NUTS & BOLTS
TAX ISSUES
any payments being released to the named insured.
not assume this will protect you in all circumstances, for an insurance company could always argue that 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 when- ever 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? The accompanying chart provides a guideline that I use. Ultimately, insuring your property through an entity comes down to having a discussion with your insurer and/
ADDITIONAL INSURED An “additional insured” is the insurance term least under- stood and most misapplied 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
Understanding Insurance Designations
NON-OWNER OCCUPIED
OWNER
COVERAGE
POLICY DESIGNATION
POLICY TYPE
LLC, LP, Corp.
Dwelling and premises liability for entity Premises liability for manager of entity
Name insured Additional insured
Commercial
MAKE SURE YOU PROPERLY UPDATE YOUR CASUALTY AND LIABILITY INSURANCE POLICY WHEN CREATING AN ENTITY TO HOLD TITLE TO YOUR REAL ESTATE.
Land Trust
Dwelling and premises liability for trust Premises liability for trustee Premises liability for beneficiary Dwelling and premises liability for trust Premises liability for trustee Premises liability for manager of entity Premises liability for beneficiary
Name insured Additional insured Additional insured Name insured Additional insured Additional insured Additional insured
Residential/Rental
by Clint Coons
ou 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 for- get or improperly update their casualty and liability insurance. Insurance coverage is a fickle business where seeming- ly 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 always the best course of action. As the named insured, your entity is protected from liability and casualty claims associat- ed 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 a higher fee. • Your carrier will issue only one policy per entity, and it only covers one property. • 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. Y
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: NAME INSURED The “named insured” is the owner of the insurance policy and the only party with the authority to make changes to the policy, file claims, seek modifications, etc. The named insured must always have an insurable interest in the prop- erty. 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 destruc- tion or impairment when the risk insured against occurs. ADDITIONAL NAME 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 mortgag- ee) 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
Land Trust with LLC as beneficiary
Residential/Rental
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 lawyer’s blog wherein he stated real estate investors should name their LLC as an addi- tional 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 the carrier named it as an additional insured. Hence, that is a reason I prefer to use land trusts to hold the title. Further, land trusts can be the named insured without ob- taining 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. •
Clint Coons is a founding partner of Anderson Law Group and cur- rent manager of Anderson’s Tacoma, Washington, office. He works primarily with medical professionals and real estate investors in his practice. A noted author and presenter on asset protection and tax reductions, Coons has gained national recognition as an expert in his field. He is noted for his unique ability to take a complicated law or structure and explain it in crystal-clear terms. This, combined with his dynamic speaking and on-cam- era personality, has made him a favorite at asset protection and tax-related programs across the country. For more information, call 800-706-4741 or visit www.andersonadvisors.com.
110 | think realty magazine september :: october 2016
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