The Home Went Into a Trust. The Insurance Didn't.

A Winnetka couple moves their $3 million home into a living trust as part of their estate plan. They also own several rental properties through an LLC. Between their homeowners, landlord, and $10 million umbrella policies, they believe they're well insured.

Then a kitchen fire damages their home. Upon tender, the insurer notices that the deed names the couple as trustees rather than individual owners.

A few months later, a tenant is injured at one of the rentals and sues both the LLC and the couple. Their umbrella insurer says the LLC isn't covered.

While the estate planning may have been perfectly sound, the insurance planning clearly didn't keep up.

Ownership and Insured Status Are Different Things

Putting property into a trust or LLC changes who legally owns it, but insurance policies don't automatically change when the deed does. For instance, an umbrella covering a married couple doesn't automatically protect an LLC simply because they own the company. Same issue arises with a homeowners insurance when the home is owned by a trust.

Insurers offer ways to address these arrangements. A trust endorsement may extend coverage to trustees or the trust's interests. Some personal umbrella policies can accommodate LLC-owned rentals, while others require separate commercial insurance. But when nobody checks whether the policies still match the ownership documents, the homeowner may find that the people, entities, or properties they intended to protect are not actually covered.

The Trust-Owned Home: Insurable Interest Is Rarely the Problem

The trust transfer does not always defeat coverage. Initially, an insurer might argue that the couple no longer owns the home personally and therefore lacks an insurable interest. However, Illinois law doesn't require someone to hold title to have an insurable interest; what matters is whether that person stands to suffer a financial loss. For instance, a couple who continues living in, maintaining, and paying for a home held in their revocable trust may have a substantial insurable interest. However, that doesn’t guarantee coverage, because the policy’s terms about who is insured and who gets paid still apply.

Liability coverage can present a different problem. Suppose a visitor falls on the property and sues the couple individually and as trustees. Their personal liability coverage may protect them in one capacity without necessarily protecting them in the other. Even an endorsement addressing the home’s ownership may not resolve every liability issue.

The LLC-Owned Rental Presents a Different Problem

Suppose the couple told their broker about the rentals, listed the addresses on the application, and renewed the umbrella every year. That history may matter, but it doesn’t establish that the policy covers the LLC.

Listing a rental property doesn't automatically make its LLC owner an insured. The umbrella may exclude certain business activities, limit eligible rental properties, or require the LLC to be specifically added.

Further, umbrella coverage generally sits above an underlying liability policy. Suppose the LLC has $500,000 in landlord liability coverage, but the umbrella requires $1 million in underlying limits. A tenant obtains a $2 million judgment. Even if the umbrella otherwise covers the claim, the missing $500,000 in underlying insurance may remain the insured's responsibility, depending on the attachment provisions.

What Did the Insurance Agent Know?

After a denial, one of the first questions is whether anyone told the broker about the ownership changes. Did the couple request coverage for the trust? Did they explain that the rentals were LLC-owned? Did the broker promise to update the policies? Those conversations matter when the insurance broker potentially failed its duty of care required under Illinois law.

However, a claim against the broker has its own deadline. Under Illinois law, lawsuits concerning an insurance producer's procurement of coverage generally must be filed within two years after the claim accrues. That means a couple who discovers a coverage gap years after transferring their property may have already lost their opportunity to sue the broker. Renewing the policy doesn't necessarily restart the clock.

The Insurance Needs to Follow the Property

A trust or LLC can accomplish exactly what its owners intended while creating an insurance problem nobody anticipated.

However, the solution is usually easier before a loss. A careful policyholder should review the deeds, named insureds, endorsements, underlying liability limits, and umbrella coverage whenever ownership changes. Otherwise, once a claim arrives, the same review becomes much more expensive and the options may be fewer.

If your insurer has questioned coverage because of how a property is owned, we can review the policies, the ownership documents, and the placement history. Contact us to discuss your matter.

This article provides general information and does not constitute legal advice. For guidance concerning a specific matter, see our insurance recovery services. Coverage depends on the policy wording, the facts, and applicable law. To discuss potential representation, request a consultation. Submitting an inquiry does not establish an attorney-client relationship.