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Aside from being inexpensive and easy, there are other benefits to a TODDA. The owner of the real property can change or even revoke a TODDA at any time. The owner can sell or transfer the property and the simply TODDA no longer applies to the real property. TODDA forms are readily available online, often without cost or expense, and appear, at first glance, to be easily completed without a lawyer and recorded with only a nominal expense. What could go wrong?
Disadvantages of TODDAs
First, the automatic and direct transfer of assets carries some foreseeable and significant risks. This Blog has addressed in previous articles the dangers of direct transfer designations such as transfers on death (TOD's) and payable on death (POD's) designations. See, for example, Beware Direct Transfer Designations (TODs and PODs). A TODDA does not solve any risks, generally, of automatic and/or direct transfers of real estate.
Second, TODDA's may risk loss of the deceased's property and casualty insurance, which ordinarily would cover the property if the property passes to beneficiaries through probate or through a trust. This is vitally important in assessing the risk of a TODDA given that TODDA's are only used to pass interest in real estate.
Loss of Insurance Coverage
The risk is illustrated by a recent Ohio case, Walker v. Albers Insurance Agency. To be clear, the case did not actually involve a TODDA, but the ruling and reasoning predict what would happen if the case had involved a TODDA. According to the court in Walker, a beneficiary of a TODDA cannot rely on the owner's property insurance, and may suffer loss of or to the property if an event, such as a fire, occurs after the death of owner before the beneficiary can secure insurance protecting the property.
Ms. Walker inherited a partial interest in her childhood home. She lived alone in the home for some years and was the only named person on the homeowner’s insurance policy. Ms. Walker passed away without a will, and her sister opened a probate estate to administer Ms. Walker's estate. Ms. Walker’s interest in the house was transferred to the her heirs, other property was distributed, and the estate was closed. Two weeks later, before anyone could take physical possession of the house, a fire burned down the house.
Ms. Walker's homeowner’s insurance policy had not yet expired, a fortunate circumstance, or so it would initially appear. The estate made a claim under the policy. The insurance company denied the claim, however, because neither the descendants nor the heirs qualified as an “insured” under the terms of the policy at the time the loss occurred. An appeals court ultimately affirmed the trial court’s determination that coverage was rightfully declined.
The case is instructive regarding the risk of insurance coverage loss using a TODDA, because it analyzed carefully the iwho" is insured person under an insurance policy of a deceased owner. All policies differ, but many policies are crafted with similar language. In the Walker case, an insured person under the policy was:
Up until the death of the insured:
- the named insured; or
- residents of the household who are relatives or certain other dependents are insured persons.
Upon death of the named insured:
- any household member living in the premise at the time of death; or
- any person having temporary custody until a legal representative (executor/administrator) is appointed.
Once the property was in the probate process, the legal representative (executor/administrator).
In Walker, there was no dispute that the sister was a legal representative at some point in time, the question was whether she the legal representative at the time of the loss. When the probate estate was closed, two weeks prior to the fire, she was no longer a legal representative, and insurance coverage for the property lapsed; at the time of the loss there was no person insured under the policy.
With a TODDA, the "transfer" occurs automatically, immediately upon the death of the owner. This automatic transfer means that, in at least some cases, the beneficiary is wholly unaware that coverage has lapsed; indeed, a beneficiary may be wholly unaware that s/he became the owner of property immediately upon the death of the owner! With little or no time to seek replacement insurance, the beneficiary may suffer a loss substantially impairing the value of the inheritance.
Many planners don't advise their clients regarding this risk, and certainly those folks that avail themselves of online forms are probably wholly unaware of the risk.
Simple Fixes or Just Complicating Matters?
There is a "fix" that some attorneys employ to solve the problem of insurance lapse, and that is the use of an "additional insured" or "additional named insured" protecting the TODDA beneficiary. An owner can name another person as an additional insured, and indeed, trustees often use these for insurance owned in trust when the insurance company will only permit a natural person as an insured on the policy. Beware, however, a suggestion that this always solves the problem. To be fully insured, even if an additional named insured, the insured must have an "insurable interest" at the time of the loss.
The reality is that the seemingly easy "fix" adds just another layer of complexity to the issue. There is a common misconception that there is little or no distinction between being an additional insured and a named insured on a policy. From a liability perspective, however, there can be a substantial difference. Many assume that so long as they are included as an additional insured on a personal or commercial insurance policy, they enjoy the same benefits as the owner of the policy itself. This is usually only partially true.
