F I N A N C E

personal financial planning

Property and Casualty Insurance

Solutions for Entity Owners
Plugging the Holes in Asset Protection Plans

By Tim O’Brien and

Michael Markiewicz

n increasing number of Americans

A are transferring personal ownership

of residential property to trusts, lim-
ited 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 cover-
age for both the families transferring the
property and their professional advisors.
Although it is impossible to document with
precision how many trusts and other enti-
ties are created each year for asset-protec-
tion or tax-advantaged purposes, a review
of IRS records verifies past and projected
growth in fiduciary tax filings (Exhibit 1).

‘Personal Property and Casualty Insur-

ance 101’
Much has been published on the prop-
er use, design, and implementation of the
tax and asset-protection benefits available
to individuals who transfer residential prop-
erty 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. receives the benefit of coverage is the ways, the insurance industry’s leading sup-
An insurance policy is a legal contract named insured. plier of statistical, actuarial, underwriting,
in which one party agrees to indemnify The contract language used in home- and policy language, the Insurance Services
another party against certain risks in owner policies was developed when peo- Office (ISO), uses the following language
exchange for an agreed-upon sum of ple, not entities, owned homes. As a result, in its commonly adopted broad-form
money. Many advisors operate under the the definition of “insured” was carefully homeowners policy to define an insured:
logical but false premise that the common crafted to protect the interests of a very “Insured” means you and residents of
homeowner insurance policy covers the specific group of people. Although defini- your household who are:
actual home. In fact, the party that tions used by carriers can vary in subtle a. your relatives; or

44 JUNE 2008 / THE CPA JOURNAL

 b. other persons under the age of 21 and lenging to understand and underwrite the policies are structured to protect the inter-
in the care of any person named above. true purpose and scope of all entities that ests of all parties that have an insurable
“You” includes the named insured and own residential property. Consider, for interest (i.e., something to lose) in the
spouse if a resident of the same example, the situation in which an entity event of a property or liability claim. This
household. that owns a residence is named in a law- may include a number of different indi-
The definition of “insured” has been suit alleging damages sustained far away viduals and entities, such as a trust
tested many times in court to determine from the insured home. The broad liabili- (including beneficiaries, trustees, and
who is eligible to receive the benefits of ty coverage provided by a homeowner pol- grantors); an LLC (and its members); and
coverage provided by a homeowner icy may obligate the insurance carrier to a family limited partnership (FLP, and its
insurance policy. Regardless of the actu- pay defense costs and related damages. managing partners and limited partners);
al ownership interest in the property at Given this potential for severe losses, insur- as well as the individuals who occupy the
the time of loss, in no known instance ance carriers have not been eager to pro- residence.
has a court required an unendorsed home- vide liability coverage to entities, which Protecting the insurable interests of all
owner policy to provide coverage to any may present a far greater exposure to parties that have a risk of loss connected
party other than those defined by the lawsuits than individuals. to a residence requires considerable exper-
insurance contract. tise. Consider the following example of an
Given this background, one can see Avoiding Hidden Gaps in Coverage actual claim that occurred in the south-
that when residential property is trans- To avoid potentially disastrous gaps in eastern United States, for which coverage
ferred from a person to an entity, the coverage, individuals and their advisors was denied: An extended family owned a
insurance policy that protected the indi- must take steps to ensure that insurance large property consisting of 140 acres,
vidual owners is not structured to pro-
tect the new entity owner of the proper-
ty. When asset protection is among the EXHIBIT 1
primary reasons for transferring the prop- Past and Projected Growth in Fiduciary Tax Filings
erty, the resulting absence of insurance
protection is an especially problematic
Year Individual Returns Growth 1041 Returns Growth
unintended consequence.
1980 93,196,100 — 1,881,800 —
Critical Form of Asset Protection: 1990 112,596,000 20.82% 2,680,900 42.46%
Liability Insurance
Although often overlooked, the very 2000 128,049,000 13.72% 3,456,000 28.91%
broad liability coverage provided by a 2010 140,522,200 9.74% 4,003,200 15.83%
homeowner insurance policy serves as a
critical form of asset protection. Indeed, 10-year avg. 14.76% 29.06%
homeowner policies not only provide pro-
tection against many forms of suits alleg-
EXHIBIT 2
ing bodily injury or property damage asso-
Homeowner Insurance Losses by Cause, 2001–2004
ciated with residential premises, but pro-
(Percentage of Losses Incurred)
tection is also extended to the named
insured for acts arising away from the
home. In addition, regardless of the mer- Cause of Loss: 2001 2002 2003 2004
its of such legal actions, the liability pro- Property Damage
tection provided by a homeowner policy
obligates an insurance carrier to provide Fire, lightning, and debris removal 30.8% 32.6% 31.8% 20.5%
the insured with a legal defense for cov- Wind and hail 21.7 20.7 25.5 51.2
ered losses.
Water damage and freezing 22.3 21.5 21.9 15.7
Compared to other causes of loss, lia-
bility losses occur with far less frequency Theft 4.7 4.5 3.3 2.2
than those that result in damage to the All other property damage 13.2 12.3 10.7 6.1
home (Exhibit 2). Because liability losses
have a low overall impact on total loss Liability
costs, carriers apply only a small charge Bodily injury and property damage 6.5 7.3 5.8 3.7
for the liability coverage on a homeown-
er policy. Liability claims are infrequent, Medical payments and other 0.7 0.8 0.8 0.7
but the costs to settle the few losses that Credit card and other 0.2 0.3 0.2 0.1
do occur can be high. Compounding this Source: Insurance Information Institute
concern is the fact that carriers find it chal-

