Umbrella Insurance Coverage...is it worth it?

Question

Afternoon BB,

I am looking into getting umbrella coverage through USAA for all of my properties? I was wondering if you could give me some advice.

Thanks.

Joe Splitrock · Answer

My personal umbrella liability coverage is a wrap on top of my regular policies, so it adds protection to my home, auto or rental properties. One good reason to hold all your insurance with the same company. Also I am not sure if it would work that way if the properties were in an LLC. I then may need separate personal and business umbrella liability.

The argument isn't that LLC hurt you, just that they cost money to setup and maintain through yearly filings and extra accounting effort. You also have to be very careful how you separate personal from business. For someone starting out with a couple highly leveraged properties, it is really overkill in my opinion.

Joe Splitrock · Answer

I have never met an attorney that didn't recommend an LLC and I have never met an insurance agent that didn't recommend a good umbrella liability policy.

Personally, I think the umbrella liability is a must have. If you do get sued, the insurance agency pays or fights it.

Weston Couch · Answer

@Mike McCarthy Well, this is just my opinion as an investor, but I may be biased because I use the new one's(Series LLC) for our clients, granted we also use the traditional LLC's. Objectively speaking, you can enjoy the benefits(rates) of buying the property in your name and still put them "in" an LLC through a land trust, though eviction issues may be complicated some.

I think using LLC's are worth it even if you even if you're not a bigger investor for a couple reasons. First, they do provide effective protection that insurance doesn't as long as you avoid mixing money, etc. They can prevent a court from stripping you of your investment properties if there's a large judgement from a car accident you were involved with for example. They also compartmentalize what's at risk in any given lawsuit meaning that if a lawsuit comes from an accident at a property, you can't lose more than that specific property.

Second, they're more about being proactive in protecting yourself. When used appropriately, they prevent you from ever being low hanging fruit for a lawsuit. If you only have insurance and own everything in your own name, when or if there's an accident on your property, you'll be a clear target for a lawyer looking to collect.

Also, they're surprisingly affordable if you get the right services(comparable to insurance).

The only notable bad side I know of is related to what you mentioned. It can make some of the bureaucracy(like financing or evictions) more tedious, but there are easy fixes for that as well.

Mike McCarthy · Answer

@Weston Couch I do not currently hold my properties in an LLC.  My feeling based on a lot of research is that for a small investor, the benefit of purchasing properties under my name and getting those benefits far outweigh the possible liability protection of an LLC.

Purchasing under my name allows me to get conventional financing (30yr fixed at 5-6%).  For a commercial loan, it's more along the lines of 10-15 year balloon with a 6-9% rate.  Also if/when I have to deal with eviction, owning the property personally allows me to file for eviction.  As an LLC I would have to use an attorney (though I probably would use an attorney anyway).

For a small investor, I don't know that the protections of an LLC would hold up in a significant lawsuit.  Plus, the LLC would need liability insurance anyway.

As an attorney-investor, what are your thoughts on the matter?

Weston Couch · Answer

@Joe Splitrock Of course, and both are essential for good asset protection, but I think a lot of people don't realize insurance only protects your properties from claims stemming from the properties themselves. LLC's protect the properties from yourself(if you hit someone while driving your car), and from claims at other properties(tenant on Property A can't collect payment on Property B for example).

Andrew Pettit · Answer

Hey Mike,

That is really the route that I am going the only reason I started the LLC was because I was conducting a BRRRR and the Hard Money Lender needed me to have a LLC. It doesn’t matter now because I was able to get private money and like you said we are going through a attorney anyway.

Mike McCarthy · Answer

For the few hundred $$/yr that it costs, I think it’s well worthwhile. I’m sure it’s rare to have an event that racks up over a few hundred thousand in liability... but if it does happen, I don’t want to have to worry about it.

The umbrella helps me sleep well at night not worrying about a thing. (Insurance-wise at least$

Weston Couch · Answer

@Mike McCarthy  @Lynn M. Hi, just sharing from my experience. Do y'all use an LLC as well to protect your properties? The new one's are pretty cheap and let you put all your properties into separate liability compartments which really supplement the insurance a lot more cost effectively than having a bunch of separate LLC's. https://www.biggerpockets.com/blog/the-traditional-llc-vs-the-series-llc-which-is-better-for-real-estate-investors/

Lynn McGeein · Answer

We've had umbrella through USAA for many years.  We did lose it, however, for a  few years when my kids were teenagers and too many cars were totaled (4 in 2 years), so had to up the liability on all policies separately during that time, but we couldn't get it from anyone else then, either.   It's my understanding that they allow up to 10 properties now, but you'd need to ask.  We also deal with Foremost (USAA referred them) and Progressive  (boat) and USAA allows those under our umbrella as well.

Matt Moylan · Answer

@Andrew Pettit how many properties do you own?  I believe USAA will only provide coverage for up to 4 investment properties.

Going with an insurance broker will be much more beneficial for you as they will have more options and will have the ability to ensure you have the proper coverage needed in place.  Best of luck.

Umbrella Insurance Coverage...is it worth it?

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