Insuring Property Owned by a Holding Company

Why ownership matters to an insurer

An insurance policy is a contract with the people and companies named on it. When a building is owned by a holding company, the holding company is the one with something to lose if it burns down. So the holding company needs to be on the policy. That sounds obvious, but it’s one of the most common gaps in a business owner’s insurance.

Ontario business owners often hold real estate through a holdco for tax, liability and estate reasons. Those are decisions for your accountant and lawyer. The insurance job is to make sure the policies follow whatever structure they’ve set up.

Named insured versus owner: the most common gap

Here’s how it usually happens. You buy a rental property, a cottage or a small commercial building in your own name and insure it that way. A few years later, your accountant moves it into a holding company. The deed changes. The insurance doesn’t.

Now the policy names you, and the property belongs to a corporation. After a loss, the insurer can question whether the named insured had an insurable interest in the property. There’s a well-known Supreme Court of Canada case on exactly this point, Kosmopoulos v. Constitution Insurance (1987). The owner won in the end, but it took a trip to the Supreme Court to get there. Nobody wants a claim that depends on that.

The same mismatch shows up in other forms:

• The policy names the operating company, but the holdco owns the building.
• The policy names an old numbered company that was amalgamated or renamed.
• A family trust owns the property, and the policy names one family member.
• Two holdcos own the property together, and only one is named.

The fix is simple once it’s spotted: the owner on title should be a named insured. If other parties have an interest, such as you personally, your operating company or a family member, they can usually be added as additional named insureds.

A building owned by your holdco and leased to your operating company

This is the classic setup: the holdco owns the building, and the operating company rents it. Two companies, two policies, one building. Each policy has a job.

The holdco (landlord) usually needs:

• Property coverage on the building, insured to its rebuild cost, not its market or assessed value.
• Rental income coverage, so the holdco keeps receiving rent if a fire shuts the building and the operating company can’t pay.
• General liability as the property owner, for things like a slip on an icy parking lot.

The operating company (tenant) usually needs:

• Coverage for its own equipment, inventory and contents.
• Coverage for improvements and betterments: the build-out, fixtures and renovations it paid for.
• Business interruption coverage for its own lost income.
• General liability, with the holdco named as an additional insured.

The lease ties it together. It should say who insures the building, who insures the improvements, what limits each side carries, and whether each waives its right to sue the other for insured losses. Many leases between related companies are a page long or were never written down. Take the time to write a proper one; it helps at claim time.

Additional insureds and mortgagee clauses

Two pieces of wording come up constantly with holdco property.

Additional insured. This adds another party to a liability policy so it’s protected for claims arising from the named insured’s operations. A holdco landlord is commonly added as an additional insured on the operating company’s general liability. It isn’t the same as being a named insured, and it doesn’t give the additional insured coverage for its own separate activities.

Mortgagee clause. If there’s a mortgage on the building, the lender is shown on the property policy under a mortgage clause. Under the standard mortgage clause, the lender’s interest can still be protected even if the owner did something that would otherwise void the coverage. Lenders check this. The lender’s name and address need to be exactly right, and if the property moved into a holdco, the lender’s documents and the policy should both reflect the new owner.

When you’ve signed personally

Lenders and landlords often ask a business owner to sign personally for a holdco mortgage or a commercial lease. That ties your personal finances to the building. If it’s underinsured, or a claim is denied because of a named insured mismatch, the shortfall can land on you. It’s one more reason to keep the building insured to value and in the right name.

Umbrella alignment

A personal umbrella is written for property and vehicles you own personally. It usually doesn’t cover a building owned by your holding company. So holdco property needs its own liability limits, and often a commercial umbrella or excess policy above them.

Then check that the layers line up. The holdco’s general liability should carry whatever limit its commercial umbrella requires. The operating company’s liability should meet both its own umbrella requirements and any limit the lease specifies. If the holdco owns a cottage or a rental home, make sure it isn’t left off both the personal and the commercial umbrella because each side assumed the other had it.

Where your business and family policies overlap

Holdco property is the overlap. In one review, Steve might find a cottage in a holdco insured under your name, a rental in a numbered company that no longer exists, a building leased to your company with no written lease, and a personal umbrella expected to cover all of it. What he checks:

• Title versus named insured on every property.
• The lease between holdco and operating company: who insures what, at what limit.
• Additional insured and mortgagee wording, with the correct names.
• Rebuild values, not market or assessed values.
• Umbrella coverage on both the personal and the business side, with underlying limits that match.
• Planned changes: transfers, refinancing or a sale that will change ownership.

How Steve works on this

Steve starts by asking for the deeds or parcel registers, the leases and the policies, and lays them side by side. He walks you through what each policy covers and doesn’t, explains the shortcomings plainly, and gives you options and his professional opinion. He places business with more than 20 insurers, which helps when a structure is unusual. If your accountant or lawyer is planning a restructuring, bring Steve in before the transfer closes so the insurance changes on the same day. And before each renewal, he calls to ask whether anything has moved, been bought, sold or refinanced.

If your holding company owns property, a review of who’s named where is worth an hour.