JUNE 2008 / THE CPA JOURNAL 45

divided into 15 different sublets. Some lots homeowner policy. A long period of liti- ■ The family occupants are often close-
were owned by family members, others gation followed, and the family that formed ly connected to the entity (as trustees,
were owned by LLCs controlled by fami- the LLC was required to pay substantial grantors, or beneficiaries of a trust, or as
ly members. The property was divided legal fees, as well as an undisclosed judg- members of an LLC).
for mixed use. Portions of the property ment against the LLC. Exhibit 3 identifies the insurable interests
were covered by a commercial policy, oth- Although precise coverage needs vary of each party for this common risk profile.
ers by a homeowner policy. One family widely based on many factors (especially
member’s employee died while landscap- the use of the residence), the following Cookie-Cutter Solutions and
ing a residential property. The LLCs with characteristics outline the most common Other Pitfalls
ownership interests were not listed as risk profiles when residences are owned by The insurance industry offers no univer-
named insureds on either the commercial an entity: sal approach to address the protection needs
or homeowner policies. Suits were filed ■ An entity is established to replace the of residential properties owned by all kinds
against the family and the LLC that owned private ownership of a personal residence; of entities. ISO, which assists most insurance
the property where the fatality occurred. ■ The family that has transferred owner- carriers in developing policy language, makes
Although the family’s personal assets were ship of the residence to the new entity con- the Residence Held In Trust HO 05 43
protected by the homeowner policy, the tinues to reside there; endorsement available to carriers that use its
family had to retain counsel to defend the ■ A family retains personal ownership of services. This endorsement is not intended to
LLC, because it was not covered by the the household possessions in the home; and address the coverage needs of entities other
than trusts; it is not available from all carri-
EXHIBIT 3 ers; and it deems certain residential proper-
Insurable Interests of Each Party for Common Risk Profile ties to be ineligible. Furthermore, even in
instances where this endorsement offers an
ideal solution, it is used so infrequently that
Party with insurable many insurance agents neglect to recommend
interest Coverage required for... it. The lack of a well-focused and standard-
Trust (LLC) ■ Dwelling owned by the trust ized approach to effectively address the
coverage needs of all parties presents a real
■ Other structures owned by the trust
dilemma.
■ Premises liability; trust can be named in a lawsuit To better meet the protection needs of
Trustee (LLC member) ■ Premises liability; trustee can be named in a lawsuit each party, an experienced independent
Beneficiaries ■ Contents owned by occupants insurance agent or broker can access
(LLC member) and those ■ Additional living expenses (loss of use); occupants effective coverage solutions through car-
residing as occupants would incur costs to reside elsewhere after a riers with experience writing customized
covered loss policies for entity-owned personal resi-
■ Liability; occupants’ negligence may cause them to dences. Exhibit 4 provides a sample of
be named in a lawsuit; coverage required for this one carrier’s “additional insured” contract
location and elsewhere endorsement. Carefully crafted solutions
such as this enable experienced insur-
ance professionals to structure coverage
to properly protect the insurable interests
EXHIBIT 4 of each party as described in the common
Sample “Additional Insured” Contract Endorsement risk profile.
The most common pitfall when struc-
Additional Insured—Residence Premises turing coverage for entity-owned residen-
tial property is issuing a homeowner pol-
Name and address of person or organization: icy with the entity as the named insured.
Although commonly prescribed, such
The definition of insured in this policy includes the person or organization named “solutions” often neglect the needs of one
above with respect to: or more parties. In this instance, those
Coverage for Damage to Your Property residing in the home would have no
Dwelling and Other Structures; and insurance protection for liability claims
filed by third parties, first-party losses to
Coverage for Liability and Medical Payments to Others their personal possessions, or additional liv-
The person or organization named above is covered for Liability and Medical ing expenses should they need to live else-
Payments to others but only with respect to the residence premises and only where where due to a loss.
the person or organization is held liable for an act or failure to act by any insured. Another common pitfall is neglecting
to add the new entity as an additional

