. . . is a problem. (My apologies to Shakespeare.)
A problem I encounter on a fairly regular basis, I might add.
Specifically, the problem is misnamed or unnamed insureds. It’s a big problem for insureds who think they are but aren’t. It’s also a problem for insurance agents and brokers (and their errors and omissions insurers).
Getting the name right isn’t always as simple as it sounds.
Surprisingly, however, I have most frequently encountered this problem in contexts in which getting the name right should have been a fairly simple task. For example, I recently discovered that the named insured was wrong on all of the insurance policies for a community association, and had been so for a very long time. I’m not sure how this can happen, since community associations (typically referred to as “homeowners associations”) are generally incorporated in the State of California, and they have governing documents which include articles of incorporation and bylaws, so figuring out what the association’s legal name is should be cinchy (a technical legal term). I just don’t get it.
Here’s something else to think about (as if you didn’t have enough already). When the insured’s name is changed, special attention must be given to any policies issued on a claims made basis. This would include (but not be limited to) professional liability policies (what used to be called ”E&O” or “D&O” policies), and even some general liability policies which are written on a claims made basis.
What about when the name of the insured has been changed to reflect a change in the business structure? This raises some issue which are too complex to discuss here. To see just the tip of the iceberg, take a look at the “Who Is An Insured” section of your commercial general liability policy (if you can find it), and you will see that the named insured’s business structure determines who is covered. Even more important, of course, is who is not covered. For example, if your policy’s coverage form says that a partnership that is not named as an insured is not covered, changing your business form from a sole proprietorship to a partnership without changing your insurance policy to reflect that would be a really bad thing. And oh, don’t get me started on what can happen to your commercial auto insurance policy if ownership of the covered vehicles isn’t described properly.
Making sure that policies properly name the insured(s) isn’t only a problem with business/commercial insurance policies, either. I often encounter this issue with homeowners insurance policies when the property is held in trust. It is important for homeowners to tell their insurance agents how title to the insured property is held, and it is even more important (in my opinion) for insurance agents to ask. In fact, I’m going to go out on a limb here and say that, since homeowners usually don’t understand how creating a family trust for estate planning purposes has an impact on insurance, but the insurance agent does (or, at least, should), an agent’s failure to inquire falls below the standard of care. The real problem arises, of course, when the property is placed in a trust after the homeowners insurance policy is first written, the homeowners don’t tell the agent, and the policy just keeps renewing with the agent never bothering to ask if there have been any changes.
Suffice it to say that upon putting your home in a trust, the named insured(s) on your homeowners policy must be changed. Consideration should also be given to ownership of the contents of the residence and how they are insured, and to the individuals (trustees, beneficiaries, occupants) who require liability coverage (and how that will be accomplished). Similarly, for all you business moguls who put your personal residences in an LLC for tax purposes, your homeowners insurance policy will also need to be changed (potentially in a major way, since some personal lines insurance carriers, considering LLCs to be strictly business entitles, will not issue their policies to one). Oh, and don’t forget that any umbrella policies will need to be changed as well.
Finally, just to add the cherry to the whipped cream, the California Court of Appeal recently held, in a case called Kwok v. Transnation Title Insurance Co., that when the Kwoks, who had formed the LLC which originally took title to a house and was the named insured on the title insurance policy, later transferred the property from the LLC to a family trust, they terminated coverage under the title insurance policy. Which turned out to be a bad thing when they were sued by their neighbors over an easement. (Go ahead, you can say. I know you’re thinking it. “What a Kwok.”)
There, you’ve been warned.
Properly naming a business entity isn’t just important for purposes of insurance contracts. It’s important for purposes of any contract. For example, let’s say you are a residential property developer, and your risk management process includes setting up an individual LLC for each project. You use a number of consultants for each project (architects, engineers, environmental consultants, construction managers, etc.). You have a contract with each consultant, and every one of those contracts require the consultant to protect you against legal liability arising from the consultant’s work through indemnification and insurance provisions, with some of the consultants required to have their liability insurance policies endorsed to add you as an additional insured. These indemnification and insurance provisions are iron-clad, top notch, brilliant risk shifting mechanisms, providing you with every available protection against legal liability, because they’ve been drafted by a brilliant, insurance and risk management savvy, attorney. Well, all of that effort may be for naught, if the contracts and/or additional insured endorsements don’t properly name all of the business entities.
The devil really is in the details, or to put it in construction terms, “measure twice, cut once”.