Insuring the Personal Trust
Writing property/casualty coverage
for homes and personal property
held by trusts and other estate planning entities
by Joseph S. Harrington, CPCU, ARP
American Association of Insurance Services
A REQUEST FROM A GOOD RISK
common approach for insuring personal
trusts, and one that minimizes—but does not
eliminate—potential problems with policy
language.
Meet Mr. and Mrs. Goodrisk, an ideal
homeowners account. For 30 years, they
haven't had a single claim. By all measures,
they are an even better risk today. The kids
are grown and out of the house, so there's no
swing set, no swimming pool, no pets, no
parties.
But if the Goodrisks insist the policy be
written in the name of the trust, chances are
good that they'll get their way. Few
companies will walk away from a profitable
risk over a technical change in legal
ownership. If Mr. and Mrs. Goodrisk still
occupy and maintain the house, and there's
no practical change in the nature of the risk,
an insurer will often comply with their
request.
Now Mr. and Mrs. Goodrisk have a request:
They want their homeowners policy written
in the name of a trust they have established
for passing their property down to their
children. Their estate planner has advised
them to conceal ownership of their assets, so
they are not tempting targets for lawsuits.
So what's the problem? Research and
interviews have turned up no evidence that
the proliferation of trusts has resulted in
widespread incidents of unexpected claims
on insurers, or of uninsured exposures for
individuals. Yet a sense of unease over trusts
persists among property/casualty
practitioners. Agents and underwriters know
that current methods for insuring trusts are,
as in the case of the Goodrisks, expedient
fixes. Opportunities for misinterpretation
abound when language drafted for persons is
applied to a legal entity. One court ruling
could wreak havoc.
Theoretically, agents and underwriters
should balk at this request. Standard
personal lines policies are written to insure
natural, living persons, not artificial legal
entities. The terms "you" and "your" are
used extensively. If a trust is insured, who
are "your relatives"? In other ways as well,
the language of a standard personal lines
policy does not "fit" a trust.
As a practical matter, however, agents and
underwriters would probably go out of their
way to retain a prime account in today's
intensely competitive market. In this case,
most insurers would suggest that the trustee
be added as an additional insured, and that
Mr. and Mrs. Goodrisk still be the named
insured. This, as we will see, is the most
The time has come to examine how property
held in trust, and the attendant liabilities, can
be best insured. Agents and underwriters
need to understand what they are looking at
when trusts appear on applications, and what
1
questions to ask to determine if and how
trust ownership affects the actual risk.

THE GROWTH OF TRUSTS
Apparently it's not enough to simply own
something nowadays. Lawyers and
accountants are advising virtually every
household with positive net worth--and
some that are technically insolvent--to use
trusts and other estate planning entities to
shield their assets from the IRS and other
creditors. (For purposes of brevity, this
report will often use the term "trusts" to
encompass other estate-planning entities.
Also, the term "personal trust" is a generic
term with no legal distinction. It is used in
this report to indicate that our focus is on
ownership and insurance of assets common
to most households, such as a residence and
tangible personal property.)

Once reserved for the wealthy, use of trusts
is rapidly becoming standard practice for
households that hold any appreciable asset,
even if it's only a home. The principal
attraction of trusts is that they allow property
to be passed down to heirs more quickly and
at less cost than a will. Under a trust
agreement, assets can pass immediately from
the grantor (or donor or settlor) to the
beneficiaries without having to go through
the cost and public disclosure of probate.
This feature alone, apart from any tax
savings, may make trusts as common as
wills in 20 years' time. Wills are still
considered to be essential elements of an
effective estate plan, however.
ownership of assets and, under certain
circumstances, shield them from
judgments.
Divorced and non-married couples.
Trusts give divorced couples more
options and flexibility for splitting up
ownership of residences, vehicles, and
businesses without having to sell them.
Similarly, they allow unmarried
cohabitants to designate heirs that are
not automatically recognized by state
law and whose rights may be challenged
by relatives of one of the partners.
Property in different states. Property in
other states, such as vacation homes, will
have to go through probate in those
states ("ancillary probate") to be passed
down to heirs upon death. Trust
ownership can eliminate this cost and
effort. Similarly, the person establishing
a trust can usually select the state or
country where it is "domiciled" and take
advantage of the regulations most
beneficial to his or her purposes.1
Given the wide variety of trusts, and the fact
that they are created in part to hide assets, it
is virtually impossible to determine how
many trusts there are and the amount of
assets held by them. Still, there is firm
evidence that the number of trusts has
indeed grown substantially and continues to
grow. The best evidence comes from the
Internal Revenue Service whose records
show that the number of "1041" fiduciary
tax forms filed has grown at twice the rate of
"1040" personal income tax forms since
1975.
Several other reasons account for the
growing use of trusts:
 Fear of lawsuits. Many individuals have
created "asset protection trusts" in the
U.S. and "offshore" (primarily in
Caribbean countries) that hide the
1
Sloan, Irving J., Wills & Trusts (1992: Oceana
Publications, Dobbs Ferry, N.Y.)
2
GROWTH IN FIDUCIARY TAX FILINGS
Year
1975
1980
1985
1990
1995
2000
2005
Ind. tax returns
84,026,800
93,196,100
99,704,200
112,596,000
116,466,900
128,049,000
135,219,000
Avg 5-yr rate
% growth
10.91%
6.98%
12.93%
3.44%
9.94%
5.60%
8.30%
1041 returns
% growth
1,564,200
1,881,800
2,125,000
2,680,900
3,190,900
3,456,000
3,667,000
Avg 5-yr rate
20.30%
12.92%
26.16%
19.02%
8.31%
6.11%
15.47%
Source: Internal Revenue Service, 1999
WHAT ABOUT P/C COVERAGE?
