LLCs, Land Trusts and Insurance – Getting it Right

insurance cartoonYou have created an entity to hold title to your real estate but did you change your insurance policy to reflect the change in ownership?  Unfortunately, some real estate investors who create LLCs, land trusts or other entities to hold title to their real estate forget or improperly update their casualty and liability insurance.  Insurance coverage is a fickle business where seemingly minor incongruities can mean the difference between full coverage, partial coverage or no coverage.  When using business entities listing the entity as the “named insured” is the always the best course of action.  As the named insured, your entity is protected from liability and casualty claims associated with the real estate.  However, it is not always practical to list your entity as the named insured especially in the following situations:

  • Your carrier will charge higher fee;
  • Your carrier will only issue one policy per entity and it only covers one property; or
  • Your property is subject to an existing mortgage and you do not want to alert your lender to the property transfer for concern it may accelerate your mortgage

If you fall into one of these situations, then choosing the proper designation for your entity is crucial.   When contacting your insurance carrier be familiar with the following terms:

Named Insured

The term “Named Insured” is the owner of the insurance policy and the only party with the authority to make changes to the policy, file claims, modifications, etc..  The named insured must always have an insurable interest in the property. An insurable interest exists when a person or entity will obtain some financial benefit from the preservation of the subject matter, or will sustain pecuniary loss from its destruction or impairment when the risk insured against occurs.

Additional Named Insured

An “Additional Named Insured” is similar to the owner of the policy and has all the protections afforded to the named insured.

Loss Payee

A “Loss Payee” (which automatically includes any mortgagee) is the party who has a secured interest in the property.  In the event of a claim or loss, the loss payee will be a party to any payments being released to the named insured.

Additional Insured

An “Additional Insured” is the least understood and most misapplied insurance term by real estate investors.  Additional insureds under an insurance policy receive liability coverage but not casualty coverage.  This approach works well in the majority of situations because the entity is afforded liability protection from claims brought by injured parties; however, there is no coverage whatsoever for physical losses resulting from such things as vandalism, flooding, theft, fire, etc.

This may not be an issue for most investors who name their entity as an additional insured because the investor is the named insured for purposes of casualty loss.  However, do not assume this will protect you in all circumstances for an insurance company could always argue you, personally, lacked an insurable interest in the property.

Additional Interest

An “Additional Interest” offers no coverage and should be avoided.  An additional interest is entitled to notification whenever a policy cancels or has a major change made to it, i.e., you find out about changes and nothing else.

With all of the different designations what is the preferred method for insuring your real estate investments?  Here is a chart I use:

InsChart

Ultimately, insuring your property through an entity comes down to having a discussion with your insurer and/or multiple carriers.  Insurance is not a one size fits all approach because each state has different requirements for the types of policies a carrier can write.  For example, I recently read one lawyers blog wherein he stated real estate investors should name their LLC as an additional insured under their residential policy.  This may not work in most instances because a policy insuring an LLC is typically written as a commercial policy.  You may find your carrier refuses to cover your LLC even though they named it as an additional insured.  Hence, a reason I prefer to use land trusts to hold the title.  Further, land trusts can be the named insured without obtaining a commercial policy and, the change of policy over to a land trust as the named insured does not invite lender scrutiny of legal ownership.

5 comments On LLCs, Land Trusts and Insurance – Getting it Right

  • Good Evening Mr. Coons,
    I have a fourplex under contract in Missouri. A friend of mine and I are purchasing one property a piece and planned on putting them both into an LLC to share the income/profits and distribute some of the risk. Our original idea was simply to put title in the LLCs until we learned about due on sale clauses.

    Now, after reading through all of your posts, we are determined to try revocable grantor trusts with ourselves and beneficiaries and then transferring the beneficial interests to the LLC.

    Today I attempted to communicate those desires to several insurers and while they were all willing to put a trust as the named insured and my friend and I as additional insured, none were willing to add an LLC as an additional insured.

    Have you found a method of approaching this problem that will include protecting the LLC? It doesn’t seem beneficial to have an LLC as a protective layer when no one will insure it. Perhaps it is a Missouri issue?

    I truly appreciate your blog and all the hard work you put into this, the resources here are incredible.

  • Hi Clint,
    I read your article with great interest. I am having a real difficult time determining the proper way to get insurance. My wife and I own 14 rental properties, each are held in a Florida land trust, same trustee co, the beneficiary is an LLC.

    Any commercial policy for dwelling (due to corp ownership) does not include liability. We have no problem getting dwelling insurance in the name of the trust with the beneficiary shown as co-insured.

    The challenge is on the liability side.
    We had one agent state that we should make the LLC the named insured and make the trustee co (not the individual trusts) the co-insured, if we wanted to name each individual trust as co-insured they would charge for each add’l co insured and it gets very expensive.

    Another agent said we need to buy individual liability coverage in the name of the trust with the beneficiary LLC as co-insured but that also gets very expensive.

    We need some guidance, what is the best way to insure a portfolio of properties held like this?

    Thank you so much!

    Thomas

    • Thomas,

      Unfortunately, this is a problem with insurance companies. You best bet might be to name the LLC and get verification from the insurance agent (in writing) that despite the properties being held in land trusts they are covered under the casualty portion of the policy. Have you consulted National Real Estate Insurance Group? This company works with real estate investors.

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