How do you, as a landlord, further protect yourself from fiscal responsibility while managing expenses so that you can continue growing your rental business?
Today, I’ll explain why umbrella insurance policies can ease fears by newer single-family real estate investors of having a need for separate Limited Liability Companies for each individual rental property.
What Is Umbrella Insurance?
Landlord insurance provides standard coverage on three components – property damage, loss of rent, and liability.
Umbrella policies pick up where landlord insurance end and primarily come into play for investors as the number of properties under management grow and the need for extra liability protections arise. These policies provide additional coverage above and beyond standard landlord liability insurance.
However, they are not all-encompassing protections against anything that may happen to your property, your tenants, or incidents occurring on the property. Umbrella insurance can provide additional coverage for injuries, property damage, certain lawsuits and personal liability situations.
If you find yourself on the receiving end of a liability claim or lawsuit greater than your standard policy provides, your umbrella coverage can mitigate the financial damages you are responsible for up to the policy limit. Additionally, most legal expenses are covered on top of your policy amount, and you’ll have the insurance’s legal team as support.
What Doesn’t Umbrella Insurance Cover?
Umbrella insurance will not cover damages or liabilities arising from normal wear and tear or if the policy holder is found at-fault. It will also not cover anything that is not explicitly included on your coverage, such as criminal acts and omissions, personal belongings, and oral contracts.
LLC’s or Umbrella Policy?
It is generally advisable to create layers of protection for your rental properties. As your portfolio grows in value, liability protection needs to be a conversation you have with your attorney and CPA.
LLC’s and umbrella policies, both offer liability protections, but function slightly different in the coverage they provide you.
Let’s say you own an SFR worth $250,000 and someone injures themselves on the property through no fault of your own and sues you for $150,000. If you have the property under an LLC, the LLC would pay $150,000. If the insurance policy has liability coverage of $1,000,000 with $10,000 deductible, you would pay the deductible out of pocket and insurance would cover the remaining amount. It would be more advantageous to have umbrella coverage in this case, as you would be out $10,000 instead of $150,000.
Continuing with the above in a worst-case scenario, let’s say there was a fire on your property and you were found to be negligent. The fire caused bodily harm to a tenant and they won a $3,000,000 judgement against you. The insurance would payout $1,000,000 and the LLC would be liable up to the value of the property, $250,000. Total monetary loss would be $1,250,000. If the owner only had an umbrella policy and no LLC holding title to the property, the property owner would be accountable for the full $3,000,000 judgement.
Do Real Estate Investors Need Umbrella Insurance?
Investments are inherently risky. It would be wise for investors to look into methods that adequately protect their personal assets in order to preserve their wealth. As always, reach out to your attorney, accountant, insurance broker, and anyone else you trust to assist you in legal and financial matters when expanding your real estate investing business.
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