The use of an LLC is a common estate planning technique for gifting, creditor protection, and management purposes. In Michigan, many people transfer their second home into an LLC for just these purposes. Absent a phone call to your insurance provider, that transfer could be costly if someone is injured or there is damage to the property. In 2018, the Michigan Court of Appeals in Thompson v Fremont Insurance Co. held that even if insurance premiums are paid, if the insured party is not the actual owner of the property, you may not be covered. While that case specifically talked about personal representatives of estates and trustees of trusts, the rationale could likely hold true for owners of a business.
Another matter to consider when contacting your insurance company is the need to obtain a commercial policy. Because property in an LLC is technically owned by a business, you may not be able to keep the lower insurance rates that come with individual insurance policies. In order to maintain adequate coverage, a commercial policy may be required. On the positive side, a commercial policy should make less work for any personal representative or trustee that must ultimately manage the property after death.
Care should also be taken to be sure that adequate insurance coverage is in place for any real estate that you offer for lease, on a short or long-term basis. Placing your vacation home on Airbnb or another short-term rental website may be a nice additional revenue stream, but you may be placing you, and your property, at risk.
A traditional homeowner’s policy is unlikely to provide coverage in the event of damage done during the occupancy of a tenant, however brief their stay. An inquiry to nine insurance companies determined that only one of the nine would allow rentals under a traditional homeowner policy, and that particular one only allowed for 31 days of occupancy by a renter in a given year. It is possible to obtain coverage, but under a landlord policy, which means significantly higher premiums.
An instance of short-term renting that is often over looked is post-closing occupancy after the sale of a residence. Quite often sellers need additional time after the closing to get all of their possessions moved out of the home and the parties agree that they may retain occupancy for a certain period of days. If the sellers continue to reside in the property after ownership changed hands at the closing, they have become tenants and the buyers have become landlords.
If those same buyers only have their traditional homeowner’s policy, and the seller backs their car into the wall of the garage, has a grease fire in the kitchen, leaves a candle lit overnight that catches the curtains on fire or any other number of housing disasters… there is no insurance coverage.