If I have homeowner's insurance and umbrella insurance, how badly can I get burned?

Question

Let's assume I have both homeowner's insurance on a SFH rental as well as personal umbrella insurance. The SFH is owned in my name, not via LLC. Let's assume my umbrella policy covers me up to $10MM in liability, just to be super-conservative.

My understanding is that if I am sued for more than $10MM, the remainder is out of my pocket. Fair. Two part question for other situations:

• Given the protection I outlined above, what can possibly happen that can make me lose money due to damage/lawsuit, other than vacancy and out-of-pocket deductibles? What kinds of things are typically not covered by these policies. I understand each policy is different and one must read the fine print, but I am looking for answers that discuss any items that are "typically" not covered.
• Assume I get sued for $5MM. What is a ballpark range for deductibles? I know that depends on the policy, but are we looking at around $50K out of pocket or more like $5K for a typical policy?

Thanks a bunch. It seems like the answers to the above are absolutely necessary to have before risking net worth on a buy-and-hold real estate investment. There is risk in everything but understanding the risk is the first step to managing it.

Jason Bott · Answer

@Vik C.

To get the nitty gritty on Flood coverage, which is run by the Fed's, go to this link,

https://www.floodsmart.gov/floodsmart/pages/faqs/f...

Neglect - perfect example is a roof that is 50 years old.  If it just falls down into the house do to the fact it has outlived it's useful life, you can not file a claim to get a new roof.  Or I have had clients where an old chimney stack just falls over because it has not been tuck pointed for 50 years.  They will most likely not cover the cost to rebuild the chimney.

Intentional Acts is referring "Intentional Acts of the Insured".  Any 3rd party act is covered.

You can never eliminate All Risk.  But once you have been identified and assessed the risks, all techniques to manage the risk fall into one or more of these four major categories:

• Avoidance (eliminate, withdraw from or not become involved)
• Reduction (optimize – mitigate)
• Sharing (transfer – outsource or insure)
• Retention (accept and budget)

Ideal use of these strategies may not be possible. Some of them may involve trade-offs that are not acceptable to the organization or person making the risk management decisions.

You can probably gather why large companies hire "Risk Manager" to help manage the ongoing, never ending risk in all things a business does.

Jason Bott · Answer

It is correct.  Neglect is covered under a Liability policy, but not under a Property policy.

Vik C. · Answer

Thanks Jason. You're right on the money. I used to work as a consultant for financial institutions so I've hard risk management beat into my skull over the years. So yeah, I'm trying to be my own risk manager and the first step is discovery of understanding what the typical uninsurable risks are.

To clarify though, it appears that the sources I've read indicate Neglect IS covered under Umbrella Insurance, though not under typical Homeowner's or Dwelling Insurance. Does this sound correct to you?

Vik C. · Answer

Hey Jason,

Thanks. The bullets you list out cover one of my questions. It sounds like the key is that there are several very "possible" events that are not covered under a typical dwelling insurance and umbrella insurance, particularly:

• Flood - Does this include flooding" from a bad storm? Is this usually not included? I know Flood Insurance exists, so it sounds like every landlord needs to have this as an additional policy per home.
• Neglect - Surprised to hear your example was about out-of-service smoke detectors. That sounds like Neglect to me, but you mention that as a common exclusion. In fact, the "Neglect" exclusion is quite concerning, since almost any maintenance/property related issue can be defined as neglect. As such, it sounds like umbrella insurance is a lot less useful than I originally thought. 
• Intentional Acts - does this mean that vandalism is not covered by dwelling/umbrella insurance? Also quite concerning. From other research I've done it looks like Intentional Acts mean Intentional Acts on the part of the insured (me), so that would be fine.

In light of the above bullets, I'm not sure how a landlord would actually eliminate the risk of total loss and asset forfeiture of all they own or all that is owned within their LLC. I must be missing something because I doubt that shrewd business people would take uncapped, uninsurable risks like these with their personal assets/LLC assets.

Thanks again.

Jason Bott · Answer

@Vik C.

If you are looking for specific example to a liability claim that will settle for X amount, it just doesn't work that way.  There is really no limit to the possibilities of what you could get sued for.

Most large liability claims are the result of a tenant repeatedly complaining about some danger;  lead paint in bad condition, no batteries in the smoke detector, not repairing a railing on a porch.  You refusing to do anything about it, then someone gets hurt.  You can avoid most of this if you are a responsible landlord.

The largest claim I have seen was a landlord being sued for a supposedly not keeping the smoke detectors in working order.  The 2 tenants were doing drugs, passed out and started the place on fire, and they both died.  The family came after the landlord for $2.3M.  $0 was paid on the claim.

Common Exclusions on  property policy,

•  Ordinance of Law •  Earthquake •  Flood •  Power Failure •  Neglect •  War •  Nuclear Hazard •  Intentional Acts

Hope this gives you a little more to work with.

Vik C. · Answer

Hey guys,

Much thanks for the clarification on terminology between homeowners and dwelling. But I don't want to get caught up in nomenclature. Does anyone else have some guidance on the two bullets I mentioned above?

Thanks!

Elizabeth Colegrove · Answer

Honestly we have the correct policy's on all of our houses. Along with a a high umbrella, that is all the protection we have currently. Based on my research that should be fine. The question is would they be awarded those amounts? Also what are you investing in? We have single family houses. At our current numbers our insurance guys says we are fine.

Mark Creason · Answer

Vik,

You will want dwelling coverage instead of a homeowner's policy.

Mark

Bryan N. · Answer

@Vik C.

My insurance company allows up to $1M in liability on my rental property insurance policies for approximately .50 a month.  @Jason Bott made a good observation about what type policy your actually working with.

Jason Bott · Answer

@Vik C.

The first thing you need to be sure of is that you do not have a "Homeowners" policy covering a rental.  A "Homeowners" policy will typically exclude any business operations, ie renting the premises for money.  You will want to make sure you have a policy that is rated for the business/commercial exposures of a rental property.

Exclusions that may be in a policy would be discrimination, sexual harassment, Intentional/criminal acts on your part.  The discrimination and sexual harassment can be picked up by other policies.  The criminal acts your on your own:)

A deductible will be a set amount like $500 or $1,000.  It will not be a % of the loss.  Your Umbrella may have a deductible as well.

Make sure you work with insurance broker who has experience in commercial lines, not just personal lines insurance.

If I have homeowner's insurance and umbrella insurance, how badly can I get burned?

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