Umbrella Insurance versus LLC approach to limit real estate liability

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Med4
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Umbrella Insurance versus LLC approach to limit real estate liability

Post by Med4 »

Dear Boggleheads,
I own 3 rental properties. Each is a small studio apartment. In addition, we own the small apartment we live in. In order to limit my liability, would you recommend:

a) getting an umbrella insurance
b) setting up LLC's for each property.
c) both

option (a) seems much easier, and preferable for that reason. But will I be safe?

Thank you!
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dm200
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Re: Umbrella Insurance versus LLC approach to limit real estate liability

Post by dm200 »

Med4 wrote: Fri Dec 06, 2019 10:00 am Dear Boggleheads,
I own 3 rental properties. Each is a small studio apartment. In addition, we own the small apartment we live in. In order to limit my liability, would you recommend:
a) getting an umbrella insurance
b) setting up LLC's for each property.
c) both
option (a) seems much easier, and preferable for that reason. But will I be safe?
Thank you!
Remember that the normal umbrella policy does not cover business related lawsuits. I don't know if you can get an umbrella policy that will cover business related lawsuits or, perhaps, there is some other kind of insurance that does.

It is also the case that, very often, debts, obligations, contracts of an LLC must be individually cosigned/guaranteed.
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gr7070
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Re: Umbrella Insurance versus LLC approach to limit real estate liability

Post by gr7070 »

0. I'm no lawyer, and have no knowledge of your local laws.

Umbrella policy, only.

I've had a couple conversations, granted decades ago and in my particular state, with lawyers that the final answer is there isn't that much, if any, protection offered by an LLC for rental property; at least not until you become huge.

As mentioned above you are typically personally liable for loans. You are also responsible for your own actions; one cannot insulate themselves via an LLC for something you may have personally chosen to do even if it's while working.

The above often flies in the face of what so many espouse, yet none of them seem to be able to address the above.

Hopefully I'll never find out one way or the other.

Get a fat, largely inexpensive, umbrella policy and make the best decision you can within your business and sleep well.
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cowdogman
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Re: Umbrella Insurance versus LLC approach to limit real estate liability

Post by cowdogman »

You need a business policy. Altho not for real estate, I have an inexpensive general "Businessowners Policy" (that's what it is called--with no apostrophe) from State Farm. I suspect a policy covering rental properties is going to be pricey. Please report back what you find out about price.

You should also have an attorney look at your form of lease to make sure it has the appropriate disclaimers and indemnities. The insurance company is likely also going to want to look at your form of lease.

Also talk to an attorney about whether an LLC will really protect you if you are involved in the admin of the properties. That is, an LLC will generally not protect a business owner if he/she is personally negligent. For example, if you have own a car service organized as an LLC and you negligently cause an accident while giving a customer a ride, you can't hide behind the LLC.

Insurance is usually the safest, easiest way to deal with liability concerns.
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cowdogman
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Re: Umbrella Insurance versus LLC approach to limit real estate liability

Post by cowdogman »

gr7070 wrote: Fri Dec 06, 2019 10:52 am Get a fat, largely inexpensive, umbrella policy and make the best decision you can within your business and sleep well.
If gr7070 is talking about a common homeowners/auto umbrella policy, it will not cover rental properties. Talk to an insurance agent.
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Re: Umbrella Insurance versus LLC approach to limit real estate liability

Post by Carefreeap »

gr7070 wrote: Fri Dec 06, 2019 10:52 am 0. I'm no lawyer, and have no knowledge of your local laws.

Umbrella policy, only.

I've had a couple conversations, granted decades ago and in my particular state, with lawyers that the final answer is there isn't that much, if any, protection offered by an LLC for rental property; at least not until you become huge.

As mentioned above you are typically personally liable for loans. You are also responsible for your own actions; one cannot insulate themselves via an LLC for something you may have personally chosen to do even if it's while working.

The above often flies in the face of what so many espouse, yet none of them seem to be able to address the above.

Hopefully I'll never find out one way or the other.

Get a fat, largely inexpensive, umbrella policy and make the best decision you can within your business and sleep well.
We've gone the umbrella policy too based on the fact that if you have a loan in your name or guaranteed it's easy to "pierce the corporate veil". At one time we had five rental properties now we're down to two. Never had a claim against the umbrella policy but did have a situation whereby a down stairs neighbor kept trying use claims to pay for her remodels. We fought one then the insurance company reversed itself which emboldened her to try again. Wound up selling the unit.
Every day I can hike is a good day.
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cowdogman
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Re: Umbrella Insurance versus LLC approach to limit real estate liability

Post by cowdogman »

I took a look at my umbrella policy. It excludes "loss arising out of any insured’s business property or business pursuits of any insured."

