Going the Insurance Policy Route vs LLC

[Aaron Moayed]

For those who go the insurance policy route, instead of going with an LLC, what are the true risks?

Like what are some common lawsuits that can happen?

[Scott Smith]

Hey Aaron,

I will answer this in a bit of a roundabout way. I generally break down asset protection for real estate investors into the "five pillars," insurance coming in second. The first pillar is avoiding high risk activities and keeping up with maintenance, as that activity with stop most lawsuits that would take place. Insurance would be the second pillar  and will cover the majority of your exposure. However, insurance is limited because it only protects you from one type of liability: accidents/negligence. Insurance doesn’t protect you from any part of the sale or acquisition of a property (e.x. Somebody wanting to sue for you backing out of a bad deal or accusing you of selling them a property with defects like unknown termite damage). Insurance also doesn’t protect you from misunderstandings, especially those made in writing and email. What happens in these misunderstandings is that something goes wrong either in the sale or after, and then they sue you for some statement you made that they “misunderstood”. That lawsuit is a claim for fraud, and that’s what fraud typically is... a misunderstanding and someone being “injured” and wanting to hold the other responsible for it. Insurance never protects you from these kinds of claims and they happen all the time. 

So I often find insurance to be the appropriate step for someone who is just getting started, I often recommend anyone growing or considering real estate investing full-time to not think of it as an either/or since it is more of a both/and. Just depends on how long you want to deal with the additional exposure.

Hope this helps, feel free to respond if you had any other questions about this.