I have liability insurance on my rental property as part of the insurance policy on the structure.
If I continue to get liability insurance on other properties the same way, do I also need to buy an umbrella liability policy?
If I purchase an umbrella liability policy, which policy should I use first in the event of a judgment resulting from a lawsuit?
Can I put a paragraph in the operating agreement of my LLC stating my liability in a lawsuit will first be covered by my insurance and then my assets, or is this assumed?
Thanks.
I’m not sure that you can specify which policy gets used first. Usually insurance policies have coordination of benefit provisions and each carrier will follow its own rules when working that out with the other carriers.
Your creditors aren’t a party to the operating agreement and are under no obligation to respect it. The operating agreement only binds the members.
The primary insurance will pay first and then the umbrella. Any excess judgment gets paid with assets. However, you can pay any settlement or judgment yourself without filing an insurance claim.
Thanks for the replies. Some people on here have mentioned keeping your properties highly leveraged as a way to deter scumbag contingency lawyers from wanting to go after you. The premise being that if there’s little to no equity, there’s not much for the lawyer to gain from it. Wouldn’t this theory be rendered useless by the fact that they could just go after you and get money from your insurance copany?
Would $1 million be considered a good amount for the umbrella policy?
Depends upon how many properties you would have under the umbrella. I try to get $1MM liability coverage for each rental property I own. I am considering an umbrella for $5MM.
I have seen very few judgments in excess in a few million dollars. My opinion is that liability insurance should cover your equity position.
As to highly leveraged property, it is true free and clear is a more attractive target, but I think the issue is really missed opportunity. The equity isn’t doing anything sitting in the property and should be invested where the return is less than the loan cost.
OK. So I guess I’m not really understanding the specifics of how the umbrella policy works. Obviously you can pay a premium to get whatever amount of coverage you want. But I was thinking that you could hold numerous properties all under a single umbrella liability policy. From Dave’s post, it doesn’t sound like it works that way.
So if I have 5 rental properties, do I buy a separate umbrella policy for each property or one umbrella for all 5?
One of your tenants sues you and wins a judgement for $2.5MM. The hazard policy you purchased has a $300K limit of liability.
After your hazard insurance policy pays the first $300K of your judgement, you will still owe $2.2MM. You will have to sell your peronsal and investment assets to come up with the difference – unless you have a large enough umbrella policy in place. An umbrella policy will pick up where your primary landlord policy stopped and cover the balance of the judgement up to the limit of the umbrella policy.
Umbrella policies do not replace your primary coverage policies for your home, your car, and your rental property. Umbrella policies provide an extra layer of protection for the times when the judgement exceeds your primary policy coverage limits.
The visual image you get from the term “umbrella policy” is a single insurance policy that covers all your investment rentals and protects you from judgement creditors just as an umbrella protects you from the rain.
The way an umbrella policy really works is a different image – an umbrella that covers all your other insurance policies and protects you when the judgement is greater than your other insurance policy limits.
So is there any real limit to the number or value of properties you put on a policy like this? You said you try to get $1 million for each property you own. If I started snatching up a bunch of $25K properties to rent out for about $500/mo, that would get very expensive for insurance.
It depends upon your insurance carrier. I use State Farm for most of my rental property insurance. For my typical landlord policy, the basic hazard insurance comes with $300K liability. Increasing the liability limit to $1MM only adds another $25 or so to the annual premium.
Thanks Dave. I was confused because I thought you meant you got an additional $1MM umbrella for each of your properties. That’s why I was thinking it would get very expensive for insurance on multiple properties (at about $300 for each umbrella). I’ll have to check with my company about bumping the policy up to $1MM liability.
Now, you have it right. Each primary landlord policy as a limit of liability between $300K and $1MM depending upon the insurance carrier. My concern is that my personal net worth is greater than $1MM but less than $5MM. So a large enough judgement in any of my rental properties could wipe me out personally.
For this reason, I am considering a single $5MM umbrella policy to cover the portion of a judgement that “overflows” my primary landlord insurance policy. I am assuming that the umbrella policy premium will be largely determined by the number of primary insurance policies that I enroll under the umbrella.
I was carrying $500K liability on our property. I called today to see how much it would be to raise it to $1MM. Only $20 more per year. Needless to say, I raised it today. Money well spent IMO. I would’ve never guessed it to be that cheap…once again, information I got here helped me out!!! Thanks!
In the initial post, you started off by mentioning that you had an LLC and OA.
I was told by my Allstate agent (who presently provides the landlords insurance) that if we transferred our rental property to an LLC, we would need to get a Business Insurance from some other company since Allstate does not provice Business insurance (atleast in NC).
Anybody experienced or knowledgeable about this issue?
Also will a personal umbrella insurance policy also cover any liabilities eminating from an LLC? I have my doubts. Looking for facts from expericenced folks.
Thanks.
Sounds like Allstate may not deal with LLCs. I know my bank (USAA) won’t do a loan to an LLC, so it may just be a business policy of Allstate’s like that.
I just finished going through a revamp of my insurance policies and purchase of umbrella. Don’t have the specific insurance carriers at my fingertips, but the umbrella covered both my investment properties (one in my and wife name, one in LLC), my primary residence, and autos.
I talked to 5 different agents and got a wide variety of quotes with varying conditions and coverages. Some carriers required very high auto limits, others would only be available if I bundled all insurance, including autos, others wouldn’t touch the property in the LLC, others wouldn’t insure high limits ($1M) for the investment properties.
Shop around…REALLY shop around.
jmd_forest
Try Allen Tate Insurance, I just had 3 properties in NC insured by them for my LLC, no problem at all.