Umbrella insurance or LLC for rental

Real Estate Broker · LA & ORANGE COUNTY CA -Multi Family · Member since 2016 · 374 posts · 132 votes

I'm trying to be extra cautious incase something happens at my rental in which I would need more coverage. My friend put his rental in a LLC and he states it will cover him if there is a lawsuit etc. My realtor was recommending an umbrella insurance coverage of a million dollars. Which is the best way to go? Currently I own one SFR but do plan on purchasing more soon. Please advise my fellow BPrs thanks!

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Bryan O.

Specialist · Lakewood, CO · Member since 2014 · 1k+ posts · 1k+ votes

@Varinder Kumar they are 2 different types of protection. The LLC can protect your personal assets from suits arising from assets owned by the LLC. The umbrella can help if the veil is pierced, but it also protects your LLC assets from suits arising from you personally. Here are 2 examples:

Slip and Trip Suit: Everyone's favorite example. A fall on the property and a suit. They can get assets in the LLC and no more
You run over a pedestrian in a crosswalk: Personal suit that can extend right into every interest you own (all of your LLCs). Umbrella absorbs the costs before your LLCs

These are not necessarily either-or strategies. They are complimentary and directional. LLCs protect from the outside in. Umbrella protects from the inside out. Look at your situation, understand your personal risk tolerances, and decide what is best for you. There is no "right" answer, only what makes sense for your situation.

Personally, I recommend umbrella for everyone because it is so inexpensive. An LLC may or may not be worthwhile, but you should understand it to know if it is something you need.

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Jason Hartley
Vancouver, WA · Member since 2016 · 230 posts · 161 votes
9y
Your friend is wrong, the LLC won't necessarily protect him. It's an extra layer, but a layer that most lawyers will blast right through with ease. Plus your lender won't allow you to put it into an LLC (due on sale clause). Umbrella policy is a good idea.
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Varinder KumarPro Member
OP
Real Estate Broker · LA & ORANGE COUNTY CA -Multi Family · Member since 2016 · 374 posts · 132 votes
9y
Thanks Jason! My rental is owner occupied so umbrella ella won't affect anything with that status correct?
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Arick W.
Amarillo, TX · Member since 2015 · 23 posts · 10 votes
9y
All mine are in my llc and I have the umbrella that provides a mm per sfr.
0 Reply
Christine Swaidan
Investor · Ventura, CA · Member since 2016 · 264 posts · 70 votes
9y
No LLC's. Just a mega umbrella policy that allows me to sleep.
3 Reply
Matt H.
Real Estate Broker · CA · Member since 2016 · 243 posts · 226 votes
9y
I have some in LLCs and some not. I have an umbrella over all of them, a build your own policy that Warren Buffet himself takes the risk on I believe. In theory the LLC should protect you from a lawsuit originating from with said LLC, but not as well for someone suing you personally out side the LLC. But again, no guarantees on anything. I do have several banks that will allow me to borrow in an LLC, and have also flopped to LLC next day many times with no issue over a 15 year period and nothing has ever been called although it says they can.
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Bryan O.
Specialist · Lakewood, CO · Member since 2014 · 1k+ posts · 1k+ votes
9y
@Varinder Kumar they are 2 different types of protection. The LLC can protect your personal assets from suits arising from assets owned by the LLC. The umbrella can help if the veil is pierced, but it also protects your LLC assets from suits arising from you personally. Here are 2 examples:
- Slip and Trip Suit: Everyone's favorite example. A fall on the property and a suit. They can get assets in the LLC and no more
- You run over a pedestrian in a crosswalk: Personal suit that can extend right into every interest you own (all of your LLCs). Umbrella absorbs the costs before your LLCs
These are not necessarily either-or strategies. They are complimentary and directional. LLCs protect from the outside in. Umbrella protects from the inside out. Look at your situation, understand your personal risk tolerances, and decide what is best for you. There is no "right" answer, only what makes sense for your situation.
Personally, I recommend umbrella for everyone because it is so inexpensive. An LLC may or may not be worthwhile, but you should understand it to know if it is something you need.
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Varinder KumarPro Member
OP
Real Estate Broker · LA & ORANGE COUNTY CA -Multi Family · Member since 2016 · 374 posts · 132 votes
9y
@Bryan O. Thanks for your reply. It makes sense and helps out! How ever it looks like i am going to be creating an LLC anyway because of the flipping im going to be doing, so my private money lender funds will go through that LLC. For my rental I think im going to just stick with umbrella insurance.
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George P.
Property Manager · Livonia, MI · Member since 2011 · 4k+ posts · 1k+ votes
9y
Originally posted by @Matt H.:

