Archive | October, 2015

Protecting Rental Properties with Umbrella Insurance

7 Oct

The following is based on my own experience and understanding, but I’m certainly no expert on the subject. Please be sure to consult with an insurance professional when contemplating your options. Best of luck!

After purchasing our 3rd duplex in May of last year, we felt the time was right to get an umbrella policy – and we’re finally getting around to pulling the trigger.

How Does Umbrella Insurance Work?
An umbrella policy picks up where your other policies’ liability ends. For example: if your auto insurance has $300,000 in liability coverage, a $1,000,000 umbrella policy provides a combined total of $1,300,000 in liability coverage in the event of an auto insurance claim.

sss

(photo by Andreas Schalk)

I also believe our particular umbrella only extends coverage that is already granted by the underlying policies. For instance, if pit bulls were a restricted breed on our homeowners insurance, I wouldn’t expect the umbrella policy to cover that liability instead.

Do I Need Umbrella Insurance?
Not necessarily. This was a personalized decision that took into consideration our assets, lifestyle, and risk-tolerance. My general philosophy is that insurance shouldn’t cover inconveniences like cell phones and windshields – but the really big, bad, life-changing stuff that could take you down financially.

Some people are relatively judgement proof (i.e. there’s not much to take, or what you have is protected in retirement accounts) so the consequences of a no-good-really-bad-day aren’t as extreme. On the other hand owning multiple rental properties probably makes us a greater target for litigation – in the event of an auto accident, it wouldn’t take a personal injury attorney long to find our real estate via public records.

Why Not Use an LLC Instead of Umbrella Insurance?
My (somewhat uneducated) impression is that an LLC is a little overkill for us at this point. I see an umbrella policy as the next step of an asset protection continuum, with LLCs offering greater protection and privacy in exchange for greater cost and hassle.

I also wonder if LLCs are better suited for paid off properties… I’ve read about investors who move mortgaged properties into an LLC with no issues, but I also know a Realtor who had a client get their mortgage called for the same reason.

Shopping Around for Umbrella Insurance
For most carriers we asked, each duplex counts as 2 properties – which means our liability exposure effectively boils down to 2 vehicles + 7 residential properties (which includes the apartment we live in). This exceeded the underwriting limits of many household name carriers, and we ultimately had better luck finding compatible umbrella policies via independent agents.

Often the insured is required to have an auto or homeowners policy with the same carrier, but there are “stand-alone” umbrella policies too. I found the combined offering a little more affordable, but I also wasn’t eager to consolidate our insurance under a single carrier. Agents were much less enthusiastic to work with me once I expressed an interest in stand-alone policies, so I imagine the commissions aren’t as enticing for them.

Comparing Umbrella Insurance Quotes
The odds of paying out are pretty slim, so insurers can offer substantial coverage for a few hundred dollars. We received 4 quotes for $1,000,000 umbrella policies:

  • $200/year (required another policy)
  • $257/year (stand-alone policy)
  • $327/year (stand-alone policy)
  • $460/year (stand-alone policy)

There was also a fair bit of variance in the underwriting requirements that wasn’t apparent until we received the applications. Each policy had around 3-15 questions that acted as pass/fail criteria – some of which could be deal breakers depending on your situation. For example, one policy disqualified locations covered by subsidized housing. Another policy required no construction or renovation in the previous 12 months and the next 12 months.

Our Umbrella Insurance Policy
We selected the $257/year stand-alone policy after taking into consideration cost, flexibility, and the application criteria. I’ll report this expense on our Schedule E and set aside $21/month from our excess cash flow to cover the annual premiums moving forward. If we choose to in the future, we can also increase the coverage in $1 million increments up to $5 million.

This policy counts 1-4 family units as 1 property each, so on paper we represent 4 properties (including our apartment). We can acquire 2 additional properties with similar terms at a higher cost, but 7-10 properties will cap our umbrella coverage at $1,000,000.

I suppose that would be a good problem to have. 🙂

Minimum Liability Requirements
Before we could finalize the umbrella, we had to update the underlying policies to meet the liability minimums:

  • Auto – $250k/$500k bodily injury & $50k property damage
  • Renters – $300k personal liability
  • Homeowners – $300k personal liability

These requirements will vary by policy and carrier. There were also some relatively trivial costs associated with adjusting the individual policies.

Considering this process was a bit more difficult than I was initially expecting it to be, I’m very content with the price and terms of the policy we found – and pleased that it should serve our needs for the foreseeable future.

Want to be notified of new posts?

Join 175 other subscribers