Many relatively sophisticated business-people are unaware of a potential pitfall that occurs when partners in real property fail to name all of the equity partners as named insureds on their property insurance policy. This can result in a partial denial of liability for the partnership based upon the equity interests of those who are not named insureds on the property policy. As commercial insurance claims adjusters, we have some tips for you below.
For example, suppose that you and I are partners in an office building. We are not incorporated as a C corporation, subchapter S corporation or for that matter an LLC. We are a simple partnership wherein you own 50% of the equity in the building and I own 50%. As partner, I place the property insurance on the office building with my local insurance agent for a limit of liability of $1,000,000.00. However, I neglect to tell the agent that I have a partner in the building who has a 50% equity interest in the real property. Accordingly, the agent places insurance on the property in my name only.
Now imagine that, after less than a year of ownership, the building suffers an extensive fire loss. The damages to the structure amount to $500,000.00 and we file a claim with the insurer seeking to be indemnified for our losses. The adjuster for the insurance company covering the risk comes to the building following the loss, and as part of his initial interview and inspection of the property, determines that we are not an incorporated entity but a simple partnership.
Following the property inspection, the adjuster subsequently sends us a letter informing us that the insurer will only accept liability for 50% of the damages or $250,000.00, even though we purchased and paid premiums for $1,000,000.00 of property insurance coverage. This partial denial of liability is based upon the fact that only I was party to the insurance contract (I’m the only named insured on the policy) and my insurable interest is 50% of the equity in the building. Therefore, the contract of insurance is only between me and the insurance company. Since I only own 50% of the equity in the building, the insurance company will only pay my insurable interest in the property loss; in this case, 50% of the $500,000.00 in damages for a recovery of $250,000.00.
It is therefore imperative that all parties to a simple partnership be named on the policy of insurance covering property where multiple equity partners are involved. This can be facilitated with an “Additional Named Insured” endorsement that can be added to the property policy to modify coverage and protect the interests of all equity partners. As always, you should make full disclosure of the ownership, use, occupancy and value of property to your insurance agent or broker when making application for property insurance coverage.