The recent California wildfires have been a devastating reminder of how important it is to ensure your homeowner's insurance policy aligns with the ownership of your home. Unfortunately, many families are discovering this hard lesson after being told their claims won't be paid because their insurance policies don't name the correct legal owner of their homes.
Here's what's happening: many homeowners transfer their properties into a revocable living trust as part of their estate planning. This is a smart move, as it helps avoid probate and provides for a smooth transfer of assets upon death. However, some forget to update their homeowner's insurance policy to reflect the trust as the legal owner of the property. When the insurance policy names only the individuals and not the trust as the insured, it creates a potential problem.
The Risk of Rescission
If your home is destroyed in a wildfire—or another disaster—your insurance company will review your policy to confirm everything is in order before paying the claim. If they find a discrepancy, such as the named insured not matching the legal owner (in this case, the trust), they may attempt to rescind the policy.
Rescission is a legal mechanism that allows insurers to void your policy as though it never existed. They can justify rescission if they find "material false statements" on your application—statements that don't have to be intentionally false but are significant enough to affect the insured risk. This could mean your claim is denied, leaving you without financial protection when you need it most.
Fixing the Problem After the Fact
While it's sometimes possible to address this issue after a loss, it often requires hiring a lawyer and potentially filing a lawsuit. This can be both expensive and stressful, especially when you're already dealing with the loss of your home. The good news is that this problem can easily be avoided with proactive planning.
How to Protect Yourself
If your home is held in a revocable living trust, here's what you need to do:
- Notify Your Insurance Company: Contact your insurance provider and inform them that your home is owned by a revocable living trust.
- Add the Trust as an Additional Insured: Request that the trust be listed as an additional insured on your homeowner's insurance policy. This ensures that the legal owner of the property (the trust) is properly covered under the policy.
- Verify Coverage Details: Double-check your updated policy to confirm that the trust is listed correctly and that the coverage remains intact.
- Review Annually: Life changes, and so do insurance policies. Make it a habit to review your homeowner's insurance coverage annually or whenever you make changes to your estate plan.
The Bottom Line
Taking the time to ensure your insurance policy reflects the legal ownership of your home can save you from devastating financial consequences in the event of a disaster. Adding your revocable living trust as an additional insured is a simple but critical step in protecting your family and your assets.
If you have questions about your trust, insurance policies, or estate plan, reach out to an experienced attorney who can guide you through the process and help you avoid costly mistakes. Proactive planning now can prevent major headaches—and heartaches—down the road.
