What Types of Transfers Can Impact Insurance Coverage?

Depending on the language of the applicable policy, a transfer of real estate out of your name and into an entity, or from one entity to another, can impact your insurance coverage. This includes, but is not limited to, the following transfers:

• Placing your home, vacation property, or other real estate into a revocable trust;
• Transferring ownership of any real estate (including a rental property or investment property) to an LLC;
• Using real estate to fund a testamentary marital trust following the death of a spouse;
• Transferring ownership of real property to an irrevocable gift trust; and
• Transferring ownership of real property at death

It may not occur to you to double check your insurance coverage because, if you continue living in your home or using your property just as you did before the transfer, it might seem like nothing has changed. However, it is important to be proactive in making sure you maintain your coverage.

What Types of Insurance Policies May Be Impacted? Why Does Coverage Lapse?

When you transfer ownership of real estate to a business entity or trust, or as part of an estate administration, you should ensure you can maintain coverage under all insurance plans that concern the transferred property. This may include (but is not limited to) title insurance policies, homeowners’ insurance policies, and personal liability “umbrella” policies. The specific language and definitions used in the various types of insurance policies may differ, but it is equally important to review your coverage under each policy associated with your real property.

Title Insurance

Title insurance, which protects property owners against losses related to ownership issues such as prior liens or unpaid taxes associated with a property, provides a good example of how a lapse in coverage can occur following a real estate transfer to a business entity or trust. Title insurance policies generally provide that only the “insured” – as defined by the policy document – is entitled to coverage and eligible to make claims under the policy. Title insurance policies also generally provide that a transfer to an owner other than the defined “insured” will terminate the policy. In other words, if you transfer your real property to a business entity or trust and the business entity or trust is not considered an “insured” under the policy, a lapse in coverage may occur and subsequent claims may be denied.

Depending on the type and age of the existing policy, the policy may contain language expanding the definition of “insured” to account for certain transfers. However, this language may not be broad enough to cover transfers to business entities or trusts. For example, the 1992 edition of the standard owner’s title insurance policy drafted by the American Land Title Association (ALTA) states the term “insured” automatically extends to transferees such as survivors, personal representatives, and next of kin. However, the 1992 policy is silent regarding transfers to business entities or trusts. The most recent editions of the ALTA standard owner’s title insurance policy, such as the 2021 edition, contain additional language that extends the definition of “insured” to cover trusts and LLCs, but this language was added relatively recently. It is likely that many current property owners have title insurance policies that predate the change.

Even though newer title insurance policies contain a broader and more inclusive definition of “insured,” it is worth taking the time to review your specific policy and determine if additional action is needed to ensure coverage will continue under the language of that policy.

Homeowners’ Insurance

Similar to some title insurance policies, homeowners’ insurance policies may only cover the named insured, and your trust or entity may not automatically be considered a named insured under the terms of your policy. Of course, homeowners’ insurance policies tend to provide much broader coverage than title insurance policies. While a title insurance policy protects against losses related to ownership issues (as described above), a typical homeowners’ policy often provides coverage for liabilities arising from the subject property and related premises (for example, if the roof is damaged, or if someone slips and is injured in the yard) as well as for the valuables and personal property items in and around the property (which may include everything from jewelry and electronics to bicycles and other recreational gear). Therefore, as a result, it is likely that both you and your trust will need to maintain coverage under your homeowners’ policy. Fortunately, insurance companies are generally willing and able to accommodate an arrangement, under which you and your entity or trust can both receive the benefits of coverage.

Personal Liability “Umbrella” Policies

A common understanding about personal liability “umbrella” insurance is that many such policies provide “follow form” coverage (i.e., they mirror the terms of the underlying policy or policies and provide additional coverage if liabilities exceed the underlying limits). Therefore, it may seem that reviewing the underlying policy terms (for example, the terms of your homeowners’ policy) and updating coverage as necessary would be sufficient to extend umbrella coverage as well. However, while it is true many umbrella policies are designed to “follow form,” they may not do so perfectly. Without carefully reviewing the terms of your umbrella policy, you may not realize your trust or business entity has been excluded from umbrella coverage, even if one or more of your underlying policies covers the trust or entity. With umbrella coverage in particular, it is wise to consult with your insurance advisor to ensure your coverage is as you desire. Your insurance advisor is best-suited to help you identify any unwanted gaps in your coverage and can provide recommendations for filling them.

How Can I Keep My Coverage?

Luckily, remaining covered is often straightforward and reasonably affordable. The best course of action will depend on the details of your specific real estate transfer and your existing policy, but one of the following options will likely be sufficient to ensure you remain protected:

• Obtaining an endorsement or extended coverage under your existing insurance policy;
• Adding your trust or LLC as an “additional insured” under your existing insurance policy; or
• Obtaining a new insurance policy that covers the new owner of your real property.

Your attorney or insurance agent can help you understand your options and select the solution that is the best fit for you. Remember – if it seems like a hassle to review and update your insurance policies now, the time, effort, and money spent to avoid an inadvertent lapse in coverage are minimal compared to the time, effort, and money at stake if a lapse in coverage results in the denial of a claim!

If you are considering transferring ownership of your real estate to a business entity or trust, or if you have transferred title to your real estate in the past, you should always confirm with your insurance agent what is necessary (if anything) to properly continue coverage. If you have questions about your current insurance coverage, please reach out to one of the estate planning attorneys or real estate attorneys at Montgomery Purdue.