How much insurance is recommended?

8 Replies

Hello all! Just signed up yesterday...

First post, first question:

I'm a newbie, looking at a 1 BR condo I can get fairly cheap, and the rent payment would cover the mortgage payment right away, making it cash-flow positive...

But I'm terrified of the nightmare scenario where someone falls down the stairs, breaks their leg, etc, or whatever the scenario, and I get sued and get wiped out financially. How much insurance is a safe amount to cover such an event? I'm guessing maybe $300k-$500k, but I'm not sure if that's on the high side, or maybe not quite enough. What would you folks advise when it comes to protecting yourself insurance-wise?

Set up a LLC and transfer title to the property to the LLC to avoid personal liability. Conduct all business in the name of the LLC. Secure insurance coverage in the name of the LLC.

I have $500K in primary liability coverage on each property plus an umbrella policy of $1M covering all properties. Umbrella coverage kicks in if and when you exceed primary liability coverage. Bumping coverage up to higher dollar levels is inexpensive. Umbrella coverage is cheap because it's rarely needed but it helps you sleep at night. 

@Terry France Most people will usually go with a $500,000 Liability Limit, Some will go higher, if it is available. It's always good to have an Umbrella or Excess Liability Policy in place. Just in case. as @Account Closed mentioned, it does help you sleep at night. 

However, not all policies, umbrella or otherwise, are the same. It is important to make sure the coverage you have in place fits your needs, goals, and risk tolerances. 

@Terry France ,

Nobody can answer this question because it is highly dependent on your situation. You can't predict what you will be sued for so you don't know how much will be enough. Covering your net worth is a good start, but if you lose a lawsuit for something akin to releasing a sex tape of Hulk Hogan then no amount of insurance will be enough. I agree with keeping your assets separated and then buying as much insurance as you can comfortably afford. That should protect you against the vast majority of realistic threats. But you never know...

Exhaustion is an insurance concept. If you set up a LLC as I stated earlier and your insurance coverage was exhausted - assume you have $500K in primary coverage and $1M in umbrella (excess) coverage and your tenant got a judgment in court against the LLC for more than $1.5M - it won't hurt you personally. The insurance company would pay out $1.5M - the limits of your coverage. Only the assets of the LLC would be available to pay the judgment. But your personal assets are safe. This is why the use of a LLC is so important.

Thanks for all the great responses, guys!

@Terry France it really depends on how much assets you're trying to protect right now. The LLC is more important for things that insurance won't cover, such as fraud or other intentional conduct, or even tax or utility liens. But if you're primarily concerned with an injury, 300-500k should be fine. If you have a lot of assets, then think about taking out an umbrella. If not, lawyers are not going to want to waste time and money to go all the way to verdict to try to get a couple thousand dollars from you. In the vast majority of cases, injury victims will take the insurance money and settle. And as you become mega-rich, you can add coverage.

This is not to be construed as legal advise, just my experience in the field.  Feel free to message me if you have any questions.

@Simcha, 

Not a lot of assets right now... I'm setting a target date to buy my low priced property by About January to February 2017, after getting all my ducks in a row. And yes, my main concern is just basic injury, slip-and-fall type of situations, where a shady tenant might try to sue me to get some money out of me. So I'm thinking I might start with something in the 300-500k range, and as I add other properties, maybe add that umbrella policy that Jim suggested above. 

@Terry France That is my plan, as well.  (It fits with my understanding of personal injury law based on my practice/experience in the field.)

I only mention the lien thing because I recently read an old post of some guy trying to get rid of a property, but it's unsellable and the city won't even foreclose on it (they have a lien for code violations (long grass or something)), and he's technically still on the hook for the lien - they tried to take away his driver's license.  That's something that concerns me, but I don't think I'm going to do anything about it yet...

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