I have some in LLCs and some not. I have an umbrella over all of them, a build your own policy that Warren Buffet himself takes the risk on I believe. In theory the LLC should protect you from a lawsuit originating from with said LLC, but not as well for someone suing you personally out side the LLC. But again, no guarantees on anything. I do have several banks that will allow me to borrow in an LLC, and have also flopped to LLC next day many times with no issue over a 15 year period and nothing has ever been called although it says they can.
matt, how much approximately does it cost? i have 35 and my insurance agent said her underwriter told her they can't insure more than 28 (weird number to pick) and when she tried with another company, they said I need to have them insured with them if they'll provide umbrella. the quote came back about $40k/yr.
I laughed. so how much are yours?
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Rosston Smith
Investor · Warner Robins, GA · Member since 2015 · 1k+ posts · 490 votes
9y
Get an umbrella.
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Colton Goodrich
Orem, UT · Member since 2016 · 12 posts · 3 votes
9y
@Bryan Otteson. fantastic responce. I'm a newer insurance agent and you gave a better response than even I could have summarized.
Your Umbrella will be the best value for the dollar spent if it's ever used. and it could potentially cover a few random things (vehicle rentals if you travel abroad, sometimes boat rentals, etc). check your umbrella policy language of course.

In Utah, a ballpark for an Umbrella policy would start at about $200. there's a base rate, and then that rate can increase depending on how many properties it covers, as well as personal autos and drivers etc, as that umbrella extends over your car insurance as well.

And yeah, watch out for those crazy slip and fallers. Anyone seen Better Caul Saul? Slippin' Jimmy was a con artist who staged slip and fall accidents and had is lawyer buddy rack in lawsuit after lawsuit. great show, funny example but you never know haha
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Soh Tanaka
Property Manager · Lindenhurst, IL · Member since 2016 · 854 posts · 506 votes
9y
@Bryan O. - Just to be clear in your second example of running over a pedestrian (assuming with your private car while doing non-rental activity), you need to have an umbrella on your own private car insurance, not to the rental property, correct? Umbrella on your rental won't cover the cost of running over the pedestrian while driving a private car doing non-rental activity.
By the way, I think this is the point where rarely discussed. We talk about how to protect if something happens with the rental property, but statistically speaking, it's much more likely that we'll be sued by getting involved in a car accident, get sued and lose rental properties.
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Bryan O.
Specialist · Lakewood, CO · Member since 2014 · 1k+ posts · 1k+ votes
9y
@Soh Tanaka you are absolutely right. The umbrella goes "over" all of the assets you place it on. Each item (car, property) typically has its own individual insurance, then you add the umbrella over those policies to add higher coverage and span the gaps. Thank you for pointing that out!
This is where people running LLCs for the sake of LLCs find their difficulties. Many insurance companies will insure person, but not commercial. Many that offer umbrellas will only cover those things they also provide the individual policy on. Some are more flexible than others, for example, my insurance only does personal, so when I tried to umbrella my LLC property they weren't going to do it. Once I explained that the LLC is owned by my family an no others they allowed me to provide proof of acceptable insurance and then extended the umbrella to that property as well.
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Rachelle P.
Salt Lake City, UT · Member since 2016 · 24 posts · 4 votes
9y
Originally posted by @Colton Goodrich:

In Utah, a ballpark for an Umbrella policy would start at about $200. there's a base rate, and then that rate can increase depending on how many properties it covers, as well as personal autos and drivers etc, as that umbrella extends over your car insurance as well.

