How exactly do umbrella insurance policies work?

[Jeff L.]

Say I have two properties, both under separate LLCs and insurance policies.

If I get an umbrella policy under one of those insurance policies, can it cover the other property as well? Or do I need to get two umbrella policies, one for each?

If I get an umbrella policy personally (like under my home residence policy), can I have it cover my LLC properties? Conversely, if I get it under one of my LLCs, can it cover me personally?

[Colleen F.]

Not an insurance person but in my experience an umbrella insurance policy will cover more then one property in your personal name. You also have to have minimum  500 thousand limit on your auto insurance which is where most of the increased cost of coverage will be. For LLCs the policy is different, multiple LLCs under one umbrella I doubt it what would be the point of the LLCs. 

[Derek Lacy]

For an umbrella to cover a property the property must specifically be named on the umbrella policy.  You must also have enough underlying coverage for the umbrella to work.

In no other sector of business have I seen such confusion on an umbrella policy.  Umbrellas will not automatically cover every property, but they will cover any property listed. 

Basically think of an umbrella as a regular old liability policy, it covers you in the fact of lawsuit, but it's got an awful high deductible, usually about $300k or $500k.  So you have the first policy to cover that first $300/500k, which is the primary policy, this will usually be a policy that also covers the property. 

So if a large claim happens it will use the liability on the first policy then go into the umbrella (excess) policy.

Here are common mistakes with the umbrella.

1.  Not naming every exposure you have (meaning not telling about every driver, auto, home, etc).

2.  Not updating the umbrella policy, important if it has a different underwriter, so you bought three houses, you purchased a policy for each, but did you tell the umbrella underwriter?

3.  Not maintaining the underlying limit.  You get a call from property A's insurance agent, he can save you a bundle, but he moves you to a $100,000 liability, you told the umbrella agent that you would provide $500,000, guess what, you just bought a $400,000 deductible.

4.  Not turning in the claim with the umbrella.  There was a fall, he seems okay, but you turned it into the property policy, 2 years later you receive lawsuit papers requesting $1,000,000, your property policy responds with the $500,000 in coverage, they use it all, you then turn it into your umbrella and they deny the claim for late reporting, leaving you on the hook for the other $500,000 plus legal fees.

Anymore, it is getting common for a $1,000,000 per occurrence on the primary policy or $2,000,000 per occurrence, I will always prefer that due to the complications above.

Now again to the confusion with SFH property investors, you can buy a policy that covers multiple locations for property and for liability, that is not called an umbrella policy, that is just called a property or liability or package policy with many locations. Do not think that Simon Property Group buys a policy for each location, they have on master policy. Bonus points if you can guess what Simon Property Group's deductible is.

[Derek Lacy]

@Jeff L. 

I went off of your title and not your specific questions.

There are about 1-2 underwriters (I represent them both), and possible one or more that I don't know about that will write over multiple LLC's. Usual standard underwriting will require one umbrella per LLC.

These specific underwriters prefer to write your full risk. So you personally, then they will only write over solely owned LLC's (the LLC may only be in your or your spouses name).

Again, that is not the norm, the norm is if you have 2 LLC's and your personal name, you need 3 umbrella policy to cover all. But there are options out there.

[Merline Raymond]

From my understanding your LLC is meant to limit your direct liability so having umbrella insurance is more so to cover those liability's that you don't have under the LLC that will cover your personal property. Your car, your home, etc if someone sues you. I'm assuming you will need to get umbrella for yourself and then an umbrella for your LLC's because they have their own separate liability.

I will admit though I have only had the experience of people using an Umbrella insurance for themselves and not their business when I worked in insurance. I would usually forward business folks to the commercial insurance department.

[Jeff L.]

Originally posted by @Derek Lacy:

@Jeff L. 

I went off of your title and not your specific questions.

There are about 1-2 underwriters (I represent them both), and possible one or more that I don't know about that will write over multiple LLC's. Usual standard underwriting will require one umbrella per LLC.

These specific underwriters prefer to write your full risk. So you personally, then they will only write over solely owned LLC's (the LLC may only be in your or your spouses name).

Again, that is not the norm, the norm is if you have 2 LLC's and your personal name, you need 3 umbrella policy to cover all. But there are options out there.

Hi Derek, thank you so much for the detailed info. So let's simplify my situation. I have:

- Personal automobile insurance

- One property with home insurance (both under my LLC)

Would I get the umbrella policy under my auto insurance and have it cover the property, or do i get the policy on the LLC's home insurance policy, or is it a separate policy altogether?

Also, does an umbrella policy cover ME or my property? I want to shield myself from liability. I'm not sure if the umbrella policy is covering the rental house or myself.

[Ivan Oberon]

Great question and feedback. There are a few issues to consider here, chief among them is probably how you separate what are considered "business" activities and liabilities from your personal liabilities and activities.

The IRS considers anything which generates income for you a Business activity. It is irrelevant whether you own the property in your personal name, an LLC, Corp or Trust, etc...

The vast majority of insurance people out there do not understand this because the majority of them are not active investors themselves and because of this, provide incorrect information and either inferior products and in many cases, based on my experience, the absolutely incorrect product altogether. This puts their clients and themselves at risk.

Coverage for your rental properties needs to be written on a commercial form, underwritten as a tenant occupied dwelling and at least $1,000,000 in liability. You want to look for the flexibility to not be subject to Co-Insurance requirements or minimum earned premiums and varying choices in deductibles and coverage forms. You also want to be able to switch coverage on the fly between a property being vacant, occupied or under renovation as sometimes you might experience a longer vacancy than expected during a turn or have to do a more major renovation after many years.

In this structure, it is possible to insure multiple controlling entities under one master policy schedule and obtain "excess" liability coverage in excess of your underline $1,000,000, in increased increments of $1,000,000.

Also, all "personal" policies and "personal umbrella" policies have what is called a "Total Pollution Exclusion." Many commercial policy forms allow you to "buy back" coverage for at least one type of "pollutant" that is pertinent to landlords. This coverage will offer defense and claims settlement for alleged or actual injury caused by CO2 emissions from a heating or air conditioning source.

You can add a "personal umbrella" to cover your personal liability exposures of your home and auto, if your net worth justifies it, but you should keep any income producing assets separate from your personal liabilities. 

Ivan