The Dangers of Insuring Entity-Owned Residential Property

Homeowner’s insurance covers damage or loss to all types of homes. The purpose of homeowner’s insurance is to protect the owner against property damage to the insured property, as well as from lawsuits for personal injuries or property damage that stem from the insured property. Also, while it is obvious that homeowner’s insurance is meant to insure the home, oftentimes Section II of homeowner’s insurance policies will cover the named insured for damages arising from the insured’s negligent acts that occurred away from the insured property.

But what happens if the homeowner is an entity such as an L.L.C., L.L.P., or a Trust formed by you? These days, more people are seeking to limit their own exposure to taxes and potential creditors by transferring personal ownership of real property to an entity. More often than not, when a residential property is purchased by an entity or transferred from an individual to an entity, the entity has no intention of using the property for business purposes. Rather, the entity was formed with the sole purpose of owning the property and the entity’s principals intend on using the property as a personal residence. The nature of this kind of transaction has led many insurance companies to refuse issuing homeowner’s insurance policies for residential properties to entities, instead requiring the entities to purchase commercial liability and property insurance policies as though it were an entity-owned property that collects rent. However, even if your insurance company will issue a homeowner’s insurance policy to an entity, there are important implications to consider.

Generally, homeowner’s insurance policies define the insured as “you, your spouse and your children that are residents of your household and under the age of 21.” Considering this definition, your family’s personal belongings are probably not covered under an entity’s homeowner’s policy because an entity does not have a family. Further, Section II benefits will not likely be extended to any individuals because any negligent acts that occur away from the insured property would not be acts of the entity (which exists solely to hold title) and therefore excluded from coverage.

So why not simply rely on your current personal homeowner’s insurance policy to cover an entity-owned home after title transfer? Insurance policies, at their most basic level, are contracts between two or more parties. If there is a party that is not included in the contract, under basic contracting principles that party would not be entitled to any of the contractual benefits. Therefore, while you may still be covered under your homeowner’s policy for loss of personal property, the entity would not be covered for loss of the residence.

What can you do to protect your entity-owned residential property that you live in? In Colorado, unlike some other states, you do not need an ownership interest in the property to have an insurable interest in that property. Rather, the focus is “on the potential for economic loss, not ownership of the property that is damaged.” Colo. Hospitality Serv. v. Auto-Owners Ins. Co., 2015 U.S. Dist. LEXIS 141077 (2015) at 6 citing 44 Am. Jur. 2d Ins. §§ 926, 938 (2015). Therefore, you should always list yourself as the named insured and the entity as an additional insured. Do not list the entity as the named insured and yourself as the additional insured! This is because the named insured has greater benefits under the policy than an additional insured and your exposed risk is greater than the entity’s exposed risk. Finally, always list the entity as an additional insured on any personal umbrella liability policy.

For more information, please contact a Longmont real estate lawyer at Jorgensen, Brownell & Pepin, P.C. Our office can be reached at (720) 491-3117.