But as an exception to the exclusion, the wording does allow for the policy to cover residential rental property IF I also have underlying "Residential Rental Liability" coverage.

So, my advice is the same: talk to your insurance agent. Plus read the policy.

Edit: One other note, not only would I need underlying "Residential Rental Liability" coverage, but it would also have to be listed on the umbrella policy as an underlying coverage. So, be careful.
Last edited by cowdogman on Fri Dec 06, 2019 11:41 am, edited 1 time in total.
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dm200
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Re: Umbrella Insurance versus LLC approach to limit real estate liability

Post by dm200 »

With the LLC(s), I would also look for ways to avoid having "personal guarantees" which pierce the corporate veil.
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Med4
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Re: Umbrella Insurance versus LLC approach to limit real estate liability

Post by Med4 »

thanks everyone. many of you mentions liability insurance not covering business related lawsuits. These are studio apartments we own and rent out. Does this qualify as a business?
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dm200
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Re: Umbrella Insurance versus LLC approach to limit real estate liability

Post by dm200 »

Med4 wrote: Wed Dec 11, 2019 12:43 pm thanks everyone. many of you mentions liability insurance not covering business related lawsuits. These are studio apartments we own and rent out. Does this qualify as a business?
Not an expert, but I would be quite sure what you describe is a business and business lawsuits are normally excluded from a personal umbrella policy. To be 100% sure, check with the applicable insurance company.
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gr7070
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Re: Umbrella Insurance versus LLC approach to limit real estate liability

Post by gr7070 »

dm200 wrote: Wed Dec 11, 2019 12:54 pm
Med4 wrote: Wed Dec 11, 2019 12:43 pm thanks everyone. many of you mentions liability insurance not covering business related lawsuits. These are studio apartments we own and rent out. Does this qualify as a business?
Not an expert, but I would be quite sure what you describe is a business and business lawsuits are normally excluded from a personal umbrella policy. To be 100% sure, check with the applicable insurance company.
Talk to your insurance agent. You should be able to get a policy that stipulates specific rental properties.
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Re: Umbrella Insurance versus LLC approach to limit real estate liability

Post by J295 »

Retired lawyer here. I will not give legal advice. However, I will tell you that some of the responses above regarding LLCs are inaccurate. I will also tell you that although I do not own real estate other than our home, many family members do, and every one of them has the real estate owned in an LLC.

Go visit with an experienced lawyer and a capable real estate agent.
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cowdogman
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Re: Umbrella Insurance versus LLC approach to limit real estate liability

Post by cowdogman »

J295 wrote: Wed Dec 11, 2019 7:01 pm Retired lawyer here. I will not give legal advice. However, I will tell you that some of the responses above regarding LLCs are inaccurate. I will also tell you that although I do not own real estate other than our home, many family members do, and every one of them has the real estate owned in an LLC.

Go visit with an experienced lawyer and a capable real estate agent.
Not sure which posts you were referencing, but I did not mean to imply an LLC did not offer protections, but an LLC does not protect an owner/landlord from a claim arising out of his/her own negligence. That's where insurance is needed.

I would use both insurance and an LLC if I had rental properties.
Revision17
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Re: Umbrella Insurance versus LLC approach to limit real estate liability

Post by Revision17 »

I live in NJ and I'm researching things related to rental properties. I met with a lawyer with experience representing landlords to discuss if an LLC is worth it over a sole proprietorship for a single unit. She very quickly said it wasn't worthwhile in NJ unless you have many properties. The amount of time and money you spend on LLC stuff could be spent on better insurance, maintenance, being attentive to the tenant's requests, and thoroughly documenting the state of the property.
ras4250
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Re: Umbrella Insurance versus LLC approach to limit real estate liability

Post by ras4250 »

Not legal advice. You need to pay for that. But there are a lot of considerations for why, at your small scale, an LLC might not be worth it.

