When has an LLC actually saved your ASSets?

Question

I'm getting to the point where i should start to look into what an LLC can do for me.  My wife really wants to set one up but I can't think of a scenario where i'd be sued for more than I'm already covered.  I honestly think for me to get sued and lose a million dollar plus judgment, I'd really need to be negligent, and i'm just not that.  But the thing is, you don't know what you don't know,,,

What i'm looking for is some real world examples of when you, or someone you personally know, has been sued and lost, and i don't mean lost 15k I'm talking real money, six/seven figures.

I want to hear about why you got sued, how you lost, who's fault it really was,  and if you had an LLC, how good of a job it did to protect your assets.  And for those that didn't have an LLC, how did that worked out with using your insurance (umbrella policy and homeowners).

Help me out, convince me i need this thing. I'm not interested in what it can do for estate planning, just how it has protect others from litigation vs their normal insurance coverage.

Account Closed · Answer

@Scott Radetich Asset protection is determined by your tolerance for risk. The two of you have different levels of risk tolerance.

1) Happy wife, happy life. If it makes her feel better, it's worth it.

2) If for instance you get into a car accident and several people are killed, your liability may be greater than your coverage. If someone gets hurt on one of your properties, the opposing side's attorney will do an "asset search" and the fewer assets you show the less likely the attorney will take the case. The people who get sued are the ones who show a lot of assets. By breaking the properties into different LLC s you mitigate some of those risks. A typical lawsuit runs about two years. You can't concentrate on your business if you are constantly providing interrogatories, attending depositions and hearings, providing exhibits and meeting with attorneys.

Protect your time if nothing else.

By the way, if protecting $15k isn't important to you I can give you my account number and you can make the transfer at your convenience. ;-)

Thomas S. · Answer

I have requested real world experiences on BP many times over the past couple of years and to date not a single member has come forward with a case. Plenty repeatedly expound on the need for a LLC none have evidence to support the need of any protection beyond having adequate insurance coverage.

Nothing beyond boogey man scenarios.

I do believe it is a mistake either inside or outside of a LLC to pay down a income property mortgage however conservative investors will continue to place themselves at very high risk by parking their cash in real estate. That is a major flashing light to attract a suite.

Jay Hinrichs · Answer

single member or closely held will be pierced most of the time

I think when your thinking of liability you need to figure out what your doing is has a high likely hood of litigation

with being a landlord of well kept properties being very low on the list.

Family trusts can work pretty good..

Kelly Wright Kelly · Answer

You'd be surprised what insurance may or may not cover.  I practiced as an civil defense lawyer for a couple years and can think of the following situations where insurance didn't cover just off the top of my head:

1) agent pocketed the premium and issued a fake certificate of insurance. This went on for a couple of years and the insured never found out until there was a claim.  The agent ended up in prison but that didn't help the insured who was now on the hook for a couple hundred thousand dollars in damages;

2) fire was caused by an electrical short and not covered once the carrier found out there was aluminum wiring.  This was an 8 or 12 unit complex and tenants all sued landlord for losing their possessions due to the fire.

3) several cases where the landlord or seller was sued for property code violations under the deceptive trade practices act and the carrier denied coverage as the allegation was of an "intentional act".

4) Insurance won't cover breach of contract claims typically, say you get into a dispute with a contractor the insurance isn't going to cover it but are you going to see it through to trial when your personal assets are at risk in the event you're wrong.

5)Not real estate related but I had another case where I represented one of two partners who were sued for a business deal gone bad. They never formally set up the partnership but one guy was acting through an LLC and my client was acting in the partnership as an individual.  Long story short, the partner with the LLC just let a default be entered as his LLC had little to no assets and he had no personal liability.  He let the plaintiff execute against what few assets the LLC had and then set up shop a few weeks later under a new LLC.  My client had to scrape and claw at a payment plan settlement because his personal assets were at risk if he went to trial and lost.

I look at an LLC as an umbrella policy with a one time fee so long as I keep the paper work straight.  I may never need it but its a lot cheaper in the long run just to pay the $400 bucks and not have to worry about it.