There's another reason why P/C insurance is
hardly mentioned in estate planning,
however: For some time, P/C insurers
themselves apparently didn't think there was
a big problem. For example, the Property
Committee of the Alliance of American
Insurers discussed living trusts at a meeting
in early 1997, and quickly came to
consensus that their companies had not
encountered any unusual claims disputes
when adding trusts as additional insureds.2
Telephone interviews with agents and
company staff representing State Farm,
Allstate, and other major insurers indicated
that they routinely insure trusts as additional
insureds.3 None of the subjects interviewed
knew of any unusual claims problems. An
officer with the Property Loss Research
Bureau and Liability Insurance Research
Bureau says he gets virtually no requests
about trusts and has heard of no problems
insuring them.
Modern estate planning is a rapidly growing
industry, with thousands of books, Web
sites, and practitioners devoted to helping
people plan for the transfer of their property.
Yet, voluminous as it is, estate planning
literature rarely even mentions property/
casualty insurance for the ownership,
maintenance, and use of property held in
trust.
It's always difficult to establish why
something has not been done, but we can
reasonably offer some reasons for why P/C
coverage would barely rate a footnote in
most estate planning guides:
 Most of the assets held in trust have been
investments and securities, posing little
or no property/casualty exposure to the
holders.
 Until recently, most of the households
creating trusts have been wealthy people,
a relatively low-risk group insurers have
been eager to underwrite.
 Professional trust companies that take
control of homes and other tangible
assets generally have their own blanket
coverage for the properties they hold, as
well as for their errors and omissions as
fiduciaries.
2
Alliance of American Insurers, Downers Grove, Ill.;
Personal Property Insurance Committee Bulletin No.
97-5, May 27, 1999
3
January 1999 interviews with (1) Roger O'Donnell,
Evanston, Ill.-based Allstate agent; (2) Ron Pruden,
underwriting officer for State Farm Fire & Casualty,
Bloomington, Ill.; (3) Jeanne Brabek, assistant
general counsel, American Family Insurance,
Madison, Wisc., and (4) Jenny Legates, independent
agent, Lake Bluff, Ill.
3
Yet the "unease" over insurance of trusts is
not imaginary. While the Alliance
committee essentially let the matter of trusts
drop, representatives of the Insurance
Services Office, New York City, informed
Alliance staff that trusts "represented a
serious legal concern," and cautioned against
adding a trust as an additional insured.4 A
different note of caution was sounded by the
Chicago-based law firm Hopkins & Sutter,
general counsel for the American
Association of Insurance Services. In a 1999
meeting with AAIS staff, partners of the
firm opined that the additional insured
approach was not congruent with their
understanding of ownership and liability
under a trust. Their preference was, in
essence, to insure a residential trust under
the equivalent of a landlord's policy
(covering building property and premises
liability) and any occupants under a renter's
form (covering personal property and
liability for personal activities).
trust to be designated a named insured on an
umbrella policy.
There are signs that insurance companies are
beginning to take notice of the growth of
trusts. USAA Group, San Antonio, recently
surveyed its membership about their use of
trusts, to determine whether property insured
by USAA was in fact controlled by people
ineligible to join the organization. (USAA
"membership" is restricted to active and
retired members of the U.S. armed forces
and their dependents.) The study projected
that as many as half of USAA members
would have some sort of trust relationship
by the end of the year 2000. While the use of
trusts grows, Salinas also detects another
trend: A tendency to give trusts names that
hide the identity of the real owners.
Fireman's Fund in 1999 filed an
endorsement nationwide that will allow a
4
Undated 1997 Alliance agenda item memo.
4
PERSONAL RISK MANAGEMENT
strong analogies to business enterprises, as
these family enterprises consciously choose
what risks to "transfer," which ones to
"retain," and whether to create "captive"
entities to manage them. Personal lines
practitioners may find themselves drawing
heavily on the practices and precedents of
their commercial lines colleagues.
Insurance practitioners must also face the
fact that trusts are emerging as a form of
competition in personal risk management.
Read what leading members of the National
Network of Estate Planning Attorneys have
to say in their book Legacy: Plan, Protect
and Preserve Your Estate:
TRUST FORM AND FUNCTION
"With your assets protected from
the reach of creditors, you will not
need to carry as much [P/C]
insurance coverage. You could
probably reduce your coverage to
the minimum amount necessary to
retain your privileges and still
maintain the legal representation
coverage. The cost of obtaining the
asset protection of estate planning
can, in most cases, be recovered in
the first year or within a few years
by the savings in premiums. A
further bonus is realized when such
insurance premium savings continue
year after year."5
A trust is a legal entity created to hold
property that consists of three legal parties:
 A grantor (or donor, creator, or settlor)
who establishes a trust and places assets
in it;
 A trustee who manages the trust
property according to guidelines in the
trust agreement; and
 Beneficiaries designated in the trust to
receive income, assets, or other
consideration as stipulated in the trust
agreement.
A person, couple, family, or other entity can
fill one, two, or all three of these roles.