You can’t represent yourself in small claims court if it’s in the LLC. You need to hire a lawyer. This goes for any eviction proceedings as well. If it is yours personally you can appear pro se (by yourself without a lawyer). A business cannot appear in court without a lawyer. More costs. Check what your home owners insurance would do. Many don’t like if home is owned in name of LLC. More costs. If you are personally managing the properties, and someone is going to sue, any competent lawyer will sue you and the LLC. So you still will be on the hook for legal costs. If you were negligent while managing the properties you could still be personally liable.

But you need to seek legal advice in your jurisdiction to be sure. These are just some things to consider.
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Med4
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Re: Umbrella Insurance versus LLC approach to limit real estate liability

Post by Med4 »

Thanks everyone for thoughtful remarks. After talking to an attorney, a CPA, reading a ton on the subject, and weighing all options, I have decided to obtain a strong umbrella liability insurance, and forgoe the LLC option.

My insurance agent offered Arbella insurance, however in talking to friends they have recommended Chubb or AIG, as a much more reputable and comprehensive option. I am willing to pay a premium for a widely comprehensive coverage. Do you have any experience with Chubb or advice in choosing the right insurance company?

Many thanks
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cowdogman
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Re: Umbrella Insurance versus LLC approach to limit real estate liability

Post by cowdogman »

Med4 wrote: Sat Dec 14, 2019 8:53 am Thanks everyone for thoughtful remarks. After talking to an attorney, a CPA, reading a ton on the subject, and weighing all options, I have decided to obtain a strong umbrella liability insurance, and forgoe the LLC option.

My insurance agent offered Arbella insurance, however in talking to friends they have recommended Chubb or AIG, as a much more reputable and comprehensive option. I am willing to pay a premium for a widely comprehensive coverage. Do you have any experience with Chubb or advice in choosing the right insurance company?

Many thanks
I would always recommend that the umbrella cover be issued by the insurer issuing the underlying insurance. You don't want to be dealing with two insurers on the same claim.

Altho I have spent a lot of time looking at umbrella insurance issues, I know almost nothing about insuring rental properties. As above, I'm still curious as to how one has "umbrella" coverage without having underlying coverage. Or are you just using "umbrella" as a synonym for rental liability insurance?
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Med4
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Re: Umbrella Insurance versus LLC approach to limit real estate liability

Post by Med4 »

I already have insurance for each rental property. I am looking to purchase an additional umbrella liability insurance.
boglerdude
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Re: Umbrella Insurance versus LLC approach to limit real estate liability

Post by boglerdude »

Umbrella usually needs to be provided by your auto insurer, cuz thats where all the risk is. So ask them how many rentals you can have under the umbrella. If you have too many you'll need a commercial policy.
AlphaLess
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Re: Umbrella Insurance versus LLC approach to limit real estate liability

Post by AlphaLess »

Med4 wrote: Fri Dec 06, 2019 10:00 am Dear Boggleheads,
I own 3 rental properties. Each is a small studio apartment. In addition, we own the small apartment we live in. In order to limit my liability, would you recommend:

a) getting an umbrella insurance
b) setting up LLC's for each property.
c) both

option (a) seems much easier, and preferable for that reason. But will I be safe?

Thank you!
I would not use this forum to answer this question.

I would use a very competent lawyer in your state.
"A Republic, if you can keep it". Benjamin Franklin. 1787. | Party affiliation: Vanguard. Religion: low-cost investing.
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Re: Umbrella Insurance versus LLC approach to limit real estate liability

Post by AlphaLess »

IANAL, but here are the basics:

- if you already own these properties in your own name, too late for LLC. You might be able to create an LLC and put those units in the LLC, but a lot of issues with mortgage as well as stamp fee. In many jurisdictions, when you move from personal to LLC, that is a sale, and you have to pay stamp tax, which could be 0.5, 0.75, 1.0, or even 2.0%.

- since you owned these personal properties in your own name, not sure if there are future claims against those properties under the LLC, the shield would be pierced.

For right now, you should:
- get million liability on each unit (this is typically the highest it would go),
- get your own primary residence to 1 million liability,
- get an umbrella with your primary as your main unit: I will let you decide the umbrella amount,
- add the rentals into the umbrella.