And yeah, watch out for those crazy slip and fallers. Anyone seen Better Caul Saul? Slippin' Jimmy was a con artist who staged slip and fall accidents and had is lawyer buddy rack in lawsuit after lawsuit. great show, funny example but you never know haha
Hey you seem to be an expert here, so question for you. I called to get an umbrella policy and was told $40 a month for a million in coverage, but that my auto rates would go up also. They said I had to bump my deductible from $1000 to $500. What is the deal with that? And if I look to another insurance provider for the umbrella, will they give me that policy without messing with my auto rates or is that just part of how it works? Thanks!
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Anthony Lee
Insurance Agent · West Long Branch · Member since 2015 · 206 posts · 64 votes
9y
@Varinder Kumar I'm an insurance agent, not an attorney or CPA, so I cannot speak to the legal and or accounting requirements or tax benefits of a property being listed under an LLC. However, there are advantages in within both of these realms.
On the insurance side of things, everything is a matter of risk tolerance and management. With regard to the great Umbrella vs LLC debate, the answer is simple, the two work in unison with each other.
The intent of the LLC is generally for tax reasons, but also to limit the ownership to a separate entity that is not yourself, among other things. Such veil of protection can be breached in various situations (again i'm not an attorney).
An umbrella insurance policy is there in excess of the underlying policies you have in place. e.g. If the liability limit of your Landlord dwelling policy is reached, the umbrella will back it up and provide additional coverage. When it comes to umbrella policies, each can be very different, the at the end of the day they act the same, assuming they are follow form, and meant to back up the underlying policy limits and thereby protecting your assets.
@George P. I have carriers that do not have limits on the number of properties. I wrote an umbrella for a client just yesterday who had in excess of 150 properties and that wan't even close to 40K, it was significantly less.
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Matt H.
Real Estate Broker · CA · Member since 2016 · 243 posts · 226 votes
9y
@George P. The policy is through the USAA agency (I have too many properties for a straight USAA) underwritten by USLI - a Berkshire Hathaway Company. I think it is about $3500/year. Lot of stuff on there. It does have a 25 property limit so we left some off. Most of those others are with State Farm that has a really high liability option. But no, not 40k.
Matt
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Justin B.
Investor · Gaithersburg, MD · Member since 2013 · 659 posts · 441 votes
9y
It really depends on the situation. There are people who will say LLC is all you need, others who say umbrella is all you need, others who say both, and others who say neither. I'll try and keep it general. The LLC does provide a level of protection, but it's not the end all be all. The LLC does other things besides protection as well depending on your situation. A single-member LLC and a multi-member LLC are also 2 different things (in most cases). Do some research there.
Also, if you are talking about an SFR and it's just you, an LLC is probably unnecessary. If there are multiple people involved or it's an MFR, I'd probably recommend an entity. LLC's are usually the entity of choice for real estate but it's not the end all be all and it's not right for every situation. There are other situations where another entity might work depending on your situation.
It's not really the answer you want to here I'm sure, but your approach really would be based on your personal situation. Do some research, talk to a couple of experts and make a decision. Don't over think it.
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Aaron Smith
Bountiful, UT · Member since 2016 · 112 posts · 52 votes
9y
@Varinder Kumar use both, and this is only my unqualified opinion. The LLC, IF MANAGED CORRECTLY (get with your attorney on how to do this) will shield your personal assets from being brought into play if someone were to sue you in regards to the rental property. There are rules to managing your LLC and if not done properly, then you have what's called "Piercing the corporate veil", and your personal assets (home, savings, retirement, etc) can be brought into the suit as well. As long as your managing the LLC properly, then the only assets in play during the suit will be the ones in the LLC.
The umbrella policy is an additional layer of protection. And a smart investment. And since most ambulance chasers want the quick payout, the insurance SHOULD be enough to solve the issue without going to court. No guarantees of course.
You should meet with your attorney and CPA to learn how best to protect your assets, both investment and personal.
All the best,
Aaron
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Varinder KumarPro Member
OP
Real Estate Broker · LA & ORANGE COUNTY CA -Multi Family · Member since 2016 · 374 posts · 132 votes
9y
@aaronsmith thanks for the advise. From the looks of where my goals are headed it seems as I would need to get both regardless of utilization of both or not.
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Thomas S.
Member since 2016 · 13k+ posts · 12k+ votes
9y
My conclusion based on all of the above is that with a LLC you should have a umbrella policy, if you have adequate insurance coverage you do not need a LLC.
LLCs also complicate your business and add costs due to higher taxes.
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Varinder KumarPro Member
OP
Real Estate Broker · LA & ORANGE COUNTY CA -Multi Family · Member since 2016 · 374 posts · 132 votes
9y
Investors prefer holding money in an LLC account rather than personal bank account...is the tax fees etc worth the investment, I say yes.
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George P.
Property Manager · Livonia, MI · Member since 2011 · 4k+ posts · 1k+ votes
9y
Originally posted by @Varinder Kumar:

@aaronsmith thanks for the advise. From the looks of where my goals are headed it seems as I would need to get both regardless of utilization of both or not.
@Mindy Jensen this is what i am talking about.... @varinder Kumar wanting to tag @aaronsmith and can't happen.
Oh, and i can't tag them either because......i am not their colleague. Varinder has to request a colleage request, wait until it's approved, then come back to the thread (if he remembers which one it is, and tag him....
it's like having soup at the dinner table but having to go back to the store to get a spoon. how is that efficient? it just makes no sense.
@Joshua D.
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Varinder KumarPro Member
OP
Real Estate Broker · LA & ORANGE COUNTY CA -Multi Family · Member since 2016 · 374 posts · 132 votes
9y
Ah I see no wonder
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Gerald Marshall
Investor · Cumming, GA · Member since 2016 · 56 posts · 21 votes
9y
Both!!!
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Varinder KumarPro Member
OP
Real Estate Broker · LA & ORANGE COUNTY CA -Multi Family · Member since 2016 · 374 posts · 132 votes
9y
@Mindy Jensen when I tag someone on my desktop and they are Not my colleague I am still able to tag them, only when I do it on my phone via the BP app I am unable to tag.??
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Mindy JensenPro Member
BiggerPockets Money Podcast Host · Longmont, CO · Member since 2014 · 7k+ posts · 10k+ votes
9y
Hi @Varinder Kumar. Tagging is currently not available on the mobile apps. We're working on adding it...
[email protected]Podcast Guest on Show #261
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