Author: Chris Boggs
"Who owns the building?" Asking this rather basic, four-word question can save your insured, you, and your errors and omissions carrier a major heartache and undue costs following a building damage claim.
Never assume a small, closely-held corporation is as simple as it appears on the surface. Exposure and legal realities often exist, the importance of which are not fully understood by the "business owner."
Consider the following example, George Bailey owns Widgets, Inc., a manufacturer of widgets (who would have guessed?). The manufacturing operation is conducted in a building that, according to Mr. Bailey, is "owned by the insured." However, Mr. Bailey owns the building individually.
Understand, Mr. Bailey is not attempting to mislead the insurance carrier or misrepresent the facts. In his mind, there is no distinction between the operations of Widgets, Inc. and the ownership of the building. To Mr. Bailey, it's all the same because he owns both. Such belief is more common than many agents realize.
But within the realities of insurance and law, two separate "persons" are involved in this all-to-common situation. Potential insurance coverage gaps arise from the existence and participation of two separate "persons." Each natural person and legal person must be accounted for and managed separately within the insurance policy. (Natural persons are flesh and blood individuals. Legal persons are created by the filing of specific legal documents such as articles of incorporation or articles of organization.)
Natural persons and legal persons have the same rights; the right to sue, to be sued, to own property, etc. Therefore, each "person" presents his/her/its individual risk exposure that must be analyzed and specifically insured.
Unless each person's exposure is properly addressed, the property policy may not respond to a property claim for one of two reasons:
- Lack of insurable interest; or
- Lack of insurance protection.
Property insurance policies do NOT respond to a claim if insurable interest does not exist at the time of the loss. Likewise, if the party with insurable interest is not an insured, the policy does NOT pay.
Insurable interest, in a property insurance context, exists when a "person" suffers direct financial loss as a result of damage to or destruction of the specified property. If the "person" with insurable interest is not covered by a property policy, the loss must be paid out of that "person's" resources. Insurable interest in real and personal property is created in one of three ways:
- Legal liability: Responsible for someone else's property – like a dry cleaner is responsible for its customer's clothes; or
- Contract: A lease agreement making another party responsible for insuring the property.
Returning to the initial scenario: George Bailey owns the building individually, but Widgets, Inc. is the policy's only named insured. If the building is damaged or destroyed by any covered cause of loss, the property policy covering the building owes – nothing. The legal person listed on the policy as the named insured, Widgets, Inc., did not have insurable interest; and the natural person with insurable interest, George Bailey, is not covered in the policy as an insured.
Beyond the individual (natural person) ownership of a building, one of several possible ownership scenarios could exist that must be considered, anticipated and/or researched, including:
- The building is owned individually by the "owner" of the business operation (as in our example above);
- The building is owned by several individuals;
- The building is owned by a separate legal person; or
- The building is owned by any combination of natural and legal persons.
Attorneys often recommend such separation for various reasons. But sometimes, the building is not owned by the named business entity because it was purchased first, willed to the individual, or any number of reasons. Again, never assume ownership.
How is building ownership confirmed? The simplest way is to ask the question; specifically, "who or what entity owns the building." Even Mr. Bailey in our example knows he owns the building individually, he just didn't see or understand the need to tell the agent. Explain the need.
A second method requires individual effort, but it's quick and painless in most circumstances. Research the county's online tax, GIS, or other public record system. Most counties offer access to at least one public record. Once the proper site is located, an address search can be done. Depending on the county, massive amounts of building information can be found when such an online search is done:
- Year built;
- Square footage;
- Construction (sometimes);
- A photo or footprint drawing; and
- Who owns the building.
Once you become familiar with a particular county's website, these searches can be conducted in a matter of minutes. A few minutes of work to save thousands of dollars in uncovered claims, E&O deductibles, and court time seems like a fair trade.
Managing and insuring the separate ownership exposure is the delicate and tricky part. Since the same "person" or groups of persons who/that own the operation also own the building, it is unlikely they will want to purchase a separate Lessors Risk Only (LRO) policy, which is an option.
In most "common ownership" situations presented previously, the owner(s) want the building insured on the same policy as the operation. Two main methods to accomplish this are:
Naming the building owner as a named insured. As simple as this seems, this is often an improper or unavailable option – especially if that person (natural or legal) is involved in other ventures or activities. Remember, the specific operation was underwritten and adding named insureds has the possibility of extended protection to unintended or unexpected exposures. Many underwriters are unwilling to extended what is essentially LRO coverage in a package policy because of the uncertainty surrounding the breadth of the building owner's operations. Underwriters may also be unwilling to add the additional named insured because it may own several building or be involved in other operations. Legally lease the building to the business (named insured operation). This is the most proper way to manage and cover the building owner's exposure. Remember, insurable interest can be created by contract. The lease agreement can and should be used to create insurable interest by making the tenant operation responsible for insuring the building. Once the tenant has insurable interest by legal contract, the building is properly covered and the building owner's exposure can be protected by attaching specific endorsements:
- Name the building owner as a named insured; or
- Legally lease the building to the business.
- CP 12 19 Additional Insured – Building Owner: This is a property endorsement extending property coverage to the named building owner; and
- CG 20 11 Additional Insured – Managers or Lessors of Premises: A general liability endorsement extending additional insured status to the building lessor/owner.
Creating a proper lease and attaching the proper endorsements extends the necessary protection to the building owner without the need of a separate policy. This is also the best option because many underwriters are unwilling to add the building owner as a named insured on the operation's (Widgets, Inc.) policy.
To end, never assume building ownership. Always ask what seems like a "duh" question. If the question isn't asked, research ownership through the county's website. Once ownership is known, insure the exposure.
Last Updated: March 17, 2017