Never assume a small, closely held corporation is as simple as it appears. Asking this basic question can save a major headache.
"Who owns the building?" Asking this basic question can save your insured, you and your errors & omissions carrier a major headache following a building damage claim.
Never assume a small, closely held corporation is as simple as it appears on the surface. Exposures 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.
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-too-common situation. Potential insurance coverage gaps arise from the existence and participation of two separate "persons." Each natural person—a “natural" flesh and blood individual and “legal" person created by the filing of specific legal documents, such as articles of incorporation or organization—must be accounted for and managed separately within the insurance policy.
Natural persons and legal persons have the same rights: the right to sue, to be sued, to own property and so on. Therefore, each person presents 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: A 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 a direct financial loss because of damage to or destruction of the specified property. If the person with an 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: Responsibility for someone else's property, such as a dry cleaner, is responsible for its customer's clothes.
- Contract: A lease agreement making another party responsible for insuring the property.
We return to the initial scenario: Mr. 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, Mr. Bailey, is not covered in the policy as an insured.
Beyond the natural person's ownership of a building, one of these ownership scenarios could exist that must be considered, anticipated and researched:
- The building is owned individually by the owner of the business operation.
- The building is owned by several individuals.
- The building is owned by a separate legal person.
- 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 knows he owns the building individually. He just didn't see or understand the need to tell the agent.
A second method requires individual effort, but it's quick and painless in most circumstances. Research the county's online tax, geographic information system (GIS) or other public record systems. 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 is online, including year built, square footage, a photo or footprint drawing, and—the item you're really after—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 time in court seems like a fair trade.
Addressing Common Ownership
Managing and insuring the separate ownership exposure is the delicate and tricky part. Since the same person or groups of persons who own the operation also own the building, it is unlikely they will want to purchase a separate lessors risk only policy, which is an option.
In common ownership situations, the owner or owners want the building insured on the same policy as the operation. Two ways to accomplish this are:
1) Name 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 could extend protection to unintended or unexpected exposures.
Many underwriters are unwilling to extend 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 buildings or be involved in other operations.
2) Legally lease the building to the business. 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's 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. The CP 12 19 Additional Insured – Building Owner endorsement extends property coverage to the named building owner. The CG 20 11 Additional Insured – Managers or Lessors of Premises is a general liability endorsement that extends additional insured status to the building lessor or 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 policy.
Never assume building ownership. Always ask what seems like a "duh" question. Once ownership is known, insure the exposure.
Chris Boggs is Big “I" executive director of risk management and education.