Please help with insurance!

General Real Estate Investing
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Please help with insurance!

Dima A.
Member since 2010 · 3 posts · 0 votes

Hi everybody, I'd like to get some feedback on an insurance question I am struggling with.

Here's the situation: I am 33% member in an LLC that owns and rents real estate. For simplicity, let's say we have a 60k home with a 60k mortgage. We have home insurance, with a personal liability policy of 100k. The kicker is that every member is personally guaranteed on the 60k loan to the bank.

The question is this, if the LLC is sued by a tenant for whatever reason, for let's say for 500k in damages. What will happen??

My understanding is this: the insurance policy will cover 100k of the damages, and we loose the 60k home (lets say our only asset) to the party suing us, but no more because of the limited liability provision (assuming we did not do anything grossly negligent, etc) and the company is bankrupt.

But because we members are personally liable for the loan, wouldn't each member be stuck having to pay 20k to the bank?

How can one protect from such an incident? Is that what umbrella insurance policy covers? Will ANYTHING cover such an event?

Thank you for all your help in advance!

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Andy J.
Wholesaler · Colorado Springs, CO · Member since 2009 · 286 posts · 255 votes
16y

Firstly, you may want to consider placing the home inside a trust with your LLC as beneficiary. It will mask the true ownership of the home, not a foolproof strategy but may discourage a lawsuit and/or make it harder/more expensive for someone to pursue. I believe the only way to reveal the beneficiaries is to subpeona the trustee (whom I would recommend not be you or your partners, I use friends out of state).

It would be unlikely that you would lose the house in that situation. If it is mortgaged to the full extent of its value it brings no benefit to the litigant, unless they really want to become a landlord with no equity and poor cash flow. They could take ownership interest in your LLC, again though if all you have in this LLC is a fully encumbered property it's unlikely they want it.

I would also recommend Bronchick's wealth protection strategies, some very insightful options to encumbering your property.

Secondly, you need to raise the liability insurance on your property. I have $1 mil. liability per entity (not per house), I believe the cost is around $100/year. $100k liability gets eaten up pretty quickly in a slip and fall lawsuit.

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  • Jon Holdman
    Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
    16y

    OK, not a lawyer, and you're asking questions you should ask a lawyer.

    The plaintiff in the lawsuit could not take the house and leave the loan. They could, at best, take the equity in the house. In Bill Bronchick's "Wealth Protection Secrets of a Millionaire Real Estate Investor", he recommends keeping all your properties mortgaged to the hilt. A creditor can only take assets, and a mortgaged property is a combination of an asset and a liability, so there's little to take.

    Further, if done properly, the LLC protects each of your personal assets. Since the property is owned by the LLC, the plaintiff can only go after the LLCs assets. Just like someone who sues IBM cannot come after the assets of any IBM shareholder, the plaintiff cannot come after the members of the LLC.

    However, as officers of the LLC, you can be held personally liable. Just like Ken Lay and Joe Nachio ended up doing time (or, would have, in Lay's case), you could end up on the hook if a judge decides you, as an officer of the LLC, were liable for the cause of the suit.

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  • Andy J.
    Wholesaler · Colorado Springs, CO · Member since 2009 · 286 posts · 255 votes
    16y

    Firstly, you may want to consider placing the home inside a trust with your LLC as beneficiary. It will mask the true ownership of the home, not a foolproof strategy but may discourage a lawsuit and/or make it harder/more expensive for someone to pursue. I believe the only way to reveal the beneficiaries is to subpeona the trustee (whom I would recommend not be you or your partners, I use friends out of state).

    It would be unlikely that you would lose the house in that situation. If it is mortgaged to the full extent of its value it brings no benefit to the litigant, unless they really want to become a landlord with no equity and poor cash flow. They could take ownership interest in your LLC, again though if all you have in this LLC is a fully encumbered property it's unlikely they want it.

    I would also recommend Bronchick's wealth protection strategies, some very insightful options to encumbering your property.

    Secondly, you need to raise the liability insurance on your property. I have $1 mil. liability per entity (not per house), I believe the cost is around $100/year. $100k liability gets eaten up pretty quickly in a slip and fall lawsuit.

    1Reply
  • Dima A.
    OP
    Member since 2010 · 3 posts · 0 votes
    16y

    Wow, I actually had no idea that if we loose the house the mortgage goes with it... that was really my biggest concern.

    The homes are all mortgaged to the brim, so there is very little equity for anyone to go after.

    What if the house (and mortgaged apparently) is lost in a lawsuit and the new owner does not pay, would I be liable for the loan or would the bank take the home? Since I am personally guaranteed?

    Thanks for the replies! I'm glad I asked and I will look into the book.

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  • Account Closed
    OR · Member since 2008 · 1k+ posts · 845 votes
    16y

    Dima, slightly off topic, but one of the things you want to do to help prevent lawsuits is to keep the property in tip top repair.

    Respond immediately to repair requests and always walk through the house with your eyes looking for anything that could be slightly dangerous. If you see anything, repair it immediately.

    It won't stop all lawsuits, but it will cut down on the possibility. A common cause of lawsuits is injury. Make sure there is nothing on your property that would cause injury with normal usage.

    One other thing: when I am screening applicants one of the things I check is whether or not they have been involved in any lawsuits. If they have, I find a legal reason to reject their application.

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  • Jon Holdman
    Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
    16y

    Again, not a lawyer, and this would be really good stuff to discuss with your lawyer.

    They can't "take the house" with the mortgage in place. They would have to pay off the mortgage in order to take the house. That would make sense if there was a lot of equity. But with no equity, its not worth the trouble and they would say "nothing there to take".

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