The basic principle underlying a trust is that
it separates the legal title to property, which
carries the right to dispose of it, from the
equitable, or beneficial, title which carries
the right to use and derive benefits from
property. The division of ownership into
interests has ancient legal precedent, and has
probably been more common over the
centuries than fee simple ownership, the
practice of exclusive ownership and use of
property.
One can easily challenge this assertion.
Anyone with a substantial amount of
personal assets is well-advised to purchase
umbrella coverage up to their full value or
the highest limit available. Nonetheless,
estate planning tools are emerging as forms
of personal risk management that can both
compete with and complement insurance.
With modern estate planning, more and
more families are managing themselves as
enterprises. Like aristocrats of old, they are
explicitly planning to increase the value of
their holdings over generations. There are
By separating legal from equitable title and
allowing them to be held by different
persons or entities, trusts can increase the
number of potentially insurable interests in
trust property. It is well established in
insurance law that equitable title on its own
can support an insurable interest in property
5
Esperti, Robert A., Renno L. Petersen, and Chester
M. Przybylo, Legacy: Plan, Protect and Preserve
Your Estate, pp. 246-247, (1996: Esperti Petersen
Institute, Inc., Denver, Col.)
5
to the same extent as if the holder had legal
title. Also, the holder of a future interest in
property, such as a trust beneficiary, is
considered to have an insurable interest in
the property the instant the future interest is
created.6
Trust agreements can help insurers
determine insurable interests because they
clarify interests that may be unclear or in
conflict under common law. For example,
conflicts can easily arise among heirs of
someone who has been married two or more
times. At least until now, married couples
have usually owned property under joint
tenancy, under which each spouse is
considered to have an insurable interest in
the full value of the household property,
with a right of survivorship that supersedes
provisions of a will. Thus, if both spouses
died in an accident, all the property would
pass from the first to die to the second to
die, then to the heirs of the second to die.
Children of a first marriage can be
disinherited, regardless of the intentions of
their parent.
Trusts can resolve such conflicts by
removing property from joint tenancy and
placing it an entity structured to pass
property to intended heirs. The property to
be transferred and the parties' interests in it
can be clearly identified and valued for
insurance purposes.
TRUST CLASSIFICATIONS
There is a limitless variety of possible trusts,
because the U.S. Supreme Court recognizes
that trusts can be freely established under the
common law of contracts, and need not
conform to authorizing statutes as
6
Wiening, Eric A., and Donald S. Malecki, Insurance
Contract Analysis, (1992: American Institute for
CPCU, Malvern. Pa.), pp. 153-154
6
Underwriting questions: How much information is enough?
Trusts can be freely created under contract law for business or personal purposes, or
both. For that reason, there is no "standard" trust agreement. A property/casualty
underwriter would have to read every trust agreement to fully understand exactly who has
what insurable interests and liability exposures.
Up until now, individual review trust agreements may have been feasible, as use of
trusts has been limited to wealthy households. The growing popularity of trusts, however,
means that insurers have to anticipate the day when use of trusts will spread through their
homeowners book of business. They can't possibly review all those agreements, so they
have to devise a series of questions that will efficiently identify trust arrangements that
pose extraordinary risk so they can be pulled out for special underwriting attention.
Here are some suggestions:
 What tangible property does the trust hold? (Residences, vehicles, boats, equipment,
etc.)
 Who are the parties to the trust (grantor, trustee, beneficiaries)? What is their
relationship to each other?
 Is any of the property used for business purposes?
 What rights has the grantor reserved regarding the property held in trust? Can he
reclaim it or substitute other property?
 What duties does the trustee have regarding physical maintenance and control of
tangible property?
 What qualifications does the trustee have to be trustee?
 What rights do the beneficiaries have regarding the trust property or the trustee? Can
they change the trustee?
corporations and other organizations do7.
Virtually any competent adult can establish a
trust for any lawful purpose and still fulfill
one of the principal purposes of creating a
trust: hiding, or at least obscuring,
ownership of assets.
for how the assets are held; others are
merely proprietary "brand names."
Many of the legal distinctions among
statutory trusts refer only to the nature of a
trust agreement itself, and tells a
property/casualty insurer little or nothing
about who actually owns, holds, or uses
property. For example, a testamentary trust
is a trust created under a will; a living trust
(or inter vivos trust) is created during the
lifetime of the grantor. These terms indicate
when an ownership or use relationship is
triggered, but do not, on their own, establish
that relationship.
Many of the trusts used in estate planning,
however, are authorized by legislation or
regulation to offer tax savings and other
benefits. Anyone trying to understand trusts
must sort through an ever-growing thicket of
trust terms. Some of the terms refer to
genuine legal distinctions with implications
Similarly, an irrevocable trust is an
agreement that, once made, cannot be
changed. A revocable trust can be revoked
or modified. Again, these terms in
themselves establish nothing about the
underlying trust agreement, but they do carry
7
Glen Halliday, " The Truth about Trusts," from Web
site www.trustlaw.org (as of 17 May 1999) cites two
Supreme Court rulings. In one, Crocker vs. MacCloy,
the court stated that trust relationships are "based
upon the common law, and [are] not subject to
legislative restrictions as are corporations and other
organizations created by legislative authority."
7
meaning for property/casualty underwriters.
All things being equal, an irrevocable trust
will establish a stronger separation between
an individual and the assets placed in trust
than a revocable one.
persons for a stated period of time, after
which the remainder must be passed on
to charity;
 Charitable lead trusts that make
payments to charity for a stated period of
time, after which heirs inherit the
principal; and
 Grantor retained trusts that make
payments to a person or persons for a
stated period of time, after which the
remainder must be passed to relatives or
other beneficiaries;
These trusts are commonly created to hold
financial assets, but they can hold rental
properties, real estate, and shares of business
ownership as well.
