Looking for umbrella insurance recommendations

[Romain Nguyen]

Hi all, 

I'd be interested if some of you can share recommendation of good umbrella insurance companies that you're using, and am also interested in insights regarding the coverage that you selected. I understand that these parameters are largely dependent on everyone's situation, so here's more context: 

- I live in California and am planning to buy my first rental property outside of California (I'm planning to do buy and hold) 

- I was initially considering establishing an LLC in order to protect my personal assets, but I realized via other threads (link) that doing so would cost me about $800 / year since I am a California resident, and the law requires me to establish the LLC in California. These costs sound high for a first buy and hold property, and using am umbrella insurance seems to be a good alternative at a fraction of the cost. My understanding is that an umbrella insurance is an appropriate alternative as long as my portfolio of properties remains modest (this article and the example of the warehouse was insightful) 

Thanks in advance for any insights that you can share, and have a great weekend, 

Romain

[Romain Nguyen]

Thanks Michael. Which liability limit did you put on your umbrella ? $1m or above ? 

From what I've seen, you're indeed at risk of veil piercing if you do not observe some basic principles with the LLC (e.g. need to file annual report and pay fees, not mix up personal vs. business funds, etc.). As long as you respect these rules, it seems a safe option but it seems that the LLC does not always provide the best outcome for an investor depending on the scenario. The examples in the article I pasted above were quite enlightening for me: 

Scenario 1: Umbrella insurance

The landlord owns a triplex worth $700,000. A tenant breaks their leg on the property. The tenant sues the landlord for $300,000.

LLC: The LLC has assets of $700,000. The LLC pays the full amount of $300,000.

Umbrella insurance policy ($10,000 deductible/$1,000,000 coverage): The dwelling insurance picks up the liability max. After that, the landlord personally pays $10,000 out of pocket for the deductible. The umbrella policy would pick up the remaining balance plus legal costs.

Result: The landlord would be better off with the umbrella insurance policy. With the LLC, the landlord would lose $300,000. However, with the umbrella policy, the landlord only loses $10,000.

Scenario 2: LLC

This unfortunate situation happened in Oakland, California. A landlord rented out a warehouse as an event and residential space. A fire ignited at the warehouse, killing 36 people. Prosecutors sued the owner and leaseholder for “negligently ignoring safety hazards.” Insurance paid out $3 million to the owner for the fire. However, 31 of the 36 victim’s families sued over the fire.

We don’t know yet how much the families will win. Let’s say they win $20 million.

LLC: The judgment is $20 million. The value of the warehouse is $3 million. The landlord loses the warehouse and insurance payout. The total monetary loss is $6 million.

Umbrella Insurance Policy ($10,000 deductible/$3,000,000 coverage): The landlord goes bankrupt, losing $20 million.

Result: The landlord is better off with an LLC, which shields them from personal bankruptcy.

Ultimately, landlords should make a decision based on their own real estate portfolio. An umbrella insurance policy is generally the better financial choice for most small portfolio holders.