Asset Protection Strategies: The Role of Umbrella Insurance for Landlords
It makes the news almost daily: tenants suing their landlords. Sometimes it’s because the apartment is allegedly unfit for habitation. Other times it’s for injuries. Sometimes, landlords are sued for discrimination, like in this Robert Durst case in Texas.
Can you afford to pay a tenant $200,000 if they take you to court? What about $500,000? One million? Most of us don’t exactly have that kind of cash stuffed under our mattresses. So how can you protect yourself, and all of your assets, as a landlord?
As lawsuits are somewhat prevalent in the United States, it’s important to take steps to properly insure yourself. One way to do so is with an umbrella liability insurance policy.
What is umbrella liability insurance?
An umbrella insurance policy, as defined by Investopedia, offers supplemental liability coverage beyond the limits of standard home, auto, or watercraft insurance. It provides an extra layer of protection for individuals susceptible to lawsuits for property damage or injuries. In the context of rental property ownership, securing umbrella insurance is especially prudent. Landlords face potential liability risks associated with tenant accidents or property damages that exceed their primary insurance coverage. An umbrella policy bridges this gap, offering extended liability protection to landlords. However, it’s important to note that umbrella insurance for rental property typically requires a basic insurance policy as a prerequisite. By investing in umbrella insurance for rental property, landlords fortify their financial security and safeguard against unforeseen liabilities, ensuring comprehensive protection for their real estate investments and peace of mind amidst potential legal challenges.
Umbrella insurance for landlords kicks in when your basic policy has reached its limits. For example, let’s say a tenant files a lawsuit against you for an injury that occurred on your rental property. You now must pay your tenant $1 million in damages. Your basic liability insurance policy is for $250,000, which isn’t enough. If you had a large umbrella liability policy, it would then take effect and cover the outstanding balance of $750,000.
What exactly does it protect?
As a landlord, you could face a number of situations that may unfortunately end up in a lawsuit. For example, one of your tenants could fall down the stairs in your rental property and hold you responsible for their injuries. Or the lawsuit could be personal in nature. A tenant could sue you for slander if they feel you told someone lies about them, or libel if they believe you wrote untrue statements about them and passed on the information to a third party. Other possibilities include false arrest, detention or imprisonment, “mental anguish”, discrimination and more.
An umbrella insurance policy protects against liabilities landlords may face in lawsuits. It therefore protects a landlord’s assets, as any damages will be paid from the insurance policy, not from the landlord’s pocket. Without insurance, a large award against you could be financially devastating, forcing you to sell your assets, lose all of your money and even lead to bankruptcy.
Most umbrella insurance policies cover your legal expenses if you’re ever sued. Some insurers will even provide you with their own team of lawyers and experts, as they have a vested interest in protecting you.
What isn’t covered under an umbrella policy?
Umbrella insurance policies cannot be used as health insurance – you should also keep a comprehensive health insurance policy.
This type of insurance policy generally won’t cover damage to your personal home or vehicle, as it would be covered under your own homeowner or automobile insurance policies. If you commit a crime or negligently fail to do something you are legally obliged to, your liability insurance won’t cover you. The resulting award for damages would be your responsibility.
Finally, there are always exceptions and coverage exclusions. Herein lies the rub: some insurance providers may intentionally leave loopholes big enough to wriggle out of covering you against the worst risks. Carefully read the details of your umbrella policy to make sure your coverage is appropriate and complete for your situation. If there is a particular liability you’re worried about, grill your insurance agent to cover every angle of the coverage, and try to get their answers in writing (email works as a written record).
How much does it cost?
Umbrella insurance for landlords is often cheaper if purchased from the same insurance company as the original policy. It doesn’t replace traditional coverage – it’s an additional insurance. In most cases, your original policy must meet a minimum base coverage; $300,000 is typical.
Costs vary greatly depending on location, potential natural disasters and coverage amounts. Rates start around $250 per year for $1 million of coverage. The insurance expense is tax deductible for landlords.
How much coverage do I need?
Umbrella policies of $1 million and $2 million are common. Some landlords own several rental properties and insist on $5 million in coverage. Speak to an insurance professional to see what your risks are, and how much coverage would be appropriate for your situation. The general rule of thumb is to insure yourself up to your net worth… but a little extra insurance might help you sleep better at night.
Does every landlord need an umbrella insurance policy?
Any landlord knows that renting out a property comes with a certain amount of risk. From tenants to property damage, there are several potential liabilities that can arise. That’s why umbrella insurance for rental property is so important. Umbrella insurance for landlords is a type of coverage that provides more protection in the event of a claim. It can help to cover the cost of repairs, legal fees, and even eviction costs. In short, umbrella insurance can help to protect landlords from financial ruin. So, if you are thinking about renting out your property, make sure that you first buy an umbrella insurance policy. It could be the best decision you ever make.