Posted over 10 years ago

Liability Insurance Needs for Rental Properties

As real estate investors one of the most important things in your business should be asset protection.  If you haven’t already done so you need to take time to exam your investments and obtain the best possible protection for them.  Asset protection starts first and foremost with your attorney properly setting up the entities in which you hold your properties and run your business.  Insurance should be the second round of protection but it is every bit as important as the legal makeup of your business.

We’re all familiar with property insurance and what it actually does.  In case of a fire or natural disaster it will pay to repair or replace your property.  That’s pretty simple but what’s a little more complicated is liability insurance.

Liability insurance is often over-looked or set aside when it comes to owning property.  It’s very easy to do so since your main concern is the source of your income & wealth, the property.  However, without proper liability coverage your income and wealth are in serious danger of disappearing.  In short, liability insurance protects you against lawsuits and other similar claims.

Arguably, no investment is more important to have the right liability protection for than rental property.  There is a limitless amount of risk when owning rental property.  If you’ve been in the rental business for very long you undoubtedly know that tenants are capable of almost anything.  There’s no telling what your residents, guests of your residents, neighborhood children, or what pets will do. 

The thing to keep in mind is that anything that anyone or anything does while on your property you are responsible for.  That’s right, even though you didn’t put that ice on the sidewalk, you are the target when your tenant slips and breaks his hip.  We’ve heard some absolutely ridiculous liability lawsuits but the sad thing is they are becoming so prevalent. 

Remember the McDonalds hot coffee fiasco?  McDonalds lost a $2.86 million lawsuit because a woman burned herself with her coffee and blamed McDonalds for not telling her it was hot!  Thus, we now have “Caution Hot” written on every cup of coffee.  That may seem a little extreme but that can actually happen to you.  Proper liability coverage protects against lawsuits like that.

When you think about insurance you have to think about risk, not how much your investment is worth or how much you have in it.  The cost or value approach may work for the property itself but  you cannot skimp on liability coverage.  When it comes to liability risk you are virtually limitlessly at risk 24 hours a day.  Your dwelling coverage will pay for your fire damaged property but the severe injury or even death that occurred during the fire are not covered.

Let’s assume the fire was caused by faulty wiring and the tenant files a lawsuit against you for medical bills and “emotional trauma” experienced though the process?  You could spend tens of thousands of dollars defending yourself.  Or, your liability insurance can kick in and pay for the defense and any award granted to the tenant. 

The cost of liability insurance is so cheap that there’s no reason to short change it.  For this reason and the types of risks outlined above we suggest a minimum of $1 million in liability coverage.   A few hundred thousand dollars can disappear rather quickly in a jury trial.  Why not be sure you are protected with the right liability coverage?

Comments (7)

  1. Peter- If your insurance company doesn't provide any liability coverage I'd search for a new provider. What I do with rental coverage is get a fire policy and then extend my liability policy from my home to the rental. I think it is $36/annually for this liability extension.


  2. Hi, can anyone recommend any liability only insurance companies? My current home owners insurance only cover Hazards and no liability.


  3. There's a difference between hot coffee and scalding hot 190 degree coffee that can cause third degree burns in 3 to 7 seconds and require skin grafts.


    1. Thank you! The hot coffee fiasco was the biggest disinformation campaign in pushing through tort reform and it's ignorant parroting about how some woman took advantage of some poor multinational corporation that let them do it. That cup of coffee completely ruined an older woman's life. I wouldn't trade a few million for what she went through.


  4. Great article. So how much are policies for $1mill in coverage generally?


    1. also, in general what would you look to cover lets say for a portfolio of SFR & duplexes?


    2. Fred, A $1 million liability only insurance premiums is less than $15/month per location. When coupled with dwelling coverage it is even less. Most investors are comfortable with a $ 1 million per occurrence, $2 million aggregate liability policy.