Some common trust terms can be set aside
for our purposes. "Insurance trusts" refer
exclusively to life insurance trusts, wherein
a grantor establishes a trust that owns life
insurance that pays a death benefit on his
demise. Trust ownership allows the grantor
to avoid "incidents of ownership" in a
policy, and thus keep the death benefit out of
the taxable estate. Insurance trusts rarely if
ever involve property/casualty issues,
although agents that want to sell life
coverage need to know about them.
PERSONAL RESIDENCE TRUSTS
Insurers will frequently see trusts labeled by
three IRS classifications:
 Simple trusts, from which all income for
the year is distributed to beneficiaries;
 Complex trusts, for which trustees have
discretion over distribution of income
and assets; and
 Grantor trusts, from which income is
distributed under detailed IRS rules.
As a practical matter, the IRS classifies all
trusts that do not meet the specifications for
simple or grantor trusts as complex trusts.
As indicated, the IRS trust classifications
refer solely to how income is distributed,
although the greater discretion offered
trustees under complex trusts may carry
greater liability exposure for them.
There are at least two forms of trusts that by
their very nature modify ownership in real
property:
 The Personal Residence Trust (PRT),
which can hold only a residence; and
 The Qualified Personal Residence Trust
(QPRT), which can hold a residence,
insurance policies, and a limited amount
of cash for maintenance.
Under a residence trust, a donor transfers a
home to the trust, and has unlimited rights
over a specified term (usually five or 10
years) to occupy, rent out, or even sell the
residence, provided he or she purchases a
substitute property within two years. A
qualifying residence trust is irrevocable,
however, and the donor-occupant retains the
responsibility for maintaining the property
and paying all expenses.
While many trust classifications imply
nothing about property ownership, some
statutory trusts require property to be
transferred from one person or entity to
another as an intrinsic condition of the trust.
Common examples include:
 Charitable remainder trusts that make
payments from assets to a person or
If the trust term expires during the lifetime
of the grantor, the residence passes to the
beneficiaries. The value of the donor's right
to use the property, his or her "retained
interest," is deducted from the value of the
8
residence, thus reducing estate and gift
taxes. If the grantor dies before three years,
the residence is taxed at its full value, and
the parties have lost what they spent to set
up and administer the trust.

A residence is the most valuable tangible
property owned by most households, and
the most valuable asset of any kind,
tangible or intangible, for many of them.
Preserving and protecting the residence
is, then, an important part of estate
planning.

A residence carries premises liability,
and insurers need to know who is truly
responsible for controlling hazards that
might cause bodily injury or property
damage to third parties.

The homeowners policy is the principal
means of insuring personal liability for
injury and damage arising from an
individual's personal activities, other
than operating a motor vehicle.
FAMILY LIMITED PARTNERSHIPS
Family Limited Partnerships (FLPs) are
statutory arrangements households can use
to accomplish some of the same goals they
would with trusts. Under an FLP, a
managing general partner, usually a parent
or grandparent, manages a pool of assets
structured as a partnership. Other
participating family members are limited
partners with no formal management role.
As such, they receive shares of ownership in
the partnership and income distributions as
determined by the managing general partner.
(Because of their relatively high level of
liability risk, motor vehicles are rarely
held in trust. Says Chester Przybylo, a
leading estate planning attorney based in
Chicago: "Why would I put my biggest
liability in a box of assets?" His
sentiments are widely, though not
universally, echoed by other estate
planners.)
FLPs offer tax benefits for all generations
involved, and are also viewed as a good
vehicle for succession planning in a family
business. Until the general partnership
interest is passed to them, the limited
partners have no legal ownership interest in
the partnership's individual properties, only
in the partnership itself. An FLP can protect
a limited partner's beneficial interest in the
partnership assets from creditors. In many
states, creditors, including litigants, would
only be entitled to the income a partner
receives from his or her shares in the
partnership, not to the shares themselves.
And the general partners control the amount
distributed to the shares.
The creation of a residence trust in itself can
create a series of new exposures, even if
there is no change in the use of the property.
First off, the trust acquires a present interest
in the real property, for which the trustee
holds legal title. If a trust owns the
residence, courts may find that the trust
assumes some liability for bodily injury and
property damage that arises from the
premises. The duty to protect third parties
from premises hazards and nuisances exists
in addition to the trustee's fiduciary
responsibility to beneficiaries.
HOMEOWNERS EXPOSURES
The central question facing insurance
practitioners regarding personal trusts is how
to insure a residence held in trust. There are
several reasons for this:
9
Trust agreements can vary greatly, however,
in defining the duties the trustee has related
to the residential premises. On one hand,
trust agreements can include hold harmless
clauses wherein the occupant of the
residence agrees to indemnify the trustee for
premises-related liability claims. On the
other hand, the trust agreement may require
the trustee to preserve the property and
protect the health and safety of the occupant;
to act as a landlord, in effect. A trustee
acting as a landlord may run a greater risk of
liability for wrongful entry, wrongful
eviction, invasion of privacy, and other
forms of personal injury.
up to the full value of the interest as if it
matured immediately.8
Most trusts do not contemplate that nonoccupant beneficiaries would have premises
liability exposure under a residence trust.
