LLC Trust Deed investing -- Insurance for the LLC?

Question

Hi all,

For those investing in trust deeds or private lending in an LLC structure, do you place an insurance policy on the LLC?

I understand taking actions to mitigate piercing the LLC’s corporate veil (e.g., don’t commingle LLC and personal funds, keep minutes, use a valid statutory agent, etc.) and one thing mentioned is adequate business/LLC insurance.  But for an LLC that is lending or investing in deeds, is this appropriate as a general LLC policy might protect against injury or property damage, company autos, etc. – none of which is applicable when the LLC strictly engages in paper transactions without employees and a physical office.  Maybe an errors & omissions (E&O) policy might be applicable?

So, for those investing in trust deeds via an LLC do you have LLC insurance and if so, what type?  Thanks.

Chris Seveney · Answer

Account Closed

If your the lender insurance only helps you if you own the property or the borrower does not have it then you get forced place insurance

I am not aware of an insurance company that will give you a policy to cover you from getting sued

Remember if someone gets hurt on property and your the note holder that is not your issue - just like if someone gets hurt at your home they don’t sue the lender

Ned Carey · Answer

Account Closed that is a pretty specific legal question. Probably best answered by an attorney in your state. My understanding is the insurance requirement is only part of the company must be properly capitalized. I other words, to be a valid company it must have typical financial resources to run a business. In your specific instance insurance may not be needed to be considered properly capitalized.

However like I said this is pretty technical and advice of a good attorney should be sought.

Account Closed · Answer

@Ned Carey Thanks.  Yes, I plan to speak to an attorney for any specific nuances for my state.  Would appreciate hearing from anyone that invests in notes in an LLC what approach they take.

Mike Hartzog · Answer

You insure to reduce your specific risks.  If you’re simply originating and purchasing loans and doing your own doc prep, E&O insurance might be a good option.  Liability insurance would come into play if you ever take possession of a property, but that would likely be limited to that specific property unless you are doing significant volume.

Edward Seward · Answer

Interest question.  I had not thought about this but will ask my attorney when I meet with him next month.  I look forward to any replies to this topic.