Umbrella insurance -- how much?

Question

My wife and I are curious how much umbrella insurance we should be carrying in the below scenario. We are relatively new to the real estate investing business, have two properties, both sole-proprietor owned (no LLC) with maximal insurance. One of those properties is a rental for 5 college students a block from a college campus. We would be considered high income earners on each of our W2 incomes, we have less than $1,000,000 in assets, and have a goal of accumulating much more rapidly.

Is it advised to carry more umbrella insurance in the above scenario assuming we both plan to keep our W2 jobs and thus protect against future garnishing of wages in the unfortunate event of a suit costing more than our net worth?

John Mocker · Answer

Ryan.

I have several suggestions to review with your Attorney and Insurance Agent:

1. purchase the maximum umbrella coverage you can afford.  Most carriers will go up to $5,000,000 limits.  Even if your carrier can not provide the needed limits, there are stand alone Umbrella policies that you can purchase.

2. Review your Lease agreements with your attorney.  Include Hold Harmless & Indemnification Agreements.  Consider Waiver of Subrogation (their insurance can not go back after your insurance) and making their insurance Primary & non-contributory.  signed lease agreements with everyone who lives there.  If you require Guarantors (ie Parents) try to get them on as a party to the contract.

3. Their Insurance would be a separate renters policy for each Tenant with at least $300,000 Liability.  Make them name you as an additional interest.

4. If you use a Property Management company, make sure they have both General Liability & Professional Liability

5. Contracts for snow removal with spelled out amount/time frames for when they have to plow & Shovel.  Make sure they have Liability and that they name you as an additional insured on the policy.   Indemnification and Hold Harmless, waiver of subrogation and Primary & Contributory requirements in the contract should also be reviewed with your attorney

Bo Bond · Answer

Ryan,

Assuming you have typical limits for your general liability ($1M / $2M), then another $1M+ for an umbrella policy would likely be pretty inexpensive.  If you can afford it, go for it.  I think this is wise, especially as you gain more and more exposure and look to expand your current portfolio.

There's really no exact science when it comes to purchasing an umbrella (or excess limits of liability).  It's really a judgement call.  I will say that people get sued for $1M all the time now.  That use to be a lot of money, but not so much anymore.  That doesn't mean you have to go out and purchase umbrella coverage today though, or that you should.  If you're a very prudent and fair person/owner, then most of your potential issues can be managed before they ever reach the point of a lawsuit.  However, you purchase an umbrella for the worst case scenario.  While most death claims typically pay out around $1M, it's the long lasting injuries to a third party that you may be liable for that could go well beyond $1M.  I do think the element of college students adds to your exposure, and is good reason to at least consider umbrella protection.

Below are some items to consider when deciding to purchase an umbrella policy or not.

#1. How many dwellings/rentals do you have in your portfolio (5, 25, or 200)?  The more you have, the more likely you'd need umbrella protection.

#2. How litigious are the areas where your rentals are located?

#3. Have you ever been sued before?

#4. Do any of your rentals have unique exposures (pool, playset, pond, significant drops in elevation/grading, high traffic area, etc.)?  College students is one to consider as you've mentioned above.  Anything that adds to what you feel is the standard/typical level of exposure for a rental should be considered for umbrella coverage.  What you consider to be standard/typical exposures will differ from the next investor.

#5. Do you tend to rent A, B, or C properties?  A and B tenants "likely" have access to more money or contacts to sue you.

Nathan Gesner · Answer

You have to make your own decision. I personally think the insurance is sufficient, but everyone has different tolerance levels and you have to consider the class of properties, the class of clientele, how Tenant friendly is your legal system, how litigious is your city, and other factors.

Here's the reality. I've been on these boards for over 12 years. I have never heard of an investor on BiggerPockets that lost so big that their property was taken from them. I've heard a few national stories over the years, but they were always obvious cases of slumlords, Landlords forcing tenants to have sex with them, or other egregious violations of human decency and law. Here are some other thoughts:

• The vast majority of court cases involve disputes around security deposits. I believe Fair Housing violations are the second largest.
• The odds of you losing are small as long as you've obeyed the law and can prove that with documentation. Most Tenants have nothing documented.
• Most cases are in the Landlord's favor. Of those that are not, most of them are settled before going to court.
• Most payments are far less than your insurance would cover. Insurance companies wouldn't make money if they were paying out $500,000 every time a Landlord is taken to court.
• In general, the average lawsuit loss is less than $135,000. That's for all lawsuits, not just Tenant-Landlord disputes
• 
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Lynn McGeein · Answer

I would suggest talking to your insurance agent about costs for different levels of protection, then decide what amount gives you the protection you feel you need for a reasonable cost.  Possibly just raising existing coverage amounts on the ones you feel are higher risk right now would be more cost-effective for you at this stage.

Umbrella insurance -- how much?

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