Under most trusts, they will be passive,
playing no role in the use in the use or
maintenance of an insured premises, but
merely waiting until the moment when
ownership of it passes to them. In some
trusts, however, beneficiaries have the
power to change trustees, a power that may
be interpreted as exercising ultimate control
over the trust property, and therefore
carrying liability for injury and damage that
results from it.
Occupants of a residence held in trust,
whether they be grantors, beneficiaries, or
trustees, have a present interest in the right
to occupy a premises and the personal
property they own, in addition to any other
rights under the trust. Occupants will also
retain some premises liability exposure for
the maintenance of the insured premises and
their activities on it, no matter who holds
title to the property or how the trust
agreement is written. Trust agreements may,
for example, promise to indemnify an
occupant beneficiary who is sued, but, as a
general principle of contract law, they will
not be able to shield the occupant from a
claim. Suppose, for example, that an older
person occupies a home as the beneficiary of
a trust and owns a dog he or she can no
longer control. If the dog bites someone, the
occupant will have to respond to a bodily
injury claim, even if the trust has promised
to pay all the costs.
Grantors may also be liable for damage or
injury arising from trust property, even if
they have clearly transferred ownership and
use of it to someone else. As stated above, if
a trust is revocable, a court may consider
that the grantor still has ultimate control
over the trust property. Even if the property
has been gifted away through an irrevocable
trust, a grantor may face a claim of negligent
entrustment. This could happen, say, if an
older individual transferred a residence to a
young adult, who allowed it to be used for
wild parties that resulted in damage to
neighboring homes and people. The power a
grantor has as the person able to dictate the
terms of a trust may carry liability that
cannot be entirely transferred.
Beneficiaries of a trust acquire a future
interest in a trust property if they are
designated to receive it at a later time, as
when the term of a Qualified Personal
Residence Trust expires. That future interest
is insurable from the moment it is created,
8
10
Wiening and Malecki, op. cit., p. 153
Insuring trusts under homeowners:
Different approaches and their implications
Approach
Purpose
Recommended approaches
Trust as
Provide trust with
additional
coverage for
insured
building property
(standard
and premises
additional
liability. Provide
insured
occupant with
endorsement) coverage for
personal property,
loss of use, and
personal liability.
Trust as
Provide trust with
additional
coverage for
insured
building and
(AAIS
personal property
expanded
and premises
additional
liability. Provide
insured
occupant with
endorsement) coverage for
personal property,
loss of use, and
personal liability.
Dwelling/
Reinforces legal
premises
separation of
liability
ownership
package for
interests.
trust; renters
form for
occupants
"Expedients"
Trust as
Provide trust as an
named
entity and trustee
insured
as an individual
with full
homeowners
coverage. May be
appropriate for
insuring a QPRT.
Trust and
occupants as
co-insureds
Provide trust as an
entity and
occupants as an
individuals with
full homeowners
coverage
Property
Coverage
Liability
Coverage
Trust is covered "as
interests appear"
under Cov. A and
Cov. B. Occupant is
sole insured for Cov.
C and Cov. D.
Trust is covered for
BI/PD arising from
the premises
described in the
endorsement.
Occupant gets the
same coverage, plus
coverage for BI/PD
arising from personal
activities.
Trust is covered for
BI/PD arising from
all premises insured
by the underlying
policy. Occupant
gets the same
coverage, plus
coverage for BI/PD
arising from personal
activities.
Premises liability
coverage limited to
premises described
in endorsement.
No personal property
coverage for the
trust.
Trust sole insured
for building
property. Occupant
sole insured for
personal property
and loss of use.
Trustee insured for
BI/PD liability
arising from insured
premises. Occupant
insured for BI/PD
arising from
premises and
personal activities.
Most costly form of
coverage.
Trust still needs
floater to cover trust
personal property.
Trust is covered
through the trustee
under Covs. A, B,
and C. If trustee is
occupant, he is also
insured under Cov.
D.
Trustee gets liability
coverage for BI/PD
arising from insured
premises or personal
activities.
Trust and occupants
"as interests appear"
under Covs. A, B,
and C. Occupants
insured under Cov.
D.
Theoretically, both
trust and occupants
get full coverage for
BI/PD arising from
insured premises and
personal activities.
Technically
ineligible under
standard programs.
Inappropriate
application of
coverage if trustee is
not an occupant.
Potential coverage
gaps for occupant.
Inappropriate
application of
personal liability
coverage.
Trust is covered "as
interests appear"
under Covs. A, B,
and C. Occupant is
sole insured for Cov.
D.
11
Limitations
Trust is not insured
for loss of rent under
Cov. D.
HOMEOWNERS COVERAGE OPTIONS
There are several options for insuring
tangible trust property and their
attendant liability, under a homeowners
policy. Every approach has its
limitations, but some are clearly
preferable to others.
Insure the trust or the trustee?
Before deciding on what approach to use
when writing a homeowners policy for a
trust, insurers have to determine whether
they will designate the trust itself or the
trustee as the insured entity. Companies
have been known to do either, and there
is no clear benefit to one or the other.
One common approach is to enter the
trustee on the dec page or additional
insured endorsement, such as "John
Smith, as trustee for ABC Trust" or
"Friendly Trust Company, as trustee for
ABC Trust." The benefit to designating
the trustee as the insured is that you are
indicating that coverage is intended for
an individual or organization charged
with controlling the insured property, in
that capacity. This avoids connecting the
homeowners policy to other trust
properties, which could—albeit
remotely—expand the exposure of the
homeowners insurer to claims arising
from exposures the carrier did not
contemplate when writing the policy.
