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Aaron Bush
  • Des Moines, IA
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Insurance for Co-Owned Property

Aaron Bush
  • Des Moines, IA
Posted Jul 8 2019, 19:19

Friends, 

I'm purchasing my first ever rental property (a duplex) with the help of a friend and business partner. We're going into it 50-50. We've done a lot of research and self-education over the past few years in preparation for owning a property, but we have come up against a tricky issue that I can't find very much clear information about online. Here's the situation:

My partner and I are purchasing the property with cash, so we have the ability to purchase the property through an LLC without triggering any due on sale clauses from a traditional lender. I had thought that this would be a nice added layer of liability protection in addition to our landlord insurance policy and my personal umbrella policy. However, I realized there might be an issue when I noticed that our landlord policy contained no mention of our entity. My partner is the named insured, and I'm an additional insured. Our entity's name isn't anywhere on the policy. We asked Traveler's insurance (our provider) if they could add the entity as an additional insured, and they were unwilling. We then looked into other options through other providers, and were unable to find anyone who was willing to add our entity to a policy for less than 200% of the price of our original policy.

My questions are as follows. Really appreciate any insight you all might have:

1. Is it a problem that our current policy makes no mention of our entity? My thought is that, if our entity owns the property, and something were to happen where a tenant or 3rd party were to sue our entity for any reason, the insurance company would not be required to cover the entity or its assets (the property) since it is not on the policy. Is that faulty reasoning? 

2. If our current coverage leaves gaps as I suspect, should it really be so expensive to have an entity added onto a policy? Most carriers we talked to wouldn't even add it. 

3. If the answer to question #2 is yes, would it just be better to ditch the LLC and make sure we each have an adequate umbrella policy? And if so, why do I always hear about people using LLCs to buy property? Why is this such a common strategy if it's not feasible from an insurance perspective? I've thought about a commercial general liability policy, but that seems expensive and a bit overkill considering we just have one duplex.

I'm just trying to find a way to get adequate property and liability insurance for our entity so that we aren't risking the assets that it owns. If the best way to protect the asset is to ditch the LLC and hold it in our personal names, any advice on how to structure that fairly for a partnership would be appreciated.

Thanks very much for any and all insights! My partner and I intend to seek legal advice of some kind, but I thought I would try asking these questions on the forums first! 

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