Author: Chris Boggs
Without belaboring the historical details, let's cut to the basic point – using an assumed name (a DBA) as part of the named insured may be detrimental to the insured. Although only a few states have specifically addressed the possibility that a DBA may limit coverage to activities specific to the DBA name, agents must still consider the ramifications when naming insureds and deciding whether to include a DBA.
Historical Perspective on Named Insureds and Status as “Persons"
Insurance is a contract between “legally acknowledged" parties, the insurance carrier and the named insured(s). More specifically, it is an agreement between “persons."
In the legal sense, there are two types of legally acknowledged “persons":
- Natural persons: Flesh and blood individuals or humans; and
- Legal persons: Formed by the filing of specific documents such as Articles of Incorporation or Articles of Organization.
Natural persons and legal persons are granted essentially equal rights and responsibilities under the law. Both can own property, sell property, hire and fire, and most importantly sue and be sued.
To properly extend insurance protection, the correct “person(s)" must be named. Further, the only name REQUIRED for insurance coverage to be extended is that of the “legally acknowledged" person(s).
Why? Because this is the only “person" who or that legally or factually exists. Further, only a “person" can suffer or cause injury or damage.
Takeaway: When naming insureds, the only “person" or “persons" that must be named is or are those acknowledged in law - natural persons or legal persons.
Fictitious Entities or Non-Persons – AKA “Assumed Names" (DBAs or T/As)
An “Assumed Name" is how the business is known in the neighborhood. Often the Legal Person is created to conduct business, sign contracts, etc., but the business is known in the community under its assumed name.
For example, McDonald's might be the most common assumed name. The actual owner of a specific store creates a legal person to run what everyone knows and refers to as the neighborhood McDonald's. The legal person may actually be “Restaurant Enterprises 1, Inc.," but none of the customers know this, they only know it as McDonald's. McDonald's is the assumed name.
Likewise, the legal name of the insured might be Tinkers, Evers & Chance, Inc., but the business may be known in the community as “1A Plumbing" (top listing in yellow pages, if they still exist). When someone calls for service, the phone is answered, “1A Plumbing." The community does not know the business as or by its legal name, only by the assumed name.
Assumed names or entities are fictitious and don't exist as persons. A fictitious entity cannot suffer or cause injury or damage.
Takeaway: Fictitious persons do not exist and are generally not extended the rights and responsibilities placed on natural or legal persons.
To “DBA" or Not to “DBA"
Because an insurance contract is an agreement between at least two legally acknowledged “persons," there does not appear to be a need to include the DBA as part of the named insured. The only requirement to effectuate coverage is the listing of the legally acknowledged “person" (natural or legal). “Fake" persons or entities are not required to be listed for coverage to exist, because they don't “legally" exist.
However, and there is always a “however," agents often feel compelled to include the assumed name as part of the named insured. Rather than simply listing Tinkers, Evers & Chance, Inc., the agent desires to list “Tinkers, Evers & Chance, Inc., DBA 1A Plumbing."
While this is not necessarily wrong, doing this has the potential to unexpectedly limit coverage in some states.
Historically, including the DBA was not viewed as problematic. In fact, the VU publicly opined that inclusion of the DBA did not appear to have any effect on coverage and that the only MUST was listing the proper person (legally acknowledged) as the named insured.
What has changed? Several state courts have rendered decisions holding that use of the DBA limits coverage to the activities indicated by the DBA. The reasoning, every word in the contract matters, and this includes the words on the Declaration page. While holding that every word matters is not unreasonable, the result of including the naming of the insured in this net could be unintended.
Using the example insured, these rulings mean that when “Tinkers, Evers & Chance, Inc., DBA 1A Plumbing" is the named insured, coverage is limited to activities related to plumbing. While this may not seem problematic on the surface (the intent was to provide coverage for a plumbing operation), what might the result be if:
- The insured undertook a non-plumbing related job to help the homeowner avert an emergency while they were on site;
- The insured subcontracts work that needed to be done before the plumbing could be done (framing, electrical, etc.); or
- The insured expanded their operations during the policy period to include another trade?
In any of these situations, if the DBA is present, there may not be coverage extended for any injury or damage that occurs because the activities are unrelated to plumbing. If the insured was listed simply as “Tinkers, Evers & Chance, Inc.," coverage would be intact, assuming the carrier has not attached any limiting endorsements such as a limited designated operations type endorsement.
Granted, this application of a DBA is precedent in only a few states (five or six), but these findings are relatively new (in a legal timeline sense). This limiting application of a DBA may become more and more common.
Takeaway: Because the DBA is not necessary to effectuate coverage and because including the DBA may actually, though unintentionally, harm the insured, do not automatically list the DBA as part of the named insured without careful consideration.
The Importance of Properly Naming Insureds
Following a loss, the very first question asked by the claims adjuster is, “Is the 'person' suffering or causing loss insured by the policy?" If the answer is “no," there is no need to dig any further into the policy. Regardless how well the policy is designed, if insured status is not properly extended, there is no coverage.
However, getting too “specific" with the named insured by including the DBA (or even a “Trading As" or “T/A") may negatively affect the breadth of covered activities. Recent court findings in a few states may require agents to rethink whether to include a DBA or not.
The importance of properly naming the insured cannot be overstated. First, the proper “person" (or persons) must be named (natural or legal); secondly, avoid unintentionally limiting coverage by using an assumed name as part of the named insured.
Takeaways About DBAs
Positively and without a doubt agents must make every effort to get the “you" (the “named insured") correct, but consider the following before adding anything other than the “legally acknowledged person" as the “you" within the policy:
- When naming insureds, the only “person" or “persons" that must be named are those acknowledged in the law, either natural persons or legal persons.
- Fictitious persons (assumed names) do not exist and are not generally extended the rights and responsibilities extended to legally acknowledged persons. Assumed names are not required to extend coverage.
- Because the DBA is not necessary to effectuate coverage and because including of the DBA may actually, though unintentionally, harm the insured, carefully consider the possible ramifications if the decision is made to list the DBA. When and where possible, don't grant these fictitious entities status as a “you."
Disclaimer: This article is intended for general informational purposes only. Any liability is disclaimed as to reliance on or use of the information contained herein. The article is not intended to constitute and should not be considered legal or other professional advice, nor shall it serve as a substitute for obtaining such advice. If specific expert advice is required or desired, the services of an appropriate, competent professional, such as an attorney or accountant, should be sought.
Last updated: August 3, 2021