Umbrella policy or not?

Question

I am about to close on my first duplex here in San Diego! Yay!

I have an insurance quote for around $60 per month that includes $1M in liability insurance (I am occupying the back so rate is lower bc its primary residence). Wondering if I should get an extra million dollars from an umbrella policy?

Bigger pockets family what do you recommend? Is $1M enough or should I get $2M or more?

James Kojo · Answer

A couple of thoughts:

• The more net-worth you have, the more insurance you should have. The corollary is, if you don't have a lot of net-worth, then you don't necessarily need a lot of liability insurance. They can't take what you don't have. As such, insure yourself up to at least your current net-worth.
• Understand the incentive structure of the insurance company: if you have 500K in liability insurance, and you get sued for $2M, they may just decide to pay out the 500K and let you swing. If you are insured for 10M, and you get sued for 20M, they may decide that 10M is well worth fighting tooth-and-nail for, so they bring their legal-guns to bare in your defense. In other words, the more liability insurance you buy, the more likely they will go to bat for you because their neck is on the line.
• Make sure you don't have "gaps" in your liability coverage. It's common for liability to kick-in after a certain threshold and stop at a higher threshold. For instance, a $1M umbrella policy may only kick-in after you've incurred $300K of loss. So to cover that gap, you'll need to have 300K of liability insurance on your property insurance. Then you should be covered all the way up to 1.3M.

I hope that helps.

Jason G. · Answer

What is your auto policy limits?  remember that your investment property is an asset that can be exposed during a lawsuit.  the umbrella not only protects you from excess exposure above your policy if someone gets injured on your investment property, but also if you are sued due to a motor vehicle accident.

Joshua Diaz · Answer

I had just bought my first property(Duplex) in November and the first thing I did when getting the insurance was adding a 1M umbrella to it.

After all the reading and research I have done and hearing stories of what could happen when it comes to lawsuits, it was a no brainer for me!

I also plan on limiting equity exposure too, as was already stated. What good is  equity if you never use it, right??

It definitely gives me peace of mind.

James Kojo · Answer

Yup. Just ask your insurance agent if you have any gaps in coverage. They will let you know. If memory serves, my umbrella policy kicks in after 300k of damages, so I’m guessing your 1M in property insurance liability will more than cover any potential gaps.

Candace Ellison · Answer

I would like to know that same thing. I have 1m for $35 a month which isn’t bad. Been thinking about going to 2m

Jay Helms · Answer

what’s the cost s to go to $2MM, $15/month?

Parker Cox · Answer

@Ellis Hammond A million dollar umbrella over and above current liability coverage is approximately $500/year depending on your assets, current coverage and company.

When James mentioned the gaps, his structure was correct, an umbrella is excess or over and above (hence the umbrella moniker), but the gaps do not exist because you are required to have your underlying coverage at a certain threshold to purchase and keep in effect the umbrella.

I would highly suggest that you get an umbrella.  The rule of thumb is to match your net worth with liability coverage, but even if your net worth is lower now than it will be someday, you can be sued and future earnings can be taken--portion of your paycheck for the next 10 years...etc very similar to alimony or child-support.  So, it is good to start at $1,000,000 and go from there as you grow.

Best of luck and congrats on the purchase.

Ellis Hammond · Answer

@James Kojo what is the best way to cover my butt on the "gaps"? is it enough to just ask my insurance company about that?

Just for forum info I went with USAA and have a million dollar liability on both units (one is owner occupied and other is tenant occupied). I will look into getting the umbrella policy after closing- needed to get insured ASAP and umbrella policy takes a little more paperwork. Really helpful thoughts everyone. Thanks so much and Merry Christmas.

Kevin Fox · Answer

Hey @Ellis Hammond

Congrats on closing escrow. A duplex in SD is an awesome investment.

An umbrella policy can definitely be a great idea - I tend to think it’s better to be over-covered than under-covered, especially in CA.

With that said, it’ll depend somewhat on the cost of that additional $1M coverage.

@Parker Cox is a great resource for insurance questions.

Umbrella policy or not?

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