Insurance coverage is an important item to be addressed with respect to Cottage Law and Cottage Succession Planning. Every cottage has insurance to cover risks of loss due to damage of property and liability to individuals who may be injured on the premises. Insurance coverage is extremely important and, in most cases, is required by banks or lenders that hold the mortgage on a cottage or vacation property. So the question becomes, “What should an individual or family engaged in a cottage succession plan do with respect to their insurance coverage?”
The first thing to do is to contact your insurance agent and explain the type of succession plan you have chosen, so he/she can determine the effect the planning will have on any existing insurance coverage. Due to the fact that most cottage succession plans involve a transfer of ownership in some way, it is important to, at the very least, change the identity of the insured parties in the insurance policy. Clearly identifying the correct legal title owner as the insured party (as well as any other individuals or entities as “additional insured parties”) is critical to avoiding any possible problems with respect to coverage of any potential claims that may occur in the future.
The second thing to do is to address the “impact” the change of ownership on the family cottage might have with respect to the type of insurance that is required for the property. Based on the fact that many cottage plans involve transferring the title of the property to a Limited Liability Company (LLC) or some other legal entity, some clients have encountered insurance carriers requiring policies to be changed from a “residential” or “personal” use classification to a “commercial policy,” typically resulting in a significant increase in insurance premiums. If you are confronted with this issue, ask your insurance carrier to reconsider its position. Many insurance carriers simply look at the fact that ownership has been transferred from an individual(s) to an LLC and conclude that the underlying use of the property has also changed from residential to commercial use. This is not always the case because, oftentimes, a change in ownership is done purely for planning purposes, and the underlying use of the property does not change at all.
During the past couple of years, many of my clients have challenged their insurance company’s attempt to change their property classification from “residential” to “commercial.” With my assistance, insurance companies have ultimately accommodated those clients in maintaining a residential use classification based on the fact that the underlying use of the property did not change. Of course, if you are transferring ownership to an LLC and begin offering the property for rental to third parties, it may be more difficult to maintain the residential underlying use classification (and thus avoid having to purchase a commercial policy).
With respect to their insurance coverage, the most important thing I want to caution individuals who are engaged in cottage succession planning is to “communicate” with their insurance agent regarding any planning that is being considered or implemented for their cottage or vacation property. Insurance coverage is an important protection for individuals and their family cottage and should be addressed as part of any overall cottage succession plan.