Should I get umbrella insurance?

Question

Hi all - want to explain my situation below and curious what you all think if I should get umbrella insurance or not? I have regular insurance on all of them and I have 2 separate LLCS.  I have 1 LLC that I use for the properties that I own 100 percent by me and another LLC that I am using for the property owned 50% by me.

1) 2 Rentals Owned 100% by me (Behind LLC)

2) 1 Rental Owned 50 % by me (Behind LLC)

3) 2 Rentals Owned 50 % by me that are not behind llcs. One of the lenders would not let me move to llc.  However, I plan to refi in future if rates go down / put behind a llc. The other property I am trying to sell.

Thank you.

Denise Supplee · Answer

Hi @Taylor Campbell, It can make sense in your situation. Since you’ve got a few properties under different setups, an umbrella policy can act as a safety net if something major happens, like a big liability claim that goes beyond your normal insurance limits. It’s not a must-have for everyone, but it’s cheap extra protection.

Alex Lawson · Answer

Umbrella insurance is cheap I would get it

Jules Aton · Answer

You are probably right but I worry that with a significant injury- MVA, fire or heck now a days someone slipping on a banana peel that could result in a multimillion dollar lawsuit especially more likely if they know you are in a high income profession or own RE. It is very possible I'm too cautious but for a few hundred dollars a year having extra coverage helps me sleep at night.  I'd rather have more insurance to right things than attempt arms length in the event of a bad event.

Jules Aton · Answer

For my situation only a few properties, no partners or employees I prefer umbrella to LLC.

Stuart Udis · Answer

Insurance and LLC's serve different purposes. The LLC when operated correctly separates business liabilities from personal assets (exception usually being the personal guarantee on loans). Umbrella insurance which is an extension of your General Liability coverage will defend and cover any damages so long as the triggering event is not an exclusion in coverage (gross negligence (sometimes mere negligence), willful misconduct, fraud/misrepresentation, illegal use are common exclusions in property GL policies.

An example: You own a property, and a tree limb falls on the front walkway and immediately after the tree limb falls a tenant trips and is injured. Let's say it's a catastrophic injury and the damages exceed your GL coverage which has a $1M limit. The umbrella coverage would likely step in. However, lets change the fact pattern around and let's say the tree limb falls,  tenants repeatedly report the issue and you don't take reasonable or timely action to remedy the situation. Someone then trips and experiences the same injury. Now there may be an argument on the part of the carrier to exclude coverage citing gross negligence. In that case the insurance carrier may not cover the damages, possibly not even defend you. You own the real estate in an LLC so that could still limit exposure to business assets and not you personally but that is really circumstantial based on the fact pattern and jurisdiction and whether level of negligence opens the door to piercing the corporate veil (again very jurisdiction specific and circumstantial).

I am a proponent of owning investment real estate in LLC's for the sole reason it keeps your name out of the docket more than if real estate is owned in your personal name and they are good tools for business planning. The objective of all investors should still be to operate their business in a manner that prevents GL claims from arising and at minimum to avoid operations that would be deemed an exclusion.

Keep in mind even if your claim is covered, in most instances insurance premiums increase, sometimes forcing the property owner into surplus line coverage (more expensive and less reliable), and the claim history exists in a docket which has to be explained to lenders, potential business partners etc. Therefore, best to strive for dispute/claim avoidance but at the end of the day with real estate **** happens, and when it does you want your operations to make it easy for your insurance carrier to except coverage.

Stuart Udis · Answer

@Jules Aton I completely agree, there's no downside to having the umbrella coverage. My intention was to point out the lack of understanding of what the coverage actually offers and how most investors acquire the coverage with unreasonable expectations. Usually along the lines of "choosing between an LLC and umbrella coverage" or "I will just get more umbrella coverage".  This lack of understanding gives many investors an invincibility complex that leads them to mismanage their operations believing they are immune from liability. They are most often the investors who find themselves in the most trouble. You are in the minority of investors who actually understands umbrella insurance's purpose and coverage limitations.

James McGovern · Answer

@Owen Rosen you have not stated what liability you are worried about

Jules Aton · Answer

No, I haven't felt the need. The advice I got was insure, no LLC to make it easier to buy, sell, refinance. I do know that LLC may not offer much protection with a decent lawyer.

Ken M. · Answer

Were you aware that even "decent lawyer's" can lose big time ? Why would you rely on a legal solution, which is costly and time consuming, when you can just hand the problem over to an insurance company to handle it? Most "decent lawyer's" settle, anyway. They rarely litigate. So, there is little to be gained paying an attorney instead of insurance. But, "as you wish".

Should I get umbrella insurance?

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