Issues with homeowners insurance when transferring title to LLC?

Question

Hello BP Community,

As is very common I have friends who purchase their rental houses under their own name in order to get lower interest rate loans with better terms and also cheaper landlord insurance, and then they transfer the title into their LLC after closing.

Let me start by saying I'm not interested in discussing the merits of owning properties in an LLC vs your own name so let's not hijack the thread for that purpose :) What I'm trying to determine is whether or not there can be potential issues with homeowners insurance claims if they arise. Say you have a fire or water damage in the house and you have to file a claim with your homeowners insurance. With this particular method, when you purchased the homeowners insurance it would have listed you as the owner, but when the claim is filed your LLC would be the owner. Wouldn't this be grounds for an insurance company to deny your claim? Because let's be honest, they are always looking for a reason to do so.

I'm especially interested to hear from anyone who actually encountered this issue and how it was handled or who works in the homeowners/landlord insurance industry.

Thanks! I look forward to hearing from you!

Allan Szlafrok · Answer

@Yinna Wang Make sure whoever wrote the policy knows that one unit is being rented because there may be additional requirements. I doubt its a problem because if you told them a duplex im sure they assume you will be living in one and renting the other but its better to check. I have some great insurance people if you are looking for help. And if you have to cancel a policy for this you usually get the pro rated premium back so it pays to check and change it if you have to.

Pawan Kalyan · Answer

Hello BP team, Can someone please give some contacts for the Landlord broker companies in TX area?Really appreciate the help here.

Thx.

Account Closed · Answer

@Chris Rendall Thank you for your post, I appreciate all the great feedback. Before reading this, I would have guessed the answers you got, more or less, I'm glad I was mostly correct.I wanted to reinforce a point, that I think was the reason for your original post. You probably had a little tickle in your moral compass which gave you pause, which is why you reached out.My wife is an accountant, when we look for every possible tax break it doesn't feel like theft, we feel accomplished to find a place for more savings and lose zero sleep over it. BUT we aren't alleging either that we have 38 children, that we're both half Native American, or that one of us served in a war that ended before either of us were born. That's fraud. Yeah, the person may never get caught...but still.Perhaps that doesn't bother some, but it bothers me.RE to me is about doing it right, and finding the greatest accomplishment in doing it right. I'm glad the advice was the same, I wouldn't feel okay unless the property was insured as a rental at least, and I'd probably have the LLC be the name. If I leave 20 bucks on the table, I'll sleep like a baby and dream up the next big deal while others are getting audited or sued. I want to know if one of my rentals has a massive even that I'm covered, that's worth the going rate on the proper insurance to me.Best of luck!

Justin Sloan · Answer

I saw your clarification about it being renter occupied from the get go so as long as you notify your insurance company that you did a quit claim deed from your individual name to an LLC you shouldn't have a problem since it was written correctly from the beginning (as a DP3 - Property rented to others).  The insurance company may do what is called a "cancel / re-write" where they just cancel the policy that was in your individual name and re-write it to the LLC name - there shouldn't be any change in premium with most insurance companies. The only problem you're going to have is with your lender. The loan was a guarantee against you personally and now if you change it to an LLC that messes everything up. Be careful on the lender side, insurance should be a smooth transition though.

Yinna Wang · Answer

What if you are currently house hacking, with a homeowner's policy. Would you wait till the homeowner's policy is up for renewal and then change it to a rental policy? Can you have a rental insurance policy if you currently reside in one of the units?

Peter Jahn · Answer

This issue is usually easily resolved when timed correctly. You would have to line up carriers that accept LLCs on non-owner-occupied dwelling coverage. Not all do, and there's potential those carriers won't accept the risk for a myriad of other underwriting reasons, too- age, current condition, etc. DM me for more information. We deal with the issue frequently.

Terrell Garren · Answer

Just my personal experience - I've used USSA for banking and insurance for 35+ years and really appreciate the way they do business.  I previously used USAA for rental property insurance when the SFHs were in my name.  When I moved the properties to an LLC, USAA informed me that they did not offer commercial insurance, so I had to move to another insurer.

Chris Rendall · Answer

@Jason Bott yes thanks for clarifying my question. I am definitely referring to a house that was already insured as a rental, not as a primary residence. So it would be a rental house under my own name with a rental landlord insurance policy in which I transfer title to an LLC.

Jason Bott · Answer

@Chris Rendall couple comments,

@Wayne Brooks is correct if it was a Homeowners policy now being transfer to an LLC and used as a rental.  You need to rewrite the entire policy.

If it was insured as a rental under your personal name, then transferred to an LLC, the insurance carrier would pay covered claims.

*** Please note, the claim check would be made out to the Named Insured (your personal name), not the LLC.  They would not add the LLC to the check.  That might create some tax issue/book keeping complication.

If @Brandon Hall is around, he may be able to clarify if this transferring of funds is a nonissue or a big deal.

Wayne Brooks · Answer

The insurance would not be valid for two reasons:

1) the insured “individual” is no longer the owner

2) the insurance was for an owner occupant, not a rental

Most people DO change the insurance to reflect the llc as owner and as a rental. This is where the bank generally gets notice Title was changed.