Real Estate Organizational Risks

Transcription

1 Aon Risk Solutions Real Estate Organizational Risks Avoiding gaps in coverage when insuring non-traditional organizational structures June 2015 Risk. Reinsurance. Human Resources.

2 Investors in the real estate industry will utilize a number of strategies in an attempt maximize return while minimizing possible risk in the acquisition and ownership of real estate assets. One such strategy is the use of complex business structures, through which investors are able to address their specific objectives. Depending on the structure employed, investors might take advantage of tax benefits or exemptions, protect personal assets or share the risk of a real estate enterprise between two entities. This strategy is commonly used in combination with the purchase of insurance to create a comprehensive risk management approach. The more commonly seen business structures in the real estate industry include: traditional corporations; real estate investment trusts (REITs); joint ventures; general and limited partnerships; and, real estate investment corporations under s. 149 of the Income Tax Act. The type of structure used by an investor will depend on a number of factors, but is often influenced by the benefit that investors are looking for the structure to provide. However, while substantial consideration is often given to the business structure used, too often, not enough attention is paid to whether an organization s corporate insurance program has been structured appropriately to provide coverage as intended. Many insurance policies are constructed to address the risks of a traditional incorporated organization with directors, officers, and employees, but, without bespoke wording, may not fully capture the risks and liabilities unique to alternative organizational structures such as REITs, joint ventures or general and limited partnerships. An inadequately drafted insurance policy can lead to gaps in coverage and issues when an insured tries to make a claim, so it is important to ensure that an insurance policy is designed to properly respond to the organizational structure in place. Examples of Possible Issues When Insuring Alternative Organizational Structures The importance of having a properly drafted insurance policy was illustrated in 2009 in a U.S. federal appeals court judgment against American Electric Power Co. (AEP). In this case, AEP attempted to insure a newly acquired corporation and its subsidiaries under an existing fidelity liability insurance policy. When loss resulting from employee theft was discovered at two of the new subsidiaries, the insurer denied coverage on the basis that the policy only covered true corporations and did not capture other types of subsidiaries, such as the limited liability corporations (LLCs) that were victims of the theft. The court ultimately upheld the position of the insurer. Thus, although AEP had intended its insurance to respond in this type of situation, it was left without insurance coverage for the employee theft at the subsidiary LLCs. Similar issues can arise where an insured is attempting to obtain coverage for its affiliated organizations, which are typically viewed as sister corporations with a common parent company. If an endorsement is not added to an insurance policy to explicitly extend coverage for affiliated companies, they will generally not meet the ownership requirement that would allow them to benefit from coverage provided for subsidiaries. Finally, insuring a partnership can also be tricky, with the potential for gaps in coverage if a policy is not properly drafted to reflect the partnership s decision making arrangement. Aon Risk Solutions Real Estate Organizational Risks: Avoiding gaps in coverage when insuring non-traditional organizational structures 1

3 Structuring Your Organization s Insurance Program There could be any number of potential issues that must be addressed when adapting insurance policy language to different business structures, however, the following items are a few key considerations regardless of the organization being insured: Nomenclature The use of incorrect terminology to describe the individuals or the organization covered by an insurance policy could result in those insureds inadvertently being denied insurance coverage. The nomenclature used should accurately reflect the individual insureds as trustees, partners, advisory board members, committee members or others. Subsidiaries and ownership interest As demonstrated in the AEP case, the way that coverage is extended to subsidiaries is important and attention needs to be given to how a subsidiary is defined. In addition to utilizing the correct terminology to include all intended subsidiaries, it is important to understand that insurance coverage is often extended to a subsidiary based on a threshold ownership interest being met by the named insured. Employee-specific insurance issues There may be instances where an organization utilizes employees that are formally employed by another entity. When this is done, the non-employer organization might be vulnerable to theft at the hands of these individuals, but have no coverage under its commercial crime insurance policy because the individuals are unlikely to qualify as employees. General Insurance Considerations Regardless of the type of business structure, Aon recommends an in-depth review of insurance policies by an experienced broker before they are purchased, to ensure that they will respond as expected. Insurance policy base wordings are often written with the intent of covering off general risk associated with traditional corporate business structures, but are not necessarily tailored for all of the organizational structures utilized by the real estate industry. Aon has developed a number of proprietary, industry-leading policy wording amendments for its real estate clients to reflect these unique business structures and we can assist your organization in understanding the nuances of a policy s language and the extent of coverage that it will provide, to avoid unfortunate outcomes such as that experienced by AEP. The end result is a policy wording tailored to meet your specific business needs and provide comfort that your organization is receiving comprehensive insurance coverage. Aon Risk Solutions Real Estate Organizational Risks: Avoiding gaps in coverage when insuring non-traditional organizational structures 2

4 Prepared by Jennifer Drake Legal Consultant, Legal and Research Practice Contacts Brian Rosenbaum LL.B Senior Vice President and National Director Legal and Research Practice t brian.rosenbaum@aon.ca Peter Kennedy Senior Vice President and National Director Real Estate Practice t peter.kennedy@aon.ca About Aon Risk Solutions Canada Aon Reed Stenhouse For more than 150 years, in one form or another, Aon Reed Stenhouse has been a major force in the Canadian insurance industry. Aon Reed Stenhouse, operating under the brand name Aon Risk Solutions, is Canada s leading insurance brokerage and risk management services firm. We serve an extensive client base, handling more than $2 billion in annual premiums on behalf of our clients. Insurance brokerage Risk management Employee health and benefits Our 1,600 professionals serve clients from 23 offices located across Canada. We provide our clients with a wide range of innovative solutions. Each day, Aon professionals work to deliver the best solutions to our clients. Aon Risk Solutions Real Estate Organizational Risks: Avoiding gaps in coverage when insuring non-traditional organizational structures 3

5 About Aon Aon plc (NYSE:AON) is the leading global provider of risk management, insurance and reinsurance brokerage, and human resources solutions and outsourcing services. Through its more than 69,000 colleagues worldwide, Aon unites to empower results for clients in over 120 countries via innovative and effective risk and people solutions and through industry-leading global resources and technical expertise. Aon has been named repeatedly as the world s best broker, best insurance intermediary, best reinsurance intermediary, best captives manager, and best employee benefits consulting firm by multiple industry sources. Visit aon.com for more information on Aon and aon.com/ manchesterunited to learn about Aon s global partnership with Manchester United. Aon plc All rights reserved. The information contained herein and the statements expressed are of a general nature and are not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information and use sources we consider reliable, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. Risk. Reinsurance. Human Resources.