Please help with insurance!

[Dima A.]

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!

[Jon Holdman]

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.