LLC and Insurance question

9 Replies

Hello everyone ! 

I sent in the paperwork to form my LLC. My question is regarding the insurance on the property. What type of insurance are you putting on your (in my case) Two Family -do I need an umbrella policy ? I do have a good amount of personal assets I need to make sure I am protected

Also, sneaking in a second question. My first deal is by mean of convential financing (20% down) I have read that a bank may flown upon having the loan in the name of the LLC even with a PG -thanks

@Mark DiGioia , the LLC should be adequately insured from a liability stand point. If you have no insurance it will just give them ammunition to try and set it aside. If you put the property in the LLC and it is properly formed and operated then your personal assets should be protected. Nothing is bullet proof, but barring illegal or egregious action on your part you should be fine.

I'm not sure what your asking with your second question.

@Edward B. thanks Edward-the second question I was referencing financing and the banks frowning upon giving the loan to an LLC even if I give them a personal garantee (PG)

Oh yeah, @Mark DiGioia , they always put a Due on Sale clause in the mortgage docs. It just protects them if you transfer the beneficial interest in the property, which is exactly what you are doing if you move the property into an LLC. Makes sense really because the LLC is not who they vetted and lent to, but the reality of the situation is that they very very rarely ever exercise their right to accelerate the mortgage because of that. And if they do they will probably give you the opportunity to remedy it (transfer it back into your name). You just need to understand that they are perfectly within their right to accelerate the mortgage and do not have to let you remedy it because you violated the contract, or at least that clause of the contract. It's a risk, just like anything and you need to understand and be prepared to deal with it.

If you have a good amount of personal assets you probably will need an umbrella policy regardless of your rental. An umbrella policy provides excess liability coverage above and beyond your underlying policies for those worst case scenarios. You want to make sure you have more liability coverage than what your net worth equals. 

With your rental I would find out from your agent what the highest liability coverage that is available. Most companies will max out at $500k then you need to rely on an umbrella policy for additional coverage. Make sure you let your agent know that the property is held in an LLC when setting up the insurance policy so they provide protection to the LLC.

Buy the property under your name & put in into a land trust. Then move the land trust into your LLC. This avoids the due on sale clause as land trusts are not recorded. On the insurance issue you list your LLC as an additional insured on the policy.

@Mike Mosee , this does not avoid the due on sale clause, it obscures it. As soon as you assign the beneficial interest of the trust to the LLC you have most likely violated the clause. This is a strategy to hide what you have done, not a legal method of circumventing the clause. People using this strategy need to understand that if the lender finds out, they can still accelerate the mortgage. And if you do not do it properly, it is easy to accidentally dime yourself out to the lender.

@Edward B. Good point on obfuscation vs avoids.

Also adding the LLC as additional insured is not effective, as the policy reads that the additional insured is only covered for the acts of the “named insured.” Meaning if John Doe was the named insured and original title holder, then signs the title over to Doe,LLC, but only adds Doe LLC as an AI not a named insured. Then a liability claim happens and Doe,LLC was negligent...

John Doe’s Policy listing Doe,LLC would not defend or pay damages as John Doe was not negligent in the claim. And since John Doe was not party, the additional insured does not respond.

Then on the other side, place burns down and the named insured is John Doe, additional insureds don’t apply to property losses (only liability). Claim denied, no insurable interest of the policyholder (the LLC owns it, not John Doe)

Truly mind boggling the bad law and insurance advice given on this forum.

There is no free lunch.

@Derek Lacy , the trust would be the named insured for the fire policy since it actually owns the property. Based on what you are saying, though, the LLC would still need it's own liability policy as being listed as an additional insured by the trust policy would not cover it. Is that correct?

I ask because one of the most popular ways of diming yourself out is to change the named insured to the LLC. The lender tracks this information because they want to ensure that their underlying security is insured and they will be informed when you change the named insured.

thanks for the information. It is hard to determine what is the best option. I just spoke with Liberty Mutual they quoted $ 2,009 annually for the two family which covers up to 500K I already have an umbrella for personal through them along with Auto and home so they would add the 2 Family to that and bring the total to 1.5 Million- the issue I still seem to have is LLC or not -feedback it really doesnt look like it protects me -So buying the home in the LLC's name with a personal garauntee is not an option? I know banks arent high on lending this way but with 20-25% down ? and a PG ?

Free eBook from BiggerPockets!

Ultimate Beginner's Guide Book Cover

Join BiggerPockets and get The Ultimate Beginner's Guide to Real Estate Investing for FREE - read by more than 100,000 people - AND get exclusive real estate investing tips, tricks and techniques delivered straight to your inbox twice weekly!

  • Actionable advice for getting started,
  • Discover the 10 Most Lucrative Real Estate Niches,
  • Learn how to get started with or without money,
  • Explore Real-Life Strategies for Building Wealth,
  • And a LOT more.

Lock We hate spam just as much as you

Create Lasting Wealth Through Real Estate

Join the millions of people achieving financial freedom through the power of real estate investing

Start here