Scenario: Insured puts all his assets in a Trust, and tells agent he no longer needs personal insurance.
“Yesterday I had lunch with a client, and came back to the office with heartburn. He and I have been friends for a long time, and I’ve written his personal insurance for years. During the conversation, he mentioned that several months ago, he transferred his home, beach condo unit, cars, and rental property into a Trust. This was news to me, and I immediately went into panic mode, since all his insurance is still in his personal name. The kicker was that he said that since he owned no real assets anymore, he didn’t see the need for any insurance in his personal name. He commented that he didn’t even have a personal checking account anymore.
“I’ve written a few homes put into personal trusts in the last year or so, but this is the first one where virtually every major asset has been put into a Trust. I want to get my ducks in a row before I approach the incumbent carriers to see how (and if) they will continue to write the coverage. Otherwise, I’ve got to restructure and remarket the account.”
Well, “Welcome to Our World,” where every day is like a trip through a Halloween Haunted House, and you never know what freaky thing is going to jump out at you. Here are my thoughts. First, some comments on the gaps as they exist now, with all policies still in your insured’s personal name. Second, I will offer a few suggestions on possible solutions. Third, I have some observations about broader issues, including why your insured still needs personal insurance, and an E&O suggestion or two.
For the discussion which follows, assume your insureds are Jack and Jill Smith, and that they formed the JJS Trust. Also, commentary and excerpts are based on ISO (Insurance Services Office) coverage forms. Proprietary forms may be different.
Gaps in the current insurance.
Homeowners. Assume Jack and Jill are named insureds in an HO-3, and that they still live in the home.
(1) I do not see any coverage on the home (Coverage A). While they still reside there, they have no insurable interest in the home, since it is owned by JJS Trust. And the unendorsed HO-3 provides no automatic coverage (Coverage A or any other coverage, including liability) for an entity such as a Trust.
(2) I think Jack & Jill still have coverage for their personal property (those items not transferred to JJS Trust), as well as Section II liability and medical payments.
(3) The same applies for the HO-6 on the beach condo unit.
Personal Auto Policy (PAP). Assume Jack and Jill are named insureds on a PAP (with 2 autos).
(1) I think they still have liability, medical payments, and uninsured motorist coverages, since they have a PAP in which they are named insureds.
(2) I do not believe the PAP will provide physical damage coverage on the two autos, since Jack and Jill no longer have an insurable interest in the autos, which are now titled to JJS Trust.
(3) JJS Trust may or may not be covered for liability in Jack and Jill’s PAP. One category of “insured” in Jack and Jill’s PAP is as follows:
3. “For "your covered auto", any person or organization but only with respect to legal responsibility for acts or omissions of a person for whom coverage is afforded under this Part.
Comments: This provision grants insured status to third parties who are made vicariously liable by another insured, such as an employer being sued for an accident his employee has with his own auto, while on a business errand. However, this applies for the use of “your covered auto,” which is defined (in part) as:
J. "Your covered auto" means:
1. Any vehicle shown in the Declarations.
Comments: While Jack and Jill’s two autos are “declared” in their PAP at the moment, I think an argument could be made that the autos are not YOUR covered autos. But if they are, then I believe JJS Trust has coverage, to the extent that it is made liable by Jack or Jill. However, if JJS Trust is maintaining the autos (tires, brakes, etc.), and the accident is caused by faulty maintenance (or failure to get proper and timely maintenance), then JJS Trust is not covered for its own direct negligence.
(1) Depending on how many rental properties Jack and Jill have, coverage would be provided by either a Dwelling Form, or a Commercial Property (or equivalent) coverage form. Liability coverage could be added under the Dwelling Form, or by a CGL/BOP.
(2) Given that the rental property is now deeded to JJS Trust, the issues discussed under the “Homeowners” section above also apply to the rental property.
Homeowners. There are several ways coverage can be written, depending on the insurer.
(1) Since Jack and Jill still reside in the home, most insurers will allow them to remain as the named insureds
(2) ISO has an endorsement for homes in a Trust in their HO-2000 program (Residence Held in Trust HO 05 43), under which the named insureds would be Jack & Jill, and JJS Trust. In the HO-2011 program, Jack & Jill remain the named insureds, and JJS Trust is added as an Additional Insured under the Trust Endorsement HO 06 15. Insurers vary on how they implement Trust endorsements, so check with the underwriter.