If you have a serious case that goes to court, 1mm would be enough for major expenses: court, attorney, the opposite side attorney, etc. for actual settlement, you probably need another million. thus, having a 2-3 m umbrella is a good idea. But I would shoot for 5m. rarely are there cases when 5 million is not enough (remember that 5m umbrella plus 1m unit's own).

if your units are nearby, and the same event actually touches all 3: that is more dangerous, imo, because you can blow through the coverage more easily. e.g., some fire, and they find you are liable, and all 3 units are suing you.
"A Republic, if you can keep it". Benjamin Franklin. 1787. | Party affiliation: Vanguard. Religion: low-cost investing.
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Re: Umbrella Insurance versus LLC approach to limit real estate liability

Post by AlphaLess »

Med4 wrote: Sat Dec 14, 2019 8:53 am Thanks everyone for thoughtful remarks. After talking to an attorney, a CPA, reading a ton on the subject, and weighing all options, I have decided to obtain a strong umbrella liability insurance, and forgoe the LLC option.

My insurance agent offered Arbella insurance, however in talking to friends they have recommended Chubb or AIG, as a much more reputable and comprehensive option. I am willing to pay a premium for a widely comprehensive coverage. Do you have any experience with Chubb or advice in choosing the right insurance company?

Many thanks
Chubb is very finicky with covering rentals under your personal umbrella.
In particular, it would depend on what kind of coverage you have for your rental units.

best case is, use chubb for all of this:
- your primary residence,
- your rental 1,
- your rental 2,
- your rental 3.
- umbrella.

In my experience, if your rental primary insurance is written in a certain way (commercial policy), chubb won't cover that unit under your umbrella. Often times, commercial policies for personally owned rental unites have good bells and whistles (like paying you rent when unit is unusable, etc).
"A Republic, if you can keep it". Benjamin Franklin. 1787. | Party affiliation: Vanguard. Religion: low-cost investing.
AlphaLess
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Re: Umbrella Insurance versus LLC approach to limit real estate liability

Post by AlphaLess »

Med4 wrote: Sat Dec 14, 2019 8:58 pm I already have insurance for each rental property. I am looking to purchase an additional umbrella liability insurance.
Do you own a primary residence, or are you renting yourself?
Do you own a car?
"A Republic, if you can keep it". Benjamin Franklin. 1787. | Party affiliation: Vanguard. Religion: low-cost investing.
Topic Author
Med4
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Re: Umbrella Insurance versus LLC approach to limit real estate liability

Post by Med4 »

I own the property we live in, and own a car as well. If we go with Chubb, our plan would be to do all insurance through them. Whichever insurance company it is, we would like them to insure everything.
dmk395
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Re: Umbrella Insurance versus LLC approach to limit real estate liability

Post by dmk395 »

Get a couple million in an umbrella policy. Don't do anything negligent. (fix things that are broken) Just had a conversation with my attorney about the same thing. State laws vary though.
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dm200
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Re: Umbrella Insurance versus LLC approach to limit real estate liability

Post by dm200 »

dmk395 wrote: Tue Dec 17, 2019 4:52 pm Get a couple million in an umbrella policy. Don't do anything negligent. (fix things that are broken) Just had a conversation with my attorney about the same thing. State laws vary though.
"Normal" personal umbrella policies do not cover business related lawsuits. I know that from personal experience.
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Re: Umbrella Insurance versus LLC approach to limit real estate liability

Post by Lafder »

My insurance agent told me our umbrella policy covers our home, all vehicles, and rental properties


We also chose not to own rentals in separate LLCs. A friend of mine did choose to make LLCs for each of their rentals after owning them for years.

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Med4
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Re: Umbrella Insurance versus LLC approach to limit real estate liability

Post by Med4 »

My insurance agent is aware that these are rental properties and we are going to chose an umbrella which covers the rentals. We are currently considering Arbella and Chubb. I find it difficult to compare and contrast coverage and exclusions. So I’m asking my insurance agent to assist in that and made it clear my primary concerns are to ensure as good coverage as possible with as little exclusion as possible for my rental properties.

Waiting for the policy docs to arrive
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dm200
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Re: Umbrella Insurance versus LLC approach to limit real estate liability

Post by dm200 »

Med4 wrote: Wed Dec 18, 2019 12:43 pm My insurance agent is aware that these are rental properties and we are going to chose an umbrella which covers the rentals. We are currently considering Arbella and Chubb. I find it difficult to compare and contrast coverage and exclusions. So I’m asking my insurance agent to assist in that and made it clear my primary concerns are to ensure as good coverage as possible with as little exclusion as possible for my rental properties.
Waiting for the policy docs to arrive
You are being very prudent, in my opinion.
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