then the advantages of a trust or LLC may actually be outweighed by the disadvantages that come from improper insurance policies and risk.

Coverage Gaps

One of the major consequences that can arise from property held in trust or LLC and insurance policies is coverage gaps. Coverage gaps occur when a preexisting insurance policy is listed under the property owner’s name before the property is transferred to an LLC.

Then, when a need for insurance arises, the company will not offer coverage because the policy is listed to an individual(s) rather than the new trust or LLC.

Property Damage

Say your parent or guardian owns a house, for example, and has an insurance policy listed under their name. At some point, they transfer the property ownership from their name to a trust that includes you and your siblings.

If during a weekend when you and your siblings stay at the property, there is property damage from a fire after the ownership was transferred to the trust, the insurance company may deny coverage. This is because they see that only the original homeowner (your parent), not the trust that was recently established (to include you and your siblings), is covered.

This would mean that instead of receiving insurance coverage for the property damage incurred by the fire, you and your family or family trust would have to pay out of pocket.

Liability Claim

In another example, say that a property owner transferred their property to an LLC for their family. The property owner previously had liability coverage, or liability insurance is added to their preexisting plan (listed in the owner’s name). If someone is injured on their property and files a lawsuit after the property ownership is transferred to an LLC, then they will be left uncovered by their insurance company as a liability policy is not listed for the new LLC.

How to Cover the Trust/LLC

As discussed, if the property insurance policy is listed under an individual rather than the trust or LLC, then you will not be covered in the case of property damage or liability. Therefore, it is vital that you adequately cover your trust or LLC, so if there is ever a need for insurance coverage, you won’t be left to pay out of pocket.

Traditionally, the contract language for personal insurance policies (aka non-commercial policies) is written to cover the individuals outlined in the contract, not trusts or LLCs. Personal unendorsed homeowner policies provided no coverage for the entity itself until recently. Luckily, some insurers have broadened the definition of “insured” to include entities like trusts and LLCs, without the need for endorsement to modify the contract language.

Therefore, it is important to understand the contract language, with the word “insured” being key to future coverage.

The Trust of LLC as Named Insured

One of the benefits of establishing a trust or LLC is the separation it issues between the entity and the owners. If the insurance property lists the entity (rather than an individual owner/member) as the “Named Insured”, it accurately describes the ownership of the property too and is therefore consistent.

The separation between the individuals and the entity is further strengthened if payments are made by the entity itself rather than any single individual. Furthermore, any insurance claim payments would be paid by the trust or LLC. In this case, the insurance policy should cover the property. However, individuals would need to purchase a renters policy to protect their individual belongings and personal liability.

The Trust or LLC as Additional Insured

Some insurance companies are willing to cover the beneficial owners of the property and list the trust or LLC as an “Additional Insured/Interest”. In this case, the trust or LLC is covered by its interest in the property and liability claims made on the premises.

Also, listing the trust or LLC as “Additional Insured” means that the trust or LLC and the individuals can be covered in one policy. However, a downside for this case is that there is less separation between the individuals and the entity itself as there is with listing the trust or LLC as “Named Insured”.

Umbrella Liability

An umbrella liability policy is used for higher liability coverage because an individual who receives an injury on the property can sue the people who live there or the entity itself. Umbrella liability further protects the entity and the residents in the case of a lawsuit.

Other Exposures

When creating a trust or LLC, other assets like art, jewelry, and vehicles may be included to better manage wealth. If you wish to have these additional assets covered, then it is important to add them to your insurance policy as “Named Insured” or “Additional Insured”.

The Takeaway

Although insuring property and assets under a trust or LLC might seem like a complex task, if anything were to go wrong, you would certainly wish you and your trust/LLC were appropriately covered.

Therefore, it’s important to speak to a trusted insurance advisor and work out the policy details to make sure that you and the other members of the trust/LLC understand it. Most of all, verify they are covered if any property damage, liability claims, or other need for insurance coverage arises.

Contact us today to learn more.