Insureds, Additional Insureds, and Additional Named Insureds
A "named insured" is the actual owner of the insurance policy. A named insured is entitled to 100% of the benefits and coverage provided by the policy. An additional insured is someone who is not the owner of the policy, but who, under certain circumstances, may be entitled to some of the benefits and a certain amount of coverage under the policy. The named insured extends protection to the additional insured under the terms and conditions of the named insured’s policy.
It should be noted, however, that coverage provided under the additional insured endorsement is often limited to liability arising out of acts performed by or on behalf of the named insured. This means that for an additional insured, coverage will only extend to liability caused by the named insured. All other liability, for which the named insured may have coverage under the policy, will not be covered when it comes to the additional insured.
How does this relate to loss of coverage? Property and casualty or homeowner's Insurance coverage usually covers two very different losses. The first is loss of the property or damage to the property as a result of a covered event, such as a fire. The other is liability to third parties from an act or omission of the property owner. Rather than of loss caused by a fire or other covered event to the property, consider a loss caused by an injury suffered by another person on the property resulting from a dangerous condition. Rather than impairing the value of the property by damage, the "loss" is the owner's liability for the person's injuries or death. How the insurance is written becomes very important.
Generally, additional insured status is required by an individual or entity when the policy owner has agreed to indemnify the additional insured. A common example is the owner of real property who leases the property to a tenant. The property owner requires that the tenant indemnify the owner from any liability caused by the tenant. As such, the tenant most often lists the property owner as an additional insured under the tenant’s insurance policy. If the tenant or its agents do something that creates liability to either the property owner or a tenant, the property owner will most likely be covered. If a third party unrelated to the tenant causes damage, however, the tenant may be covered but the property owner will not be covered. Likewise, if the property owner does something to create liability which is covered for the tenant under the tenant’s policy, the property owner will not be entitled to coverage under the additional insured endorsement.
Furthermore, coverage extended to the additional insured may be limited and/or shared by the coverage granted to the named insured. Thus, if a situation arises which creates liability for both the named insured and the additional insured, coverage under the policy is shared between the named insured and additional insured. For example, if the named insured has $100,000 in liability coverage, the additional insured will likewise have $100,000 in coverage. As such, if either the named insured or the additional insured create a liability, there will be $100,000 available to cover that liability. If both the named insured and the additional insured incur liability, they will be required to share the $100,000 total coverage. Therefore, a situation can easily arise when dual liability results in a shortfall of coverage.
By contrast, an additional named insured enjoys all of the benefits that the actual policy owner enjoys. In the examples illustrated above, an additional named insured will be covered from liability created by the tenant and/or the tenant’s agents as well as liability created by the additional named insured itself. Likewise, if there is $100,000 in coverage for the original named insured, there will be a separate and distinct $100,000 in coverage for the additional named insured.
Regardless, an additional named insured does not always have the privileges and/or obligations of the original named insured (e.g., the obligation to pay premiums or the right to cancel coverage or receive policy notifications).
In summary, insurance coverage is more complicated than most people acknowledge. Although almost all "homeowner" policies do approximately the same things in (1) protecting the homeowner from loss of or damage to the property and (2) protecting the homeowner from liability for occurrences on the property, how these coverages work after the death of the insured can be complicated, particularly if property passes automatically at the time of death. If limited coverage and rights under the policy are sufficient, an additional insured endorsement may be sufficient. If the goal is to obtain complete and distinct coverage from all potential liability, being included as an additional named insured is better, keeping in mind that the insured must have an insurable interest at the time of the loss.
Insurance companies reject claims when there is possibility that the claim may not be enforced. The automatic transfer of interest to a beneficiary that is an additional named insured seems clear enough, but what of the interest of a contingent beneficiary? What if the condition creating liability pre-dated the death of the owner, and what if the date of the loss is uncertain? At a minimum, it is fair to say that a TODDA should only be used only when advised by a competent and skilled lawyer, after consideration of the specific circumstances involved, and the objectives of the property owner.
As an alternative to a TODDA, one could simply settle a revocable trust, convey the property to him or herself as trustee, and obtain insurance in the name of the trust that will own the property both before and after the owner's death, at least until the trustee sells or distributes the real estate in accordance with the terms of the trust. The insurance coverage issue is not complicated or impaired with the use of a trust and insurance insuring the trustee of that trust.
Thanks to the lawyers at Carlile Patchen & Murphy LLP, for the excellent article that served as the inspiration for this article.
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