Defense wins championships.
Does everything have to be a sports analogy with you?
Sports is life.
Deep Brian, real deep.
Offense is exciting, it is what everyone wants to do. No kid dreams about the clock ticking down in the NBA finals, just a few precious seconds left, if only you can come up with one more defensive stop.
If defense is the forgotten half of the equation in sports, what is it for investors?
Protecting Yourself
As you rise up in the world, you have more to lose. I plan to one day be there, so better start planning now.
There are all kinds of different ways to limit your risk. Diversification. Savings. Profit margin on your rental properties.
Everyone should do those.
For rental properties there are other risks like the pipes exploding and flooding the house, or a tornado ripping off the roof.
Everyone should have a strong homeowners insurance policy.
But what else?
What Slips Through the Cracks?
Most lawsuits. Plus damages over what your standard policy covers.
- The tenant’s dog gets out of the backyard because your fence isn’t good enough. It mauls a neighbor who sues you for loss of work damages of hundreds of thousands.
- The water heater is turned too high and gives first degree burns, which results in a lawsuit.
- That crack in the sidewalk the tenant complained about actually leads to them falling and hurting their back. Boom lawsuit.
These are worse case, horror scenarios that you hear as excuses for not getting involved in rental properties. They are one in a million type things that likely won’t happen, but it still isn’t a good idea to bet your entire financial future on it.
Yet most people don’t realize they are already at risk in their personal life. Do they just sit inside all the time?
Remember this commercial?
It seems kind of silly, but is just another example of a gap in your personal coverage.
But it doesn’t even have to be a gap, it could be covered the damage goes beyond your limits. Like causing a 10 car pileup or running into a particularly expensive building.
A couple more examples from the best intro article I have found:
- Your daughter gets into a fight at school and punches another girl, breaking her nose. The girl’s parents sue you.
- You send sandwiches to your son’s school for a field trip lunch. Several students become sickened with food poisoning and their parents sue you.
- Your teenager throws a party at your house while you’re out of town. Someone brings alcohol to the party, and one of the party guests gets arrested for driving under the influence on the way home. You get sued.
Somehow the worst case, horror scenarios for children don’t stop people from having them. Just for rental properties.
An Umbrella Policy
This is where the umbrella policy comes in. It acts as an umbrella over all your various insurances in your life. Homeowners, car insurance, you name it. If you do enough research and choose the right policy, you might even one that reimburses you for a quick car maintenance, or some major repair work around your house.
You can think of it as a catch all.
Of course there are things that are excluded and tons of fine print. For example, if you do the act intentionally. Or if the damage is caused by war.
It isn’t perfect, but the good news is it is affordable. Talking with Michael at Financially Alert and doing some initial research online, about $25 a month will provide $1,000,000 in coverage.
Wouldn’t an LLC For Rental Properties Do the Same Thing?
Many rental property investors hold their properties in LLCs. This is another way to limit your personal risk – rather than the tenant suing you, they would actually be suing the LLC. Worse case scenario is you lose the LLC.
So some people do complicated multiple LLCs with 2-3 properties in each. What a headache.
Furthermore, in California this is a horrible option because each LLC is $800 a year. Ouch.
In my mind, this is putting the cart ahead of the horse. If you live outside of California and setting up this structure doesn’t dissuade you from actually getting started with rental properties, good for you. But it doesn’t make sense for my current situation.
Starting the Research
I’ll admit I don’t know a lot about umbrella policies right now, but I am going to start learning. One of my friends suggested that I should take a look at selectquote insurance or other similar ones to learn about various policies. Anyhow, I have the goal of taking an insurance policy by next month.
I’m curious to hear from the community – Do you have an umbrella policy? If you do, can you do, please share any recommendations. If not, does this article change your mind?
Nice post, Brian! I actually got an umbrella policy a year or so ago. I initially bought $1,000,000 in coverage, but then recently upped it to $2,000,000.
I have a rental house and a duplex (with a couple more to follow in the next couple of years). I like that the umbrella policy gives you that extra layer of protection that you were talking about for very little money. I currently have the rental properties in an LLC, but that only does so much for you, so I think this is a good way to go.
As a side note, if you have any properties in an LLC, you want to add the name of the LLC to the insured on the policy.
— Jim
Right – it doesn’t have to be just one of LLC or umbrella policy. You can certainly do both and they offer some different benefits.
Good call making sure the LLC is listed on the policy. There are probably quite a few people you would have to tell if you transfer the property from your individual name to an entity.
Do you know offhand how much your price increased when you went from $1M to $2M?
It was insanely cheap either way. It went from $150/yr to $250/yr. Pretty much a no-brainer!
— Jim
I’m thinking about increasing our policy too. We need a bit more protection.
As a side note, I heard that you should not tell anyone how much umbrella insurance you have. They might think about suing…
That is funny advice. You shouldn’t tell how much you are worth either, but that certainly doesn’t stop the financial bloggers out there. I think I’m ok with whatever that small additional risk is of an opportunistic / strategic lawsuit.
We finally got our act together and bought an umbrella policy this year, though I’m a big fan of insurance, so have been wanting to do it for a while. We feel fairly confident that our tenant (a close relative) won’t sue us, but you just never know what else might happen, and I keep hearing that having a higher net worth makes you many times more likely to be a target of lawsuits. Uh, no thanks! The other thing I learned when getting our policy is that not only do you get whatever amount of coverage you buy, but you’re also paying for your insurance company to mount a legal defense on your behalf, and you know they don’t to pay out a penny, so they will give the fight everything they’ve got. That’s as much a comfort to me as the coverage itself!