46 JUNE 2008 / THE CPA JOURNAL

insured to a personal excess (umbrella) ■ Has the trust, LLC, or other entity been be dangerous to assume that clients’ cur-
liability policy. Like a homeowner pol- created for purposes other than owning the rent property and casualty insurance
icy, personal excess liability policies residence? agents are properly addressing their risk-
cover individuals, not entities. Coverage ■ Does the entity own other real property? management needs. While developing
for the entity must be properly endorsed ■ Who are the parties to the trust, LLC, a relationship with an insurance profes-
so that an entity can receive the bene- or other entity? sional who can provide substantive and
fits of this important form of liability ■ Do other forms of liability protection objective risk management advice
coverage. cover the property? requires research, doing so can yield sig-
Clearly, structuring coverage that effec- nificant benefits. Accountants who pro-
tively protects all parties with an insur- Integrate Property and Casualty vide clients with access to prequalified
able interest requires a thorough under- Expertise into Wealth Advisory Process third-party risk-management specialists
standing of each situation. To secure the Traditional homeowner policies can are providing an extra level of client ser-
risk-specific coverage particular individu- represent a hidden danger to entities that vice that can help to positively differ-
als need, advisors should encourage them own real property but lack access to spe- entiate their advice. ❑
to seek specialized assistance from insur- cialized property and casualty expertise.
ance professionals with expertise in entity- Finding professionals with the needed
owned residential properties. The follow- expertise can be difficult because the Tim O’Brien is the director, private
ing are important questions to examine insurance industry has become very spe- client services for Cook, Hall & Hyde, Inc.,
before deciding how coverage should be cialized. Compounding this challenge of East Hampton and Melville, N.Y., and
structured to protect all parties with an is the fact that insurance agents often Fair Lawn, N.J. Michael Markiewicz,
insurable interest: view an invitation to provide risk advi- CPA, CFP, is director of business man-
■ Who will occupy the residence? sory assistance as an opportunity to sell agement and family services at Marks
■ Is any business conducted at the insurance, regardless of whether new Paneth & Shron LLP, New York,
premises? coverage is needed. Meanwhile, it can Woodbury, and Tarrytown, N.Y.

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