Some believe that designating the trustee
may not establish adequate coverage for
the trust, however. Presuming, in our
case, that the trust is the legal owner of
the residence, it will almost certainly be
named in a suit in addition to the trustee,
and it will suffer loss in the event of a
judgment against it. Also, designating
the trustee will create a coverage gap in
the event someone else acts in the name
of the trust and is found to be liable for
bodily injury or property damage
sustained by a third party.
These potential coverage gaps can be
addressed by designating the trust itself
as the insured (preferably additional
insured) but, as we see above, this
approach carries slightly more risk for
the insurer.
For purposes of brevity, we will refer in
the following sections to insuring the
trust itself.
Trustee as additional insured;
standard endorsement
The most common approach to insuring
a personal trust that holds a residence
and other tangible property is to list the
trust as an additional insured on a
standard additional insured endorsement
to a homeowners policy. This approach
addresses exposures usually faced by
trusts:
 The trust itself gets full coverage for
its present interest in the building
property under Coverage A
(Residence) and Coverage B
(Related Private Structures).
 The trust gets coverage for defense
costs and damages arising from its
legal liability for bodily injury and
property damage--but only if arising
from the premises designated in the
endorsement--under AAIS Coverage
L (Personal Liability).
 The trust gets standard medical
payments coverage (AAIS Coverage M),
but again, only for occurrences that arise
from the insured premises.
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For little or no extra premium, this
approach gives the trust the building
coverage needed to preserve a valuable
trust asset, as well as protection from any
liability arising from the insured
premises. By limiting the trustee's
coverage to building property and
premises liability, the additional insured
approach avoids much of the ambiguity
that can result from trying to apply the
terms "you" and "your" to a trustee.
There are limitations to a standard
additional insured endorsement that
parties to a trust and their advisers need
to be aware of, however. In the first case,
the trustee has no personal liability
coverage for activities unrelated to the
insured premises. In most cases, this is
not a problem. The trustee is added to
the policy in a specific capacity; rarely is
there any intention to cover his personal
liability.
The "premises only" liability limitation
can be a problem, however, in situations
where family members acting as trustees
fail to understand the implications of
being an additional insured. For
example, it is not uncommon for a
divorced couple to put their house in
trust for their children, and to have a
parent who has moved out of the house
serve as trustee. If the trustee parent is
renting an apartment and has no renters
insurance, he will likely have no
personal liability coverage. He might
erroneously believe he could get the
coverage by having himself "added to
the homeowners policy" as trustee. As an
additional insured, however, he would
have a coverage gap for his liability
arising from personal activities.
Another limitation to insuring a trust as
an additional insured is that the trust
itself gets no coverage for personal
property. This could prove to be quite
costly in cases where family antiques
and heirlooms are destroyed. Suppose an
adult child is living in a residence held
by a family trust, and that he is the
named insured the homeowners policy.
In the event of a devastating fire loss, his
recovery under Coverage C may not be
enough to replace his own clothes,
furnishings, computers, and other
property. He may have little if anything
left to give to the trust for lost valuables,
and may not be required to do so if he
did.
Trustee as additional insured;
AAIS expanded endorsement
Reacting to the limitations of the
standard additional insured endorsement,
AAIS in 1999 filed an expanded
additional insured endorsement.
The new form, filed countrywide with a
proposed effective date of March 1,
2000, is an expanded additional insured
endorsement available under both the
AAIS Primary and Alternate
Homeowners programs. The new
endorsement offers expands coverage
beyond that offered by standard
additional insured endorsements
commonly used to insure personal trusts
and other entities with an ownership
interest in a home. (Both the standard
and expanded additional insured
endorsements will be available to users
of the AAIS Homeowners programs.)
Like the current standard endorsement,
the new endorsement extends insured
status for building property and premises
liability to an additional insured. The
13
new endorsement, however, also extends
personal property coverage to the
additional insured, thus filling a
coverage gap that can exist when a
personal trust or other entity owns
furnishings and other personal property
in a home. To preserve the original
intent of the homeowners policy,
however, the new endorsement limits
personal property coverage for the
additional insured to property under the
control of a person insured by the
underlying homeowners policy, usually
the named insured occupant of the home.
This avoids claims seeking recovery for
damaged or destroyed trust property that
Coverage
Building property
Personal property
Premises liability
Trustee as named insured
has no relation to the insured premises or
its occupants.
In addition, the new endorsement no
longer limits premises liability coverage
for the additional insured to a location
described in the endorsement. Under the
ML 0672, premises liability coverage
would extend to any premises insured by
the underlying homeowners policy.
Coverage under the standard and
expanded additional insured
endorsements compare as follows:
Standard Additional
Insured Endorsement
Additional insured is insured
"as interests appear" for
Cov. A (Residence) and
Cov. B (Related Private
Structures).
No coverage for additional
insured.
Additional insured covered
under Cov. L (Personal
Liability) and Cov. M
(Medical Payments) for bodily
injury and property damage
arising from a premises
described in the endorsement.
Expanded Additional
Insured Endorsement
Same as with standard
endorsement.
Additional insured is insured
"as interests appear" for
Cov. C (Personal Property).
Additional insured covered
under Cov. L (Personal
Liability) and Cov. M
(Medical Payments) for bodily
injury and property damage
arising from any premises
insured by the underlying
policy.
when the language of a personal lines
policy is applied directly to a legal entity.