That’s a great point – it isn’t necessarily that you get sued and lose. Just fighting the lawsuit can be extremely expensive! If I were going to fund it myself, I’m sure I would go as cheap as possible. Instead, as you said, the insurance company will fight hard on your behalf.
No point in suing someone who is broke. That’s just a waste of time…
Great comments about having an umbrella policy. If you own property in your own name, I’d definitely get it too!
If your properties aren’t in CA, why would you register the LLC there?
The only drawback of an umbrella policy, is it only protects from covered loss. If your manager is negligent (which is usually not covered under insurance), then the tenant will quickly wipe out the manager and you.
The LLC at least limits the loss.
Well California is pretty whack about it, that’s why. It isn’t exactly $800 a year to register a CA LLC, but more a $800 a year minimum tax for an LLC operating in CA. And their definition for operating is so wide it is absurd. Just living in CA as the LLC owner of an out of state LLC with an out of state property and out of state manager is enough. http://www.corporatesecuritieslawblog.com/2014/07/is-your-out-of-state-llc-doing-business-in-california/
I’ll have to learn more about the gaps of the umbrella policy, thanks for sharing this scenario!
Yup yup! CA is whack. It’d be so much simpler if we could just set up shop in NV. 🙂
Love the article, Brian!
Ya. Now I totally understand why some crazy rich people move to Florida – Tony Robbins, Tiger Woods, the ROCK!
Another huge exclusion on nearly all personal insurance policies is the “business pursuits” exclusion. If you get an umbrella policy, make sure it covers your business pursuits. Renting property to others is a business pursuit.
Sometimes rental property owners think they’re getting a good deal by getting a personal insurance insurance policy on their single family rental homes, rather than a commercial policy. That’s usually a mistake because of the business pursuits exclusion. You might think you’re getting a deal because you’re saving a hundred bucks or so per year, but a personal insurance policy typically won’t cover claims made by the tenant against you or cover lost rental income if a disaster strikes the house and you can’t rent it out while it’s being fixed.
So check whether it’s a personal insurance policy or commercial policy. Be careful about taking your agent’s word for it. They’re often unsure of the distinction and may give you inaccurate info. (Mine did at my last policy renewal. Thankfully I knew better.) Read the policy yourself, very carefully, and/or talk to an attorney who does insurance defense work or a claims adjuster who you know and trust to make sure your policy is protecting you in the way you’re expecting.
You might also want to ask whether your policy is a “burning limits” policy. That means that the costs of defending you in a lawsuit are subtracted from the policy limit amount, leaving you will less money at the end to pay the judgment or settle the case. If it is a “burning limits” policy, take that into account when deciding how much insurance to buy.
I actually don’t have an umbrella policy. I was considering getting one, but given the distinction between personal and commercial, I would have to choose whether to get it for personal (homeowner’s and auto) OR to cover my fourplex. Nothing would cover both, based on what I found. For my personal policies, I have fairly high coverage, so I feel like I’m okay there. For the fourplex, if I want more coverage, I should just bump up the limit on that policy. The umbrella wouldn’t cover anything different from the main policy.
Anyway, insurance is too complex to cover in one blog post, much less in one comment. Just be careful with what you’re getting, don’t be afraid to ask a lot of questions from a lot of people, and don’t assume that just because you’re throwing some money at an insurance company every year, that they will have your back. You gotta protect yourself by making sure you know what you’re buying in advance. Good luck!
Great to have a lawyer chime in who actually knows a little bit more about this!
I think it is telling that you don’t have one, but I am surprised to hear you say the umbrella won’t cover anything different than your main fourplex policy. The examples I wrote about are ones I have found across several different articles as clear things that are in that gap. Do you feel those would be covered by your standard policy? Or not covered by either even if you had an umbrella policy?
Man ive been debating getting an umbrella policy now for years and I still havent taken the time to see if I really want/need one. I guess im just being lazy and hoping I never get sued. I really need to get on top of this. Better to be safe then sorry.
As of now most of my properties are under my name but the last two I purchased cash I put them in a new LLC which was dirt cheap to create here in Indy.
Let me know what you end up doing.
I’ll let you know what I decide. I don’t think it will be too much work, just a little shopping around.
I have an umbrella policy in addition to having properties in an LLC. They each offer their own form of protection and as your portfolio grows it only makes sense to protect your personal assets from the business and vice versa.
Like Jim said, umbrella policies are dirt cheap. Whoever does your personal insurance should be able to give you a $1M for about $300/year or less. At 2 rentals (I think that’s how many you have) I’m not sure if I would go through the hassle, but once you start getting a sizeable number (up to you to determine what that is for you either by # properties or market value of properties) it is prudent to get your affairs protected.
Hopefully it isn’t too big of a hassle, but I will soon find out! Plus if it is something I plan to do eventually, might as well do it now considering the low price.
Glad to hear you are doing both LLCs and umbrella!
Thanks for your fantastic article. Anyone will get the awareness by reading this article. I enjoyed this and came to know lots of new things. It’s worth able to share with my friends.
I have 12 rental properties in Texas under two LLC’s and I’m trying to get a $1,000,000 Umbrella insurance policy for the rental properties. The insurance companies are telling me they won’t write an umbrella policy because the rental properties are under an LLC. Do you know of any insurance companies that might do this?
Hmmm, I don’t know. I believe it is possible for an LLC to have an umbrella policy, but you may have to have separate ones for the two LLCs. Unfortunately I don’t know the right insurance companies to talk to.