Homeowner Policies: Not for Corporations

At the direction of their accountant, a husband and wife transferred ownership of their secondary residence condominium unit to a closely held family-owned corporation, allegedly for tax purposes. Following a loss, the couple filed a claim for direct property damage and loss of use. Are there any coverage problems? In a word: Yes.

All too often, non-insurance professionals provide advice that may make sense from a legal or financial standpoint, but may have disastrous insurance consequences. From attorneys recommending that teens be placed on their own auto policies with minimum limits to accountants suggesting that home ownership be transferred to an LLC for tax purposes, well-intentioned advice can result in significant insurance coverage gaps.

By design, personal lines insurance policies insure individual and family exposures. The wording of these forms, such as “resident spouse,” “family members,” etc., are not conducive to insuring nonhuman entities. For example, how can a corporation suffer “additional living expenses?”

For a more detailed discussion of this issue, click here.

Business Auto Coverage for Nonowned Trailers

The ISO commercial auto policy automatically includes cover¬age for a trailer pulled by an insured vehicle so long as the GVW of the trailer is less than 2,000 pounds. Many insureds have trailers titled in their names personally that may exceed the 2,000-pound limitation.

Will the nonowned auto coverage pick up the liability should a trailer come detached from the vehicle and cause BI or PD? What about coverage for the corporate officer personally since the trailer is titled personally and not to the corporation?

Symbol 1 automatically covers trailer liability since coverage extends to “any auto.” If symbols 2, 3, 4, or 7 are used for liability, there is automatic coverage for a nonowned trailer of any size while attached to a power unit described in Item Three of the BAP Declaration Page. Under symbol 7, there is coverage for an owned trailer with a load capacity of 2,000 pounds or less designed for travel on public roads.

Most of the definitions of the coverage symbols in the BAP refer¬ence autos that “you” own or don’t own. If the person who drives the car or owns the trailer is also a named insured under the BAP (and, thus, a “you”), then coverage (or lack thereof) could change completely.

While there are non-insurance reasons for titling a personal vehicle under a corporation’s name (liability, taxes, etc.), if the vehicle truly is for personal use, it’s probably better to insure it under a PAP.

For more information, click here.

Can Home Repair Costs Depreciate?

After a fire damaged an insured’s home, the HO adjuster offered to pay only part of the repair bill, stating that he was taking depreciation off the total. The agent was surprised since this was a current ISO HO-3 policy with replacement cost coverage on the building. Although the carrier can pay ACV until actual repair or replacement takes place, can the actual repair costs be depreciated? Not according to the ISO HO-3 form.

The policy clearly states that, “[W]e will pay the cost to repair or replace, after application of any deductible and without deduction for depreciation for…” The policy also states that it will pay the lesser of the policy limit, replacement with materials of like kind and quality, or “the necessary amount actually spent to repair or replace the damaged building.”

Note that it says it will pay the amount “actually spent,” not the amount “actually spent, less depreciation.” Courts have generally upheld this means of valuation, including Olson v. Le Mars Mutual Insurance Company of Iowa, 696 N.W.2d 453 (Neb. Sup. Ct. 2005).

For a complete analysis, click here.

Bill Wilson (bill.wilson@iiaba.net) is Big “I” director of the Virtual University, an online learning center for agents and brokers.