Please help with insurance!

[Dima A.]

Hi everybody, I'd like to get some feedback on an insurance question I am struggling with.

Here's the situation: I am 33% member in an LLC that owns and rents real estate. For simplicity, let's say we have a 60k home with a 60k mortgage. We have home insurance, with a personal liability policy of 100k. The kicker is that every member is personally guaranteed on the 60k loan to the bank.

The question is this, if the LLC is sued by a tenant for whatever reason, for let's say for 500k in damages. What will happen??

My understanding is this: the insurance policy will cover 100k of the damages, and we loose the 60k home (lets say our only asset) to the party suing us, but no more because of the limited liability provision (assuming we did not do anything grossly negligent, etc) and the company is bankrupt.

But because we members are personally liable for the loan, wouldn't each member be stuck having to pay 20k to the bank?

How can one protect from such an incident? Is that what umbrella insurance policy covers? Will ANYTHING cover such an event?

Thank you for all your help in advance!

[Andy J.]

Firstly, you may want to consider placing the home inside a trust with your LLC as beneficiary. It will mask the true ownership of the home, not a foolproof strategy but may discourage a lawsuit and/or make it harder/more expensive for someone to pursue. I believe the only way to reveal the beneficiaries is to subpeona the trustee (whom I would recommend not be you or your partners, I use friends out of state).

It would be unlikely that you would lose the house in that situation. If it is mortgaged to the full extent of its value it brings no benefit to the litigant, unless they really want to become a landlord with no equity and poor cash flow. They could take ownership interest in your LLC, again though if all you have in this LLC is a fully encumbered property it's unlikely they want it.

I would also recommend Bronchick's wealth protection strategies, some very insightful options to encumbering your property.

Secondly, you need to raise the liability insurance on your property. I have $1 mil. liability per entity (not per house), I believe the cost is around $100/year. $100k liability gets eaten up pretty quickly in a slip and fall lawsuit.