Insurance Requirements for reverse and Improvement 1031 Exchanges
Special Purpose Entity Formation
When you retain Exeter 1031 Exchange Services, LLC, a California limited liability company, and Exeter Asset Services Corporation, a Wyoming corporation, to administer your Reverse 1031 Exchange or Improvement 1031 Exchange transaction, a special purpose entity ("SPE") in the form of a single member limited liability company ("SMLLC") will be formed exclusively for your transaction.
Exeter 1031 will serve as your Qualified Intermediary ("QI"), Exeter Asset will serve as your Exchange Accommodation Titleholder ("EAT") and the SPE will serve as your legal titleholder ("Titleholder"). The sole purpose of this Titleholder is to acquire and hold or "park" legal title to either your relinquished property or your replacement property as part of your Reverse 1031 Exchange or Improvement 1031 Exchange.
Insurable Interest
The Titleholder is exposed to significant risks and liability while it is holding legal title to your real property and therefore has an insurable interest in the real property. Titleholder must be named as the primary insured on a liability and property and casualty insurance policy, as follows:
Name of Titleholding Entity
C/O Exeter Asset Services Corporation
205 Storey Boulevard, Suite 200
Cheyenne, WY 82009
(307) 222-8750
Other insurance coverage will be required when capital improvements are to be made to the real property while Titleholder is holding legal title. You also have an insurable interest and should be listed as an additional insured.
Evidence that Titleholder has been named as the primary insured, the insurance coverage meets Titleholder's minimum insurance coverage requirements, and the insurance coverage has been paid and is in full force and effect no later than the closing date must be provided to Titleholder for its review and approval prior to it acquiring legal title to your real property.
Required Insurance Coverage
The amount of liability, property and casualty, and other insurance coverage required by Titleholder in a specific Reverse 1031 Exchange or Improvement 1031 Exchange will vary based on its risk assessment of holding legal title to the real property. However, the following guidelines can be used as an estimate for your insurance requirements.
Liability Insurance
Commercial liability insurance coverage naming Titleholder as the primary insured must be obtained and in effect no later than the closing. The liability insurance coverage must cover liability for death, bodily injury and property damage resulting from the use, occupancy, possession and maintenance of the real property.
The minimum commercial liability insurance coverage requirements are:
- $500,000 for single family residential properties (SFR), condominiums, and duplexes;
- $1,000,000 for multi-family residential properties in excess of two (2) units;
- $2,000,000 for commercial, industrial, retail, office, and land with a fair market value of less than $5,000,000; and
- $5,000,000 for all other commercial properties.
The deductible cannot exceed a reasonable and prudent amount. Titleholder reserves the right to require higher liability insurance coverage limits in its sole and absolute discretion.
Property and Casualty Insurance
Property and casualty insurance coverage naming Titleholder as the primary insured must be obtained and in effect no later than the closing. The property and casualty insurance coverage must cover any loss or damage to the real property, including all improvements or structures thereon, in an amount equal to its replacement cost. The deductible cannot exceed a reasonable and prudent amount. Titleholder reserves the right to require higher liability insurance coverage limits in its sole and absolute discretion.
Course of Construction Insurance
Course of construction or builders risk insurance coverage must be in place prior to any improvements being constructed on the real property during the time Titleholder is holding legal title. The amount of coverage will be determined by Titleholder after reviewing the extent and scope of any planned improvements.
Workers Compensation Insurance
Proof of workers compensation insurance is required for each contractor and subcontractor prior to any improvements being constructed on the real property during the time Titleholder is holding legal title.
Primary versus Excess Insurance Coverage
The evidence of insurance must indicate that it is primary insurance and that any other insurance coverage maintained shall be considered excess coverage.