(3) Similar procedure for the beach condo unit, although some insurers prefer to put a condo unit owned by a non-person into the Dwelling Program.
Personal Auto Policy (PAP). In the 2005 ISO PAP filing, a Trust Endorsement PP13 03 was introduced which simplifies writing a PAP where the auto(s) are all titled to the Trust.
(1) Jack and Jill remain the named insureds.
(2) JJS Trust is named in the Trust Endorsement, but is not a named insured in the PAP. Under ISO rules, an auto owned by a non-person is ineligible for a PAP. However, the Trust Endorsement provides an exception which states, “For purposes of this policy, a private passenger type auto, pickup or van shall be deemed to be owned by a person if title is transferred to the trust shown in the Schedule or in the Declarations.”
(3) This solves the issue raised in the “Personal Auto” section above, where I made the comment that JJS Trust “may or may not be covered for liability in Jack and Jill’s PAP,” based on how one interprets the “your covered auto” term. With the Trust Endorsement, JJS Trust now has coverage.
(4) However, the potential gap for JJS Trust remains, since the provisions of the PAP for the Trust remain unchanged, meaning JJS Trust only has vicarious liability.
(5) An alternative would be a Business Auto Policy, naming Jack and Jill and JJS Trust as named insureds. However, if a BAP is issued in the name of JJS Trust only, then Jack and Jill need a Named Non-Owner PAP, for exposures when they are not in one of the autos on the BAP of JJS Trust.
(6) Some experts (legal and insurance) have expressed concern about the wisdom of adding automobiles to a Trust. In this view, the Trust runs a greater risk of a large liability judgment – perhaps exceeding the limit of liability – given the potential damage (and resulting lawsuit) an auto accident could cause.
(1) In most cases, the current policy can be retained (revised or rewritten), but with the named insured being JJS Trust.
Reasons Jack and Jill still should carry personal insurance.
(1) Jack and Jill seem to be under the mistaken impression that having no real assets protects them from being sued. That question often arises on the issue of titling cars in the kid’s name and not the parents’ name. What they are missing is that in some cases, a judgment can be filed and last for many years, and any future assets the tortfeasor acquires can be seized by the plaintiff.
(2) Liability insurance also includes a free defense.
(3) Some hold the view that if they carry low limits, the policy will pay out its limits, and then the insured will simply declare bankruptcy. I’m not an attorney, but I’ve read that sometimes courts will not allow such a bankruptcy, where it appears the insured is attempting to hide assets, or has access to assets in the future.
(4) Declaring bankruptcy can also do great harm to one’s credit. And if Jack and Jill also own a business, having a personal bankruptcy could impair their business from securing a business loan in the future.
(5) From a purely personal point of view, it appears to me that Jack and Jill have no concern for the devastating financial harm they may cause to someone they injure, if they carry no, or minimum, liability insurance. It would be ironic, and probably poetic justice in a weird sort of way, if one of them, or a family member, was severely injured by another person who had their philosophy about liability insurance.
(6) Liability insurance aside, if Jack and Jill carry only minimum auto liability coverage, they are creating a huge uninsured motorists (UM) exposure for themselves.
E&O issues for the agency.
(1) What you’ve run into perfectly illustrates the potential downside of writing insurance for personal friends. First, in all likelihood, a court will consider you to have created a “special relationship” with your insured, under which most courts will hold you to a higher duty. In addition, it is easy to slip into a casual interaction with your insureds, in which case you may not document conversations as diligently as you normally would, use coverage checklists (which agent and insured should sign), or conduct annual (or similar) account reviews. In fact, since Jack and Jill made these changes to their situation some time ago, I hope it was after your last account review.
(2) Where insureds have created trusts, or restructured a business from sole proprietorship to some other legal entity (LLC, corporation, etc.), agents occasionally will need to confer with the insured’s attorney, CPA, etc. However, E&O attorneys caution agents not to simply and blindly follow directions from third parties, when it comes to how coverage is written. The last place an agent should be is the caboose on a train driven by attorneys, CPAs, lenders, certificate holders, etc.
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These materials are intended for educational purposes only and should not be relied upon as legal advice. Please consult a qualified attorney for legal advice.
Last Updated: November 7, 2015