WHAT IS AN UMBRELLA POLICY?

Question

I keep hearing if you buy property under your name put them under umbrella policy, what is an umbrella policy?

Nathan Gesner · Answer

David nailed it. Every property you purchase will have its own insurance policy, to include liability. If a renter decides to sue you for a slip-and-fall or something, your liability insurance covers the loss.

If you have $500,000 liability and the tenant sues you for $2,000,000 then you would have a problem. So an umbrella policy provides additional coverage above and beyond what your standard liability policy will cover AND it's one policy that covers every property under it. Rather than increasing liability coverage on ten properties, you can purchase a single umbrella policy that covers all of them.

Here's the thing: umbrella insurance is cheap because it's almost never needed/used. Insurance companies are in the business of making money, not paying it out. Do you know what percent of Landlords are ever sued? What percent of them actually lose? What percent of them lose so much that their default liability insurance doesn't cover the loss? I don't know the numbers but I know you probably have a better chance of dying from a virus imported from China.

David M. · Answer

@Edward Adams

An umbrella policy is a liability policy that kicks in OVER an existing liability policy. It is usually in $1M increments to $5M in coverage.

Its is crucial to understand that you need an underlying liability policy. For example, a regular homeowner/landlord policy or auto policy has liability coverage. You don't even need a rental. Anybody can buy an umbrella policy for probably around couple hundred dollars a year to provide additional liability coverage in case they were sued. The umbrella policy is relatively very cheap because the underlying policies, even $500k of coverage, have already addressed what the insurance companies considered the high risk area. In the case of a lawsuit, the umbrella policy kicks in when the underlying coverage is exhausted.

That is the "advantage" of owning the properties under your personal name. The one umbrella policy covers everything, both your rentals and your personal policies. if you purchase the rentals under a legal entity like a LLC, you should need an umbrella policy for each LLC. One has to remember the policy is issued to the insured party, not to just anything that is intended to be covered.

Hope that helps. Good luck.

WHAT IS AN UMBRELLA POLICY?

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