Should your LLC be the Primary Insured or Additional Insured?

Question

I have heard from numerous insurance agents that the way they would write policies for an LLC would be:

-Primary Insured: Mortgage Holder (Individual's Name)

-Additional Insured: LLC

But if the LLC's name comes up on the Deed, shouldn't it be the opposite? I'm trying to research this but can't seem to find a definitive answer. I even read somewhere that the additional insured is mainly used for property management companies and, understandably, have MUCH less coverage (as little as 10% of the dwelling) than the actual landlord, who should be the primary insured.

How are your properties structured in regards to insurance? Has anyone ever had the unfortunate experience of not being covered in the event of filing a claim with either of these structures? Thanks!

Sergey A. Petrov · Answer

It sounds like you bought the property under your own personal name, financed a part of it, then transferred the deed to an LLC without addressing the underlying financing? That’s a problem. Fixing that will make insurability less complicated.

John Mocker · Answer

Mark,

As Jason Bott advised, the holder of the title should be primary Insured.  A good portion of our markets for Personal Insurance will now make the LLC the Named insured.  However, some of them have additional requirements (ie. The LLC not operate another type of business, The LLC is owned by an individual and family member(s),...).

The other issue could be, that the documents sent to your Mortgagee would alert them to the change in ownership.

Jason Bott · Answer

@Mark Andrews the Primary Insured (or Named Insured) should be the entity who is holding title.  This is the proper and most direct way to do it.

Now, many investors will finance under their personal name.  When they do this 99% of the time they buy a personal lines insurance policy.  These policies do not allow the LLC to be the Named Insured, but do allow them to be added as an Additional Insured.   A commercial policy would allow the LLC to be the Primary/Named insured.

Good news is if you have both your personal name and your LLC on the policy, the policy will respond to Liability claims against either party.

The down side is, if you have a fire claim, and need the claim proceeds paid out to the LLC, the policy can not do that.  The proceeds need to be paid to the Primary Insured, not the Additional Insured.  It can be worked out but still not as clean if it was set up correctly.

Jason Bott · Answer

@Ian McDuffee  @John Mocker covers this well.  Your current policy could work for you, but it's not the ideal set up.

I will say there are so many companies who can insure this building correctly (with the LLC as the Named Insured), why take the chance?  Find a competent independent agent who can provide you the proper solution.  You may even save some $ with the change.

John Mocker · Answer

Ian,

First, the Homeowners Policy form is normally for Owner Occupied Dwellings.  I do have one company, out of dozens, that will use the Homeowners (HO3) form and add an endorsement to allow for the 100% tenant occupancy.  If the company you used does not do it that way you may have a big problem.  Get it in writing from the agent that a 100% tenant occupied property is eligible for that  policy.  Unless those tenants are one of the LLC members, the fact that you are bartering rent for maintenance work I do not believe will make them insured under the policy.  Check with your agent and attorney to be sure.

With all of the Dwelling Fire policies (the form most Insurance companies use for rented dwellings) we write, there is the option to add the owners contents to the policy.  Normally, none of the tenants contents can be covered under that type of policy.  Then tenant needs to have a renters policy.

Check the Workers Compensation laws in your state.  The people doing the Maintenance work could be considered employees if injured or get sick due to the work.

Ian McDuffee · Answer

@Jason Bott and @John Mocker

I posted this as a new post so if I am double posting please forgive me. I was hoping to tag on to the above thread.

We purchased (myself and another partner) a single-family house owned by an LLC. Cash was contributed to the LLC and the LLC purchased the single family house with said cash. The deed is in the LLC's name. The LLC has two members (myself and the other partner) and is manager managed by me. The insurance policy we purchased has me personally named as the named insured.

I was explicitly told "that the LLC is listed as an additional financially interested party as our home policies have to have the named insured as a person. But the liability and financial interest of the LLC is protected how it is listed." I can see the LLC named in the declarations page as an "additional interested party."

The policy is through Allstate.

After doing some additional digging online, I am concerned that because the house is owned by the LLC, the insurance policy was not set up correctly. It appears that the named insured needs to be the LLC or at minimum the LLC needs to be included as an "additional insured" and not just an "additional interested party."

Further, we went with a homeowners policy instead of a landlord because we wanted the contents inside the structure (ie personal property) to be covered. The people living in the house will not be paying rent/taxes/mortgage but will be only covering very minor maintenance costs.

Have I made a mistake with this policy? Thank you in advance.

Should your LLC be the Primary Insured or Additional Insured?

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