Filing of the expanded additional insured
This approach is used to accommodate
endorsement was initiated, in part, to
clients who want to avoid the limitations
give insurers an alternative to use when
of the additional insured approach. In
they receive requests to designate
many cases, the new "grantor," "trustee,"
personal trusts as named insureds. That
and "beneficiary" are simply the old
approach is sometimes used to avoid the
"owner-occupants" in different legal
limitations of standard additional insured
dress. This is certainly the case under
endorsements, but ambiguities arise
Qualified Personal Residence Trusts
How 'trustee' currently appears in a homeowners policy
14
The interests and potential liabilities of trustees are one of the issues insurers must
address when insuring property held by a personal trust. Knowledgeable property/casualty
practitioners know that the word "trustee" already appears in the mortgage clause of a
standard homeowners policy.
In the section that grants building property coverage to mortgagees, both the AAIS
and ISO standard homeowners forms include the statement "The word mortgagee
includes trustee." This provision was introduced to address situations in certain states
where "trust deeds" are used in place of mortgages for secured lending on real estate. The
provision is intended to provide recovery for lenders who stand to lose from a loss to a
building. It is not intended to provide coverage for the trustee of a personal trust created
for estate planning purposes.
The limited intent of the provision is reinforced in several ways in the AAIS Primary
and Alternate Homeowners Programs:
 The full title of the clause is the "Mortgage, Secured Party, and Lender's Loss Payable
Clause," clearly indicating that the coverage is intended for a secured lender;
 There are several references to "secured party," security interest," and "lender;" and
 The sample dec page provided under the AAIS program asks for a loan number.
(QPRTs), the principal estate planning
tool for passing a residence to designated
beneficiaries. Under a QPRT, the donor
of the residence lives in it for a defined
period of time before it passes to the
beneficiaries. During that time, he
occupies the residence and maintains it,
and usually serves as trustee.
So, instead of listing "John and Mary
Smith" as the named insureds, the
homeowners declaration may read "John
Smith as trustee for the Smith Family
Trust." There may be no change in the
actual risk and no reason, from an
underwriting standpoint, not to write the
coverage as asked. As a named insured,
Mr. Smith retains his worldwide
personal liability coverage and, through
him, the trust is automatically insured for
personal property under Coverage C, as
well as for building property and loss of
use.
One could ask, however, if it is in the
owner-occupant's best interest to be
insured as a trustee rather as a person.
Depending on the circumstances of a
dispute, there is a remote chance that he
might limit his coverage to his actions as
"as trustee." By and large, however,
designating an owner-occupant as a
named insured trustee should not create
any change in coverage.
Problems arise when this practice is used
to insure trustees who are not occupants
of the insured residence. Non-occupants
are ineligible for coverage under
standard homeowners programs, and
there should be no intention to cover the
worldwide personal liability of a trust
company or professional trustee. I a
trustee is designated as a named insured,
a plain reading of the liability section
would require the insurer to provide
defense and damages coverage for bodily
injury and property damage arising from
the personal activities of the trustee.
Also, designating the trustee as a named
insured by extension exposes the insurer
to liability for actions of the trust
directed by the trustee that cause bodily
injury and property damage to third
parties. (There would be no exposure for
business-related liability however; nor
15
would there be exposure for fiduciary
liability of the trustee to the
beneficiaries.)
Yet individuals increasingly ask to have
institutions or professional trustees
named on a policy rather than
themselves. By doing so, they can hide
ownership of their assets, and specify in
the trust agreement how insurance
payments are to be disbursed. The
wording of a standard policy is
completely incongruent with this
practice, however, and the occupants of
an insured residence could find
themselves without basic liability
coverage.
Families may ask to designate a trustee
as named insured in cases where one
family member serves as trustee for a
residence occupied by another. The
trustee would then be covered for
damage to the personal property of the
trust. To revisit the example above of a
young adult who experiences a fire loss
in a trust-held residence, the trustee
would receive the Coverage C proceeds
and disburse them according to the terms
of the trust. When the trustee is an
additional insured, the occupant named
insured receives and controls the
Coverage C proceeds.
But designating a non-resident family
member as the named insured on a
homeowners policy misplaces the
personal liability coverage. As the
named insured, the trustee could claim
coverage for personal activities that he
probably already has under his own
homeowners policy. At the same time,
the occupant of the household will not
be covered for personal liability unless
he has thought to purchase a personal
liability policy.
Occupant and trustee
as named co-insureds
This approach is another expedient,
chosen to avoid the limitations of
designating only the trustee or trust as
named insured. It turns the problem of
insuring trusts on its head, however. As
we've discussed up until now, the
principal danger in most attempts to
insure personal trusts are coverage gaps
for insureds. Without careful analysis
and proper policy construction, trustees
and individuals could find themselves
without coverage they expect for
personal property and personal liability.
The practice of designating a person and
a trustee as named co-insureds seeks to
avoid coverage gaps by covering both
the user-occupant and the legal owner of
a house. This creates the potential for
unintended exposures for the insurer. If a
family trust is listed as a named insured,
Coverage C (Personal Property) could be
triggered by losses to trust property in
other states that was never considered in
the underwriting process.
Suppose a family trust owns a boat that
is operated in a different state than the
insured premises, and that the boat is
damaged by a covered peril. Under
Coverage C, the insurer would be liable
for recovery. In the case of a total loss,
this could result in stacking of limits.
