One of our Big “I” members recently asked our experts the following question.
A partnership entity jointly owns a Beach Condo (13 different partners). For property and liability coverage, an HO 00 06 10 00 form is used. Does the definition of 'Insured' extend to a business entity that is the Named Insured (with particular interest to liability protection as the Partnership Entity is exploring moving to an LLC entity type. Is the standard HO-6 form appropriate and/or are there additional riders needed to conform? Should you list the Individual Partners as 'Additional Named Insured's'? The HO-6 form is a Personal Lines form whereas the entity seeking coverage is a commercial entity (whether partnership or LLC)-, thereby more appropriately insured on a CGL policy? Thank you for your time and thoughts
The responses provided:
The named insured needs to be the unit owner. How individuals use the condo may raise other coverage issues. Many condominiums owned by a business are used exclusively as personal residences which raises other coverage issues.
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Nothing in the policy provided precludes it from operating to provide property and liability coverage FOR THE NAMED INSURED partnership.
Having said that, a thorough reading of the policy coverage form from the perspective of each of the partners (or members if the named insured converts to an LLC) will show that the policy affords little, if any, property or liability coverage to the individual partners (members).
Each of the individual partners (members) should add the condo to their individual homeowners policies as an additional residence premises for liability. They should also review coverage afforded by the individual homeowners policies for property owned by the individual partners (members) situated at the condo.
Pay further attention to liability coverage on any toys (boats, jet skis, 4-wheelers, etc.) owned by the partnership (LLC) while they are being used by an individual partner/member or a guest or family member of the partner/member.
All the above recommendations apply whether the condo is insured under an HO-6 or under CGL and Commercial Property policies.
Finally, adding individual partners (members) as additional insureds will generally not provide coverage for actions of the individual partners (members) or their guests or family members.
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We're unable to fly-spec the particular HO-6 you have in mind, but generally speaking, an HO-6 would not be appropriate for ownership by an LLC. You need a lot more information about the proposed ownership entity, the specific interests of the individuals that will own it, the forms available from the insurance company, and the insurance company's underwriting position on this kind of ownership. As a shot from the hip, I suspect the underwriters aren't going to do it, and even if they do, I'm not sure the coverage would be appropriate for both the ownership entity and the individuals that own it. Start by laying your cards on the table with your insurance company.
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I applaud your reading of the insuring agreement. The Ho-6 does not contemplate a business entity as a named insured, thereby precluding its usage. Further you stated an LLC would be the owner and a CGL policy would be appropriate in this situation.
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It is surprising that the carrier was willing to write this on an HO 00 06. Only individuals (not entities) are eligible for the ISO HO 00 06. Write this coverage on a commercial form.
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It is not clear to me how the condo is used, but you are correct that if a partnership owns it, then it does not qualify for an HO6 which was designed for an owner occupant. Write it on a BOP or a commercial package policy. The rating would depend on its usage (e.g., retail, rental residence, vacant).
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The HO-6 is designed for Natural Persons as insureds. Even though the Definition at PDF page 12 states You and Your refer to the “named insured” shown in the declarations—it refers to a spouse – i.e., designed for natural persons. I do not see an endorsement that amended the definition of the Named Insured to a partnership or LLC, and including the partners, members and managers in the scope of their activity for that entity.
Notice the business exclusion at page 15 E.2. Are they “occasionally” renting or year-round renting it out? Or is it a group of people who simply share usage for their personal pursuits? Does the exclusion apply to your client?
It drives me crazy when agents list business entities on personal lines forms without regard to the definition of named Insured and insureds. Some personal lines insurers amend the definitions with a special endorsement for the business entity and some give it no regard. Then the problem is yours as the placing broker should a loss arise. Your E&O coverage will be the insurance program.
Some insurers offer an additional insured provision for the fee owner LLC or Partnership – but the language varies often not providing the necessary coverage.
I just went through 14 proposals on a four-unit apartment house owned by an LLC. Three brokers offered seven different proposals on DP forms—unaltered for the LLC fee owner entity and without regard to the risk characteristics though we provided detailed underwriting data. Another broker managed to obtain offers on Commercial Property CP forms and ISO CGL forms in the name of the fee owner LLC entity. Apartment programs didn’t want it because of the 75% vacancy and pending construction work. Builders risk programs did not want it because of the one occupied unit. The commercial broker arranged a monoline property policy and monoline CGL to accommodate. There were lots of other issues in the limitations and exclusions because it is a 1960 property, 75% vacant about to undergo renovations in three vacant units while one remains occupies. When the work is completed and the building is upgraded, then we will remarket it with the thought it would qualify for an apartment BOP in the name of the LLC.
You are correct, treat a business entity as such – commercial forms. That said, it might not be easy to obtain, and if available, the cost could increase.
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The HO-6 is for individual condo unit owners. It is not for business entities. Write this risk on a commercial form.
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Request an endorsement indicating the partners of the partnership or the member of the LLC are “automatic insureds.”
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Here is the response from the agent who submitted the question.
Another happy customer.
In the spirit of the season, I'm thankful for everyone's time and insight! In speaking with an attorney (we have two who are member owners of the condo...), our entity is more of an 'Association' and will likely be changed to such (rather than partnership or LLC). This still lends difficulties to the appropriate 'Named Insured' and proper coverage forms, but your insight has put us on the right track for discussion with the current broker and carrier as well as the members to properly insure our risk.
Originally Published: December 6, 2024
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