Author: Chris Burand
First, this article is only for agents who care about their clients' well-being, or at least care about not incurring an errors and omissions (E&O) claim.
This morning I read about an E&O case where the agency involved deservedly lost. The agency made many mistakes. One item they really messed up was that they did not pay attention to who the insured was.
The agency had one contact person at the client's office. That contact had many businesses and properties. The agent did not put two and two together to realize that one contact does not equal one insured. The businesses and properties had different owners. For some of their businesses, the limited liability company's (LLC) ownership structure was different, but the owners of the LLCs were the same. In other words, the named insureds were different.
Many people buy property, even vacation homes, under the ownership of an LLC. An LLC is a business enterprise. A business needs commercial insurance rather than personal insurance. I know the possibility exists for writing insurance on a home owned by an LLC under a homeowners policy, but the fact that such a possibility exists does not make it a good idea.
Before you write a personal lines policy for a home owned by an LLC, read the form carefully because not all forms treat this situation in the same way. Make sure the LLC qualifies. Some LLCs will not. Make sure you and the insured are completely transparent and honest on the application. Then reconsider whether, even with these boxes checked, writing insurance on an LLC-owned home under a personal lines policy is still a good idea.
The Family Farm Dilemma
Quite a common issue occurs with regard to family farms. A family farm might have a trucking company, the farm, a different farm, some kind of processing company, personal vehicles, vehicles for road use and vehicles not licensed for road use.
The vehicle keys for all the different companies' vehicles and probably at least some personal vehicles are all available to most of the employees at all times. The employees do not know which vehicles are titled to Farm #1 or to the trucking company. However, if there is a named driver clause, the farm may have a problem.
Worse though, is the question that if the vehicles are titled to one entity but insured under another entity, will there be coverage? The basis of insurance is that the policy be written for the named insured. If the vehicles are not in the named insured's name, does the policy provide coverage? It helps to align drivers, policies and vehicle titles. It also helps to educate your clients.
Other Named Insured Issues Can Arise
Another example of this issue is kind of cute. One person buys an engagement ring and gives it to another person. Who should insure it? Up until the time the buyer gifts the ring, the person with insurable interest is the giver. Once the giver gifts the ring to the other person, the person gifted is the one with an insurable interest in the ring. Insurable interest must align with the insurance policy.
An entity named on a policy, a condominium for example, needs to have an insurable interest in that condominium. Just because someone has lots of companies, properties, vehicles, etc., does not mean they, as individual persons, have an insurable interest in that property unless the properties are in their personal names as individuals.
Businesses are separate parties from the individual(s) who own them. It really is no different than the involvement of two individuals.
As an example, a property is in individual B's name, but individual B is controlled by individual A because of all the money B owes to A. The property is still in B's name and the policy needs to be in B's name.
Just because Sally owns 123, LLC, and 123, LLC owns Property A, does not mean the producer should write the policy in Sally's name. That shortcut (which is not really a shortcut) is not allowed. It is not appropriate, which is why it is not a shortcut.
Issues with Liability Coverages
Next consider the difference in liability coverages. Too often agents are quick to address property ownership but do not consider the differences in the liability coverages afforded under a commercial versus personal form for individuals versus LLC's and corporations. The coverages are not interchangeable.
The really gnarly cases happen when a group of people own many properties or companies. The exact owners may vary slightly from entity to entity, or the ownership percentages may vary from entity to entity while the owners remain exactly the same, or it is a combination of the two. A common type of litigation claim occurs when a shareholder in one entity sues that entity claiming that his partners took advantage of him by moving value from one entity to another entity of which he owned a smaller percentage. Those lawsuits happen all the time.
But, if insurance is involved and a claim presented, and the agent did not write the policies correctly, the agent will likely incur a long, painful litigation process.
Let's Look at Cyber and D&O Issues
Taking a significant diversion here, who is the insured under a cyber policy? This is where it gets really interesting because many policies require extremely specific steps to be taken for actual coverage to be in place. Therefore, the insured under one policy may very well not be the insured under another policy. Agents must read the forms carefully to identify these issues.
Who is an insured is not always limited to insurable interest as in ownership of something. Sometimes “who" is an insured is listed in the policy form. I see many account managers and producers confused particularly in this regard relative to Directors and Officers (D&O) coverage. D&O coverage seems pretty specific based on the name in relation to who is insured. It is for directors and officers, right? Yes, but written well, it is also for employees and even volunteers.
An additional point of confusion I've witnessed among agency staff/producers is a misinterpretation of D&O applicability. Some people think having a board of directors is required in order for the company to need D&O insurance. However, having a board of directors in place is not a requirement. The vast majority of businesses in this country do not have boards of directors. They only have officers. A board cannot easily exist without officers and directors, but officers can exist without a board of directors. D&O coverage, designed well, can address both scenarios and most all people who are directors, officers, or both companies and nonprofits need D&O insurance. Make them an insured.
Cyber and D&O are unique compared to other coverages. One critical point, completely separate from the point of this article, is that the agent needs to design both types of coverages to align with the insured's exposures. Neither are so uniform that the carrier can design them, either.
A client's situation and the variances from form to form, along with the options within the forms, requires an agent's help. Collaborate with the insured to design the coverage needed client by client.
Those Pesky Divorces
Another example, always worth a chuckle even if it is a sad chuckle, is when a couple divorces. One person or the other is angry and they ask the agent to delete coverage of their ex-spouse's favorite vehicle. The agent, not knowing about the divorce, deletes the vehicle from the policy. The caller has no right to delete coverage if they no longer have any insurable interest in the vehicle, and sometimes not even if their insurable interest is only partial.
When taking orders from someone without an insurable interest or authority, an agent is again making a mistake relative to the named insureds. This situation is just from another angle. Make sure the person requesting the changes, especially decreases in coverage, has the authority and, in personal lines, is a named insured with an insurable interest.
Last, mortgage companies are not named insureds. Therefore, they cannot make policy changes. Only the insured can change their policy. Do not take orders from banks and mortgage companies.
Understanding who is an insured, who should be an insured, and who is absolutely not an insured is critical to your E&O exposure and in protecting your clients. Aligning who is an insured with property titles and liability coverages are basic agency functions. Please take the time to do them well.
Last Updated: December 8, 2023
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