How Big of an Umbrella Policy???

14 Replies

Let's just say a real estate investor owns a number of properties in their personal name and is unable to move them to an LLC or some other entity due to some 1031 exchange considerations. All of these properties are owned free and clear and the overall value is in excess of 7 figures - how big of an umbrella policy is wise with this sort of scenario? I would think the policy would be in excess of a million dollars although how much?

What are your thoughts?  Your responses are appreciated. 

Thanks in advance. 

If you have insurance on all the properties then I probably wouldn't bother with a large umbrella policy unless you've done something obviously negligent and failed to correct it such as not having a stair rail or if you are in a tenant-friendly state and you haven't tenant-proofed your lease.

I'm not sure what "1031 Exchange" considerations you are referring to, but I'll guess that it is a holding period issue in order to be able to demonstrate that the individual has/had the intent to hold for rental or investment purposes. If that is the case, you can still transfer into another entity IF the entity is considered to be a DISREGARDED entity such as a single member LLC. The disregarded entity is treated as if the individual still owns the properties for income tax purposes. It MUST be considered a disregarded entity.

Medium exeter 1031 clr cntr bBill Exeter, Exeter 1031 Exchange Services, LLC | [email protected] | (619) 239‑3091 | http://www.Exeter1031.com

@Eric S.  

I have a 2 million dollar policy. It is cheap and easy. I got as much as I could through my current company.

It really depends on your situation, normally $2-$4 Million is plenty, however if you have a LOT of assets, you might consider a bit more,,each extra million gets cheaper.

You have to think about what is a potential loss, and what you have to lose.  

If you have $4 Million in an umbrella, your pretty much covered (however if your worth $20 Million I might change that answer.

One of the main things your buying is the insurance company paying for you defense if there is a lawsuit,,,so get an umbrella,,,if you own rentals and don't have one your asking for trouble.

I had the very same question because LLC's are so expensive in CA. I would love to hear some attorneys chime in. I decided that while I am driving a lot for my job I would have a higher 5 mil umbrella and when I retire and don't drive as much in a few years I can maybe take that down to 1-2 million. I tried to measure my risk but don't really know what the costs of a defense might be. If anyone can shed light as to what their defenses have costed since I know everyone gets sued would be helpful. What is the chance that it will cost over 1-2 million?

Originally posted by @Bill Exeter:

I'm not sure what "1031 Exchange" considerations you are referring to, but I'll guess that it is a holding period issue in order to be able to demonstrate that the individual has/had the intent to hold for rental or investment purposes.  

If that is the case, you can still transfer into another entity IF the entity is considered to be a DISREGARDED entity such as a single member LLC.  The disregarded entity is treated as if the individual still owns the properties for income tax purposes.  It MUST be considered a disregarded entity.

I spent about twenty minutes trying to reconcile this with my experiences. So what you are saying is that an individual can go into an asset protection vehicle (single member LLC, Trusts, etc) as long as it is a disregarded tax entity?

Eric - Yes an Umbrella Policy is well worth it.  I'm insured above and beyond my personal net worth.  And that's a trajectory that I will continue to follow as I continue to advance.

Medium logo640x400Troy Fisher, Lanika Home Inspections | [email protected] | http://www.lanikahis.com

I fail to see the reasoning behind having the umbrella policy equal to your net worth.  If you have a $3M umbrella policy, a $1M general rental property insurance, and have a net worth of $1M, and you have a major issue at a property and get sued for $5M and lose, you are wiped out.

I think having plenty of umbrella insurance is great, but there seems to be a false comfort level in having coverage equal net worth unless I am missing something.

Originally posted by @Matt Mason:

I fail to see the reasoning behind having the umbrella policy equal to your net worth.  If you have a $3M umbrella policy, a $1M general rental property insurance, and have a net worth of $1M, and you have a major issue at a property and get sued for $5M and lose, you are wiped out.

I think having plenty of umbrella insurance is great, but there seems to be a false comfort level in having coverage equal net worth unless I am missing something.

 I've never heard of a property owner being sued for that much. If you have a $3M umbrella, will someone be happy to sue you and settle for the easy $3M, or want to spend months in court to possibly get $5M?

I had an insurance guy tell me that the rule of thumb for umbrella policies is twice your net worth. They are cheap to begin with, but I remember when I upped my policy from one million to two, it was only about an extra $50 per year.

The first thing specialized lawyers look for before advising their client to sue is the net worth of the person they're suing. If it's worth it, they'll go after some or all of it, depending on the case. They generally do not go for more because if you don't have it, well you just can't pay it, or maybe you could give them 10 bucks a month until you die. Now keep in mind you can get sued for a major issue  unrelated to your rental properties: Say you're playing golf and you pull off a 400 yard drive, the ball lands on this guy's head who's brother in law is a lawyer who's job is to wait for cases just like this one, well you're in for a ride. They'll pull off your records, find out that your net worth makes you a good candidate to be milked out of some easily accessible cash. You're an even ether candidate because if you're not insured, you could even settle out of court since you could pull cash out and payoff that poor guy with the broken head and his caring brother in law.

I recommend having an umbrella policy that regardless of the amount covered by your real estate properties', covers you for at least the amount of your net worth. Prices are relatively cheap and they provide peace of mind. Also, you could then go all out trying to improve on that drive at the golf course.

For a SFR investor, $5m is generally more than enough. Larger properties = more and different exposures and less sympathetic juries. At $5m, even with a fatality, most people and attorney's are going to settle for policy limits and move on rather than spend a bunch of additional time going after personal assets.

I spent about twenty minutes trying to reconcile this with my experiences. So what you are saying is that an individual can go into an asset protection vehicle (single member LLC, Trusts, etc) as long as it is a disregarded tax entity?

Yes, disregarded entities are treated the same as the underlying taxpayer (member of LLC, etc.).

Medium exeter 1031 clr cntr bBill Exeter, Exeter 1031 Exchange Services, LLC | [email protected] | (619) 239‑3091 | http://www.Exeter1031.com

Conventional wisdom (for what that's worth) seems to advise to have an umbrella policy cover your net worth.  If you would feel more comfortable getting more, it is relatively inexpensive (especially compared to other insurance), but I think you should be fine with covering your net worth.

I've also heard the "rule of thumb" that Rob K mentioned.  I followed it when I bought my umbrella and I will probably be increasing it again soon.  Good to know that it's probably going to be a cheat upgrade.