Liability and Property and Casualty Insurance Coverage Requirements
Special Purpose Entity Formation
When you retain Exeter Asset Services Corporation, a Wyoming corporation, to serve as your Exchange Accommodation Titleholder in the administration of your Reverse 1031 Exchange and/or Improvement 1031 Exchange transaction, Exeter Asset Services Corporation will form a special purpose entity ("SPE") in the form of a single member limited liability company and disregarded entity ("SMLLC") exclusively for your transaction.
The sole purpose of this SPE is to serve as the titleholder that will acquire and hold or "park" legal title to either your relinquished property or your replacement property until your relinquished property can be sold in a Reverse 1031 Exchange or to "park" legal title to your replacement property while the construction or improvements are completed as part of your Improvement 1031 Exchange.
Insurable Interest
Exeter Asset Services Corporation through this new SPE will acquire and hold or "park" legal title to the designated property ("parked property") for up to 180 calendar days. The simple fact that the SPE is holding legal title to the parked property exposes the SPE to potential risk and liability. Exeter Asset Services Corporation and the SPE have an insurable interest in the parked property.
Therefore, insurance coverage is required to be in place and paid in full naming Exeter Asset Services Corporation and the SPE as the insureds before they will acquire and hold or "park" legal title to any property. Evidence of insurance coverage such as an insurance binder must be reviewed and approved by Exeter Asset Services Corporation before closing will be authorized.
The investor should also be listed as an additional insured because they have an insurable interest in the parked property as well.
Required Insurance Coverages
The amount and type of insurance coverage required by Exeter Asset Services Corporation will vary based upon the type of 1031 Exchange and the risk assessment of potential liability. However, the following guidelines can be used as an estimate for your insurance requirements.
Property and Casualty Insurance
Property and casualty insurance coverage naming Exeter Asset Services Corporation and the SPE as the insured must be obtained prior to the closing. The property and casualty insurance policy must include coverage in an amount equal to the parked property's replacement cost. The deductible cannot exceed a reasonable and prudent amount.
General Liability Insurance
Commercial liability insurance coverage naming Exeter Asset Services Corporation and the SPE as the insured must be obtained prior to the closing. The commercial liability insurance coverage policy must cover liability for death, bodily injury and property damage resulting from the use, occupancy, possession and maintenance of the parked property.
The minimum commercial liability insurance coverage requirements are $500,000 for single-family residential properties (SFRs), condominiums, and duplexes; or $1,000,000 for multi-family residential properties; or $2,000,000 for commercial, industrial, retail, office and land with a fair market value of less than $5,000,000 or $5,000,000 for any and all other commercial properties. The deductible cannot exceed a reasonable and prudent amount.
Course of Construction Insurance
Course of construction or builders risk insurance coverage must be in place prior to beginning any construction or making any improvements to or on the parked property. The amount of coverage will be determined by the EAT after reviewing the extent and scope of any planned construction or improvements.
Workers Compensation Insurance
Proof of workers compensation insurance coverage is required prior to any employee or agent of any developer, contractor or builder commencing construction on the parked property, or any other service provider beginning any work on the subject property.
Primary versus Excess Insurance Coverages
The evidence of insurance must indicate that it is primary insurance and that any other insurance coverage maintained shall be considered to be excess coverage.