Trustee insured with a dwellingpremises liability package;
occupant with a renter's form
When asked how best to insure a
personal trust, AAIS's corporate law
16
firm, which does extensive estate
planning, responded that it understood
the legal relationship between a trust and
an occupant beneficiary to be like that
between a landlord and a tenant, and
should be insured accordingly.
Presuming the residence has four or
fewer living units, this would commonly
be done by:
 Designating the trust as the named
insured on a dwelling policy, thus
insuring the trust for building
property;
 Adding a premises liability form to
the package; and
 Insuring the occupant beneficiary
under a renter's policy (AAIS Form
4) that provides coverage for loss of
use, personal property, and personal
liability.
The trust would need a personal property
floater if it wanted to insure personal
property of the trust on its own.
package.
TRUSTS AND OTHER PERSONAL LINES
Homeowners exposures are usually the
principal concern of insureds and
insurers dealing with personal trusts,
since the residence is usually the most
valuable tangible asset, and the
homeowners policy carriers the insured's
general liability coverage. A trust can
hold virtually any type of property,
however, and trusts can appear on
applications for other personal lines.
Home-based businesses
This approach appeals to estate planning
attorneys because it underscores the
distinction between ownership and use
that they are trying to establish with the
trust. It reinforces and clarifies the intent
of the grantor in the event of any kind of
legal challenge. Conversely, if a grantor
placed his residence in trust but
continued to be the named insured for
both property and liability coverage, that
fact might be used by litigants to argue
that the trust is a fiction.
In the late 1990s it became standard
practice for insurers to offer property and
liability coverage for a home-based
business under endorsement options to
their homeowners policies. The AAIS
Home-Based Business (HBB) Coverage
Option, filed in 1995, was the first
standard industry form to offer this. It
extends Coverage B (Related Private
Structures) to include structures used to
store property of the covered business. It
also extends Coverage C (Personal
Property) to include personal property of
the home-based business. Coverage L
(Personal Liability) and Coverage M
(Medical Payments) are extended to
respond to claims of bodily injury and
property damage to others arising from
the business; personal and advertising
injury coverage can be added.
The problem with this approach is that it
is more costly to insure the exposures
with two forms rather than one. First off,
there are higher incidental costs for
producing two policies. More
importantly, the loss costs under each
form are greater than those for
equivalent coverages in a homeowners
Even though the home and business are
insured under the same policy, they are
in fact insured separately. This gives
insurers flexibility and clarity when
insuring home-based businesses owned
by a trust. For example, if a trust owns
the business but not the residence, the
trust can be designated as the named
17
insured on the separate dec page for the
home-based business. There is no need
for the trust to be designated on the
underlying homeowners policy (as
named or additional insured).
Liability coverage under the HBB option
extends only to business use of the
premises, however. If a trust for some
reason is found legally liable for BI/PD
arising from personal use of the
premises, it would have no coverage
under the HBB option alone. If a
business owner hosts a party unrelated to
the business in a garage used by the
business, the HBB option will not
protect the trust from a claim by an
injured guest.
If a trust owns both a home and a
business based in it, however, it does not
automatically get HBB coverage simply
by being a named or addition insured on
the underlying homeowners policy. The
trust must be designated on the HBB dec
page to get HBB coverage.
Vehicles held in trust
As stated above, it is rare to encounter
personal autos held in trust. Trusts are
established to protect assets, and
automobiles are the principal source of
liability for most households.
Surprisingly, however, use of trusts to
hold title to vehicles is rare even among
owners of antique automobiles. The
manager of CNA's antique auto program
told AAIS that only a "handful" of the
program's 60,000 accounts, perhaps
fewer than 20, had trust ownership.
Still, trusts will appear from time to time
on personal auto applications. As with
homeowners accounts, it is preferable
that the trust be an additional insured
than the named insured. If the trust is
designated as the named insured on a
standard personal auto policy, "you"
becomes the trust. Who, then, are the
"family members" or "household
members" who would ordinarily get
automatic coverage? In the event that a
trust situation results in a coverage gap
for someone who intends to be insured,
there is no "drive other car endorsement"
to address it.
If the trust is designated as the
"additional insured/lessor" on a PAP, the
named insured with custody of the car
gets full coverage, and the coverage
automatically extends to members of his
family or household. The trust is then
covered for its potential liability, and it
can be named on a claim check.
A personal trust can be designated as the
named insured on a business auto policy.
In that case, a "drive other car"
endorsement will add coverage for the
designee and (automatically) his or her
spouse; other drivers would have to be
named.9
Trusts and farms
There is much to say about insuring
farms held by personal trusts, but in
many respects the exposure is not new.
Farms have long been held and operated
by two or more generations of the same
family, each with separate ownership
interests and liability exposures. Farms
have also presented a combination of
personal and commercial exposures.
9
Morrill, Irene, "Issues in Insuring the Personal
Trust," presentation at the New England Agents
Alliance annual meeting, Boston, Mass., 14 Nov
1998
18
Trusts are merely another ownership
entity in a line where proprietorships,
corporations and other entities have long
been insured. Under the AAIS
Farmowners Program, eligibility extends
to the "owner of the farm," and a farm
tenant can occupy the principal residence
and be insured for personal and
commercial exposures under the same
policy. This gives and insurer complete
flexibility to insure farm trusts. Farm
coverage practices may well provide
many precedents for coverage of the
emerging number of personal "estates."
19