How much is enough liability coverage for a short term rental?

Question

Hello

I was wondering how much is enough liability coverage for a short term vacation rental. On the short term rental I currently own i have a commercial liability umbrella policy with coverage of 1 million/2 million aggregate. I manage my own rental but i talked to this property manager that said their company offers 25 million of liability coverage if I use them. They said 1 or 2 million of liability coverage is not enough. I dont know if he was just pulling my leg trying to scare me into hiring them or if theres any truth to this. Can anyone comment on this?

thanks!

Martha

Scott Smith · Answer

@Martha Daisley Personally, I would not leave my liability coverage in the hands of an insurance company's umbrella policy and most defiantly not another companies insurance policy.  There are so many other reasons that someone could sue that are not even real estate related that many don't consider.  You could be in a car accident and someone can sue you for your assets - that has nothing to do with renters...  If you or anyone else have specific questions please feel free to DM me and I can help.  I am on BP often as part of my mission statement is to bring education to the public.

I agree with @Michael Baum why allow your hard eared assets to be exposed?  We all as investors need to do our own homework and make our own decisions of course.  Learning from those that are experienced in Real Estate and Law make sense.  Check out Podcast #109 here on BiggerPockets, read peer reviewed articles, and consult with professional firms.

We all seek to find a balance right?  We don't want to be over protected and spend more money than necessary BUT you most certainly do not want to be under protected leaving your hard earned assets exposed!

- Scott

Michael Baum · Answer

Ok I get it. It NEVER happens. It is IMPOSSIBLE. Of course. You can do whatever you like and believe whatever you want. I am going with what I have read and information passed on to me by our attorney and CPA.

Each and every state is different regarding the rules of LLC's. There are articles all over the web that talk about it as well as examples of where it was done. It usually involves some kind of technicality but it has been done even if it was legal.

Anyways, to everyone else. Do you your homework and speak to professionals in the area where you are renting and read the articles by Scott Smith. He lays out everything about LLC's and how to make them work for you.

Michael Baum · Answer

I have 1m/2m as you do. I use Proper insurance and it has a lot of coverage.

As far as the LLC goes, I would highly recommend reading the info provided by Scott Smith as it covers a lot about LLC's.

https://www.biggerpockets.com/blog/author/scottsmith-2

From what I have read, a standard LLC will not protect you that well. A series LLC seems to be the best answer but every situation is different.

Jon Crosby · Answer

@Martha Daisley First off, I'm not an attorney so take this all with a grain of salt as it's merely based on my many conversations in this area with a variety of professionals.  : )

Liability coverage is usually just what the attorney suing you for is willing to cap at based on the amount of effort they want to put in.  In most situations they settle with insurance at $1M or $2M and make their quick fee and move on.  Unless of course there is some egregious gross negligence AND you have other assets of high value they can come after, they usually will not waste their time and you would be more likely involved in a criminal suit to which the civil suit would be the least of your worries.

Your asset protection should align with what you are trying to protect versus what the risks are involved with your STR so there really is no cookie cutter answer to the question.  That being said, I agree with @Ken Latchers and you really can't have too much, BUT I would be cautious on somebody offering that much coverage as you might either be overpaying for coverage you don't need (built into their cost model) or it's some kind of blanket policy for all their clients that you might not actually fully get access to.   Adding to an LLC might provide an additional layer that may or may not be cost effective to your business model (depends on the state and how much you want to commit to your cashflow each year as they can be expensive in some states), but will certainly provide you more protection.

Once again, if you are really worried most attorneys are happy to give you 30 minutes of consulting time to go over this for future work they might get to setup the LLC or other business entity needs.

My personal rule is $2M of liability and wrap in LLC if 2 or more properties in operation.

Best of luck!

Martha Daisley · Answer

hi @scott smith. Thanks for your reply! i have a call with an attorney from your office in 5 min :)

Michael Baum · Answer

@Ken Latchers well, I will have to respectfully disagree. There are plenty of ways an attorney can penetrate a normal LLC. It does offer some protections, but there are plenty of stories about people losing.

I am not an expert nor a lawyer, but there is lots of data about it.

I don't use one as we have one STR, but I carry a ton of insurance. If we get a second one, we will setup a series LLC and drop each property into it's own child LLC to protect the lot.

Kevin Hart · Answer

@Martha Daisley 1 million minimum. more if your net worth is higher than that

Martha Daisley · Answer

thanks for your input everyone!

How much is enough liability coverage for a short term rental?

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