The other advantage is that the llc doesn't just shield you from the investment's liabilities but will also shield the investment from your and your other investment's liabilities.  Divorces, partnership disputes/lawsuits, deficiency judgments and called loans all can happen more often than you think.  The LLC will help you to break your portfolio up into little compartments that are insulated from one another, so if something goes bad with you can can write that part off and have the others largely unaffected.    Say you lose a property to a foreclosure with a personal guarantee on the note and the lender takes a deficiency judgment,  your other properties are now subject to foreclosure to satisfy the deficiency since they are held in your name.  If there were in an LLC they aren't liable for your debts.

Richard C. · Answer

Excellent question!  Very few small-time real estate investors actually manage their LLCs in such a way that they provide much protection.

It always makes me cringe to read posts on here from people who seem to think an LLC is magic.

They have their place, and their role.  But they are definately not magic, and if you change nothing about the way you operate, but place assets in LLCs, they won't protect you much.

Simply having the piece of paper does little, if you treat the LLC as an extension of yourself and not as an independent entity.

Rachel N. · Answer

Here are a few examples:

http://www.mercurynews.com/2011/11/07/marin-tenant...

https://lafavelawgroup.com/case-results/

Costin I. · Answer

Here is another set of examples from a BP member: https://www.biggerpockets.com/forums/51/topics/177....

And everyone interested in this topic might benefit from reading this forum post: https://www.biggerpockets.com/forums/51/topics/177095-asset-protection-podcast.

Tom Gimer · Answer

@Scott Radetich

In order to answer any question regarding insurance... you'd need to produce the exact policy language including exclusions and coverage amounts.

People think insurance covers every loss. Hardly!

I'll work on finding some interesting cases where the owner had plenty of insurance and still lost his/her ASSets.

Costin I. · Answer

The missing rail case I'm pretty sure is negligence (landlord duty to maintain property up to code) and at fault, especially if notified about the issue - insurance will not cover in this cases (more than that, I think they will look, maybe even help, to blame the insured in order to deny the insurance claim - in other words, I don't think their first priority is to help you, but to find reasons to deny the claim). Maybe the umbrella policy? But even that is supposed to come into play once the actual insurance policy is exhausted.

The mold cases...I wonder if insurance got involved and covered any, and that's the reason many of them got setled. It's still not answering the questions raised in this post; it only scares me further, as here in Texas, mold (and there are all kind of) is pretty much part of landscape. Especially since one can file a lawsuit for mold and you'll have a hard time proving absolute cleanliness.

FYI:

https://www.moneypit.com/fix-improve-it/home-safety-health/mold/mold-free-home-top-10-tips/

https://www.mnn.com/money/green-workplace/stories/creating-a-mold-resistant-home

And I think that's where the whole asset protection strategy comes in play. It's not so much to protect you once you got sued (since even with an LLC you'll still have to hire an lawyer and incur defense costs)(plus you can get sued for whatever reason, and you'll still have to pay to defend), but to discourage and make it harder to even start legal action against you, and to make it harder/improbable to collect if it comes to that.

Now, looking at those setlements in the mold cases, a small fish hit by that is probably no longer an investor and member here...so I don't think we'll hear any "got sued and lost it all" response, but I still hope a bigger shark might share some from his/her survivor experience and how insurance and PUP/LLC/Series-LLC/Corp/Trust/LandTrusts/EquityStripping protected them.

Thomas S. · Answer

@Rachel N.

Would insurance not have covered those settlements.

Cases involved landlord negligence and the law suites were to be expected. Definatly ambulance chasing lawyers are a major concern in society today. Likely involved fraud on the part of the tenants in may if not most cases but that is neither here or there. Law suits are on the same level as buying lottery tickets in the US. Instant retirement.

Lawyer would have named the principals of a LLC I would expect anyway.

The reality is that landlords that follow safety codes and stay on top of their investments should be well served by adequate insurance. Negligent landlords, or those believing they may possibly be negligent, should consider the added protection of hiding assets behind a LLC.

Sh*t happens, a LLC may or may not protect leaving insurance as your first and best line of defence in either case.

When has an LLC actually saved your ASSets?

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