Filed Under:Agent Broker, Coverage Issues

When it comes to insurance, keep it simple

This month of Valentine's Day, remember that in real life relationships, be they insurance or love, keep it simple.
This month of Valentine's Day, remember that in real life relationships, be they insurance or love, keep it simple.

We seem to have a never-ending quest to overcomplicate what should be simple in the relationships of love. Can it be any less in the relationships of insurance?

Consider the relationship complexities that are revealed in the following e-mail received from a faithful agent reader (edited for brevity):

The business is a corporation. As part of its operation, it has a number of pickups, trucks and trailers insured on its Commercial Auto (CA) policy. The owners have a bid to purchase another semi and trailer, and are looking at purchasing and titling it in the name of a newly formed limited liability company (LLC), rather than in the corporation's name. Furthermore, as the existing vehicles are replaced in the future, they would likely be purchased and titled in the newly formed LLC's name. The new LLC would consist of two of the three current owners of the corporation. The LLC would have no employees, and the sole operation would be to lease the vehicles back to the corporation only. Based on this information, the insurance company currently insuring this risk stated that it would add the new LLC as an additional insured and loss payee to protect the carrier's interest. This for sure would be done on the Commercial Auto, and I was also thinking we should do the same on the General Liability (GL) policy.

If the new LLC would hire employees and have other functions, then we would look to set up separate CA, GL and Commercial Umbrella policies for the liability concerns.

The reader states that his insured lists three reasons for potentially forming the LLC. First, for tax reasons. Second, the insured claims that an LLC would ease the transfer of ownership from three to two people, if all new assets and purchases were placed in the LLC. Third, the insured says it will limit liability.

The reader writes:

The insureds are getting the impression from their attorney that they would be lessening their liability exposure by setting up and having the vehicles owned by the LLC. I don't see it, especially when the vehicles are leased back to the corporation, and the corporation's employees will be operating them. In the event of a bad vehicle accident, an attorney is going to sue both the corporation and the LLC. If the limits are exhausted on the policies, the attorneys are going to pursue the entity with the most assets, in my opinion. The corporation would likely have more assets than the LLC. Am I missing something?

As I told my exasperated reader, his insureds have embarked on this quest into complexity. The key to the correct insurance answer is to focus on the facts.

From an insurance coverage analysis viewpoint, there is no reason to care about either the taxes or the nefarious ownership gamesmanship among the individuals

To a certain extent, it also doesn’t matter whether the attorneys are correct or incorrect on their assurances about the reduced liability exposure. (I happen to agree with the agent’s analysis. It appears that come claim time, those assurances will prove, like some love affairs, to be more flash than substance.) No doubt they have accompanied the LLC vehicle leasing arrangements to the original corporation with hold-harmless agreements and demands for waivers of subrogation and additional insured status, but as the majority owners are on both sides of the transaction that begs a simple question: So what?

The essence of the arrangement is quite simple. We have two separate legal entities: the original corporation and the new LLC. Those are the entities on which we must focus, not the individual owners, partners or members. Each must be properly protected as “named insureds” for any liability arising from their own actions, plus any obligations contractually assumed from others.

Now that we know what they need, the only remaining tasks are mechanical: Arrange the proper coverage to make it so. Looking at the reader's e-mail we can find two errors that often arise from overcomplicating — and thus confusing — the actual legal relationships.

  • Error No. 1: The reader writes, “Based on this information, the insurance company currently insuring this risk stated they would add the new LLC as an additional insured and loss payee to protect their interest.” As a separate legal entity, the LLC needs “named insured” status, not “additional insured.” For those who assume the carrier is only taking this approach because the LLC must have its own separate CA policy covering its primary liability exposure as vehicle owners (the typical additional insured endorsement is only intended to provide vicarious liability), reread the agent's comment.

  • Error No. 2: The reader writes, “If the new LLC would hire employees and have other functions, then we would look to set up separate CA, GL and Commercial Umbrella policies for the liability concerns.” In other words, the LLC is sufficiently covered by the additional insured and loss payee clause attached to the original corporate policy, correct? No. Having “employees or other functions” has nothing to do with whether an entity that has vehicles titled in its own name has a need for a CA policy. Because the agent has already correctly analyzed the potential “pursuit of deep pockets” legal strategy of any claimant attorney, the need for a separate umbrella is a given if the underlying CA limits are not thought to be sufficient protection. Regarding the GL, there are arguments as to what exposure the LLC may have beyond the auto if it exists only on paper as a vehicle-leasing concern, but an abundance of caution (especially given the expressed plans for the eventual palace coup against the third owner) suggests a separate GL is advisable.

Be wary of getting lost in the details and losing sight of the facts. Consider: If our agent friend had simply been approached to write the insurance for the original corporation, which was then so pleased with his efforts they referred him to write the insurance for the firm from which they leased some of their vehicles, would any of this coverage confusion have arisen?

Complexity may make a better movie, book or television show. This month of Valentine's Day, I hope you remember that in real life relationships, be they insurance or love, keep it simple.

Chris Amrhein, AAI, is an insurance educator and speaker, and serves as the chief fun officer at insuranceisfun.com.

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