Insurance in addition to LLC?

Question

I've been advised that in addition to the liability protection an LLC provides, and in addition to the homeowner's insurance I cover on my rental property, I ALSO need insurance for the LLC that protects me from general liabilities that might arise....

Sounds like overkill to me...thoughts anybody?

Kevin C. · Answer

If this topic is still being followed, I would suggest that you play it safe.  Like Gary indicated, many people think it is too expensive until they need it.  I have been in the insurance industry for many years for one of the largest carriers (on the claims side) and I have seen what a loss can do to you.

If you have an LLC you probably can (and should) afford the policy(s) needed to accurately protect your interests.  All it takes is 1 loss to wipe out everything you have worked so hard to accomplish.

Jeff Takle · Answer

Sorry, a few more quick thoughts.

You have to look at each type of coverage and see if the risks outweigh the benefits of coverage. I'm not an attorney and I'm not an insurance broker, but here's what they cover:

Errors and Omissions: This will help cover you if your written or verbal contracts are incomplete or errant. If you improperly handle escrow money, security deposits, etc., this comes to the rescue. If you pay a quality lawyer for your paperwork and are a diligent professional in setting up procedures and systems for doing business, then you can mitigate a lot of this risk yourself.

General liability insurance: This helps cover the LLC if someone slips and cracks their head open on the sidewalk, gets hurt at work, etc. Comes in pretty much any amount you'd like.

Michael Shadow · Answer

Another option is to set up two LLC's, one to own the properties and the other one to do all the management and work on the properties.

Get liability insurance on the management LLC then you're doubly covered (property ins and the liability ins) and when you are working on your properties you're covered under the managements LLC's insurance.  It's also nice because if you happen to break a pipe and flood out an apartment then that liability insurance will cover the damages done to the apartment.

You need to talk with a local attorney though to see how your specific situation should be set up.

-Michael

Jeff Takle · Answer

I agree with Gary. An umbrella policy is dirt cheap...usually much cheaper than the state LLC annual filing fees...and is much more likely to protect you in the event that something goes wrong.
                                    
                                    Regarding working as the PM separately, here's my take. If the LLC owns the property and employs you personally--as an outside vendor and not as an internal employee--and something goes wrong and you get sued:
                        
                        1. The injured party can sue both the LLC as the owner, the one ultimately responsible for the non-negligent management, and
                        
                        2. The injured party can also sue you as the agent for the owner (LLC).
                        
                        3. Since it appears your agency status as a PM is a sole proprietorship, they can attach your personal assets. 
                        
                        4. Since the owner of the property is the LLC, the judgment can also attach the assets of the LLC which include this property and any others it owns.

Which entity gets sued? That depends on which entity the attorney thinks has more money. If they sue the LLC and fail, or don't get a large enough judgment, they'll next try coming after you the individual, or contractor, or sole proprietorship...
                
                                    A better solution would be to work either as an employee of the LLC and have the LLC perform both PM and ownership duties. (unless you've got 20+ properties, in which case you might want to open a separate LLC just for PM of all the units)  If there is a legal employment agreement (or "work for hire"/independent contractor) in place between the LLC and you the employee, then only the assets of the LLC can be attached in a judgment and your personal assets are safe. Unless the infringement is gross negligence on your part as an employee (drunk on the job, etc.) in which case you're personally fully liable regardless.
                                    
                                    And of course, you have to be running the LLC as a legitimate business, as mentioned above...
                        
                                    -Jeff

Will Barnard · Answer

Jason Wrote:
                        "All of the experts I have talked with say it's overkill"
                                    
                        You are not talking to experts if this is the advise you received. You can never be over-insured, only under-insured. As Gary stated, umbrella policies and additional coverages are very inexpensive, and when needed, you will be glad you had it.
                                    
                                    If you do not act in a negligent manner, as in the example Gary mentioned, you can avoid those situations, however, negligent or not, responsible or not, I would rather have the protection of the insurance to fight the lawyers rather than my own money.
                                    
                                    Moral of this story is to make sure you have proper and adequate (if not excess) insurance coverage, particularly when you have multiple properties (multiple possibilities of litigation).

Gary Moore · Answer

It is not overkill. If you also do any work as part of the LLC the chance of having your entity pierced is increased if anything goes wrong.

You need general liability insurance for the LLC, you probably also need Errors and Omissions coverage talk to your agent on that one. If you hold rental real estate there may also be specific liability coverage you should consider.

In addition to that, you need to seriously consider getting a personal umbrella liability policy.

The thing about insurance is many think it is expensive until they need it and unfortunately, most state laws prohibit back dated coverage now. Therefore, you can't wait until you need it to buy it.

Gary Moore · Answer

Also, say for example, your LLC owns rentals and you personally manage those rentals. Now, when a suit is filed the attorney can sue the LLC for any liability it is responsible for as well as you personally. For example, suppose your tenant claims to have notified you about a fault railing on a deck and then someone falls through the railing and is injured. If you also do the management piece, they can come after you if the LLC does not have enough assets or insurance to cover the damages from the injury caused by your negligence to do the repairs.

This type of protection is extremely cheap to purchase and hideously expensive to not have when you need it. A personal umbrella offering 1-2MM in protection is a few hundred per year depending on how many properties you have.

Besides, your accountant can show you how this ends up being a deductible expense which is the usual argument against a personal umbrella.

Jason Hanson · Answer

All of the experts I have talked with say it's overkill.

You have your insurance as your first line of defense then you have the LLC. Which of course the main purpose of the LLC is for liability protection.

The extra stuff is just a waste of money that some insurance person is probably trying to sell you.