Insuring multiple LLC's on the Same policy

[Eagleeye]

If you do insure multiple LLC's on a single policy, does this now comingle the LLC's together and allow a lawsuit to access all of the LLC's assets collectively now?

[jimmyr1978]

I'm not an attorney, but I'm 99.9% sure that an insurance policy has no bearing whatsoever on a plaintiff's right to sue all entities. If they did, defense should be able to easily dismiss the suit for entities unrelated to the claim - the insurance policy doesn't create vicarious liability between the entities; it has to exist already. The only potentially negative result is that you would effectively erode limits for all entities on a policy if one has major claims. An umbrella policy should help with this problem.

I've actually had insureds buy this line from other agents competing for the business. I quickly know then I will retain it, as the competition doesn't understand it! If all entities aren't listed, and an unlisted entity is named in a suit, guess who doesn't get defended? Or, at least, guess who gets defended by your E&O policy!

[Eagleeye]

I understand your response, but still have a question on this. I was told by a company underwriter that when you have multiple LLC's on one insurance policy that you have now comingled their assests because the insureds have combined their liabilities together. (Hence the dilution of Liability Coverge between Insured's). In addition, they are paying for their insurance policy with different accounts which further combines their assets as a sharing devise. This then allows a Judge, in a court of law, to allow the plaintif's attorneys to combine ALL ASSESTS of ALL LLC's in the law suit, even if only one is actually being sued.

[msquire]

Eagleeye, the underwriter was referring to the kinds of evidence a court will consider when determining whether or not to "pierce the corporate veil". Normally we consider the corporate veil as a legal concept protecting individual investors/shareholders from personal liability for the corporation's obligations, but where multiple LLCs have been created in order to protect each from the liability of the other, the concept applies as well. Yes, a business entity's insurance policy is an asset, and evidence that multiple LLCs have so intertwined their assets as to be covered under the same insurance policy could be one factor used to support piercing the corporate veil between them. The bottom line is that this is a legal analysis that would probably be more safely (for you) analyzed by an attorney.

[Eagleeye]

msquire, thank you for the response and also to jimmyr. I do have one last follow up question that was brought up in our innner-office discussion as well. If the multiple LLC's have different % breakdown of ownerships or different ownerships all together, does this make any difference. An example would be that Joe has 25% ownership, Tom has 25%, and Larry has 50% in ABC LLC. Joe has 40% ownership, and Tom has 60% ownership in EFG LLC. And last Larry has 75% ownership and Tom has 25% ownership in XYZ LLC. Do we now have a different outcome? and/or Does this not make a difference in the view of the situration? We have discussed this with some companies already and they WILL NOT insure this situation on one policy. They must be on 3 poilicies.

[jimmyr1978]

Some underwriters may be nervous about disparate ownership groups on one policy, and if the operations of each entity are different, then it most likely would NOT make sense to combine all into one policy. For example, a real estate developer uses one entity for general contracting/development, while other entities are the owners of specific properties. This would almost always require separate policies. We have several clients like this.

Most large real estate schedules, REITs, commercial property managers, etc., will have one policy for hundreds of entities, most of these having completely unrelated ownership interests. In most cases, the only "tie that binds" is the management company. However, usually the entities' operations are similar, i.e., commercial building operations. This is a common practice amongst the largest brokerage houses in the country (Marsh, Aon, et al).

I've never heard of an insurance policy being used to pierce a corporate veil, but I guess using it as one element in a preponderance of evidence would make sense. An attorney would have to jump in to explain this better.

To follow up to my original response, my question would be how related are the entities in the first place? Are the operations similar? Is it necessary to commingle the liability insurance due to entities sharing employees, resources, operations, etc.?

[Temblor]

In the example given, the three LLC's do not have majority common ownership and thus are not combinable.

In certain situations, as the example given of large real estate schedules, the management co. has the contractual responsibility to manage all the properties and to purchase the insurance. In this case, where there is contractual responsibility the properties are combinable under one policy (even for small and medium size agencies) with the management co. as the lead named insured.

Doing this has nothing to do with piercing the corporate veil.

[Eagleeye]

Tembler, thank you for your response. So, what you are saying is that if you have common ownership you can insure them on one policy, (as we thought in our agency) however, if there is different ownership then you can not combine them. We are looking for something in writing from somewhere to back us up on this. Where can we find THIS in writing? Thank you again for your response.

[LadyBroker]

You won't necessarily find it in writing, but you will find it in the declinations you get from the insurance carriers when you try to place this risk with them. I have several policies that have multiple LLC's, BUT one entity is the majority owner of each LLC, so the interests are combinable, for the insured property. I have never had anyone suggest that by writing one insurance policy, the LLC"s are now combined through the magic of insurance.