Have you ever used your umbrella insurance policy?

Question

I’m curious to hear from private real estate investors who’ve faced unexpected insurance claims and were protected by an umbrella insurance policy.

We often see discussions whether investors should use an LLC or an umbrella insurance policy. I have looked for examples of landlords that were protected by their LLC and always come up empty handed. It occurred to me today that I've never asked about umbrella insurance claims.

I’m particularly interested in real-world examples where this type of policy came through during:

• Property damage (fires, storms, floods, etc.)
• Liability claims involving tenants or third parties
• Major unforeseen events

If you’ve ever had to file a claim and your umbrella policy saved your bacon, I’d love to hear:

• What happened? (The claim situation)
• How did the umbrella policy protect you?
• Any lessons learned or advice for other investors?

These stories can help others make better insurance decisions before they need it. I appreciate any insights you can share!

Henry Clark · Answer

OP.  Our insurance agent said that in their 11 years they don’t remember anyone ever using it.  But it is so cheap so who cares.  Plus the part I like about insurance is their lawyers get involved and handle the legal issues with no cost to you.

Dan H. · Answer

My view is the insurance is not only valuable if it is used.  In addition, while the umbrella did not end up having to pay out, having it meant I did not stress about it at all.  I knew I was adequately insured and had zero risk of financial consequences.  I just let the various insurers work it out.

As for vehicle vs RE, I agree this was a vehicle but the peace of mind was unrelated.

Also previous to a year ago, my $5m  umbrella did not cost much.  More than doubling in one day did change that a bit, but I am glad I have it and hope it is never needed.

I advocate those who have significant assets have the protection necessary to protect those assets.  I like umbrella because there is no worry of being pierced for inadequate separation of finances, if sued you have a heavy weight in your corner who has all the consequences of a defeat, and because usually it is reasonably priced (mine today is not so reasonably priced but I believe it is mostly related to the risks of CA).

I do understand that the probability of needing the umbrella policy is low.  I post all the time about how often someone threatens to sue me.  It has yet to happen for an RE related event but my last threat of being sued was last month (and unlike most suing threats, we had made some minor mistakes on this one). Nothing ended up happening with it just like always.

I do not stress over the threats because 1) most are meritless and silly 2) they never follow through for RE related stuff 3) I have ample coverage.   I like not worrying about being sued even when the local 2-bit lawyer tells me he is going to sue me (which he has done multiple times).

Best wishes

Henry Clark · Answer

Repost from a few years ago:

We had a flood several years ago.  Umbrella or General Liability did not come into play.  Again, this covers Liability and not property damage.  To curtail Liability, we locked the facility up as it was flooding.  Flooded to about 5 feet in 30 minutes.  12 feet in about 2 hours.  Kept people out.  Due to this water being behind levees the water stayed up for 4 months.  Kept people out.  When I let people back in, had a detailed plan as people salvaged thru.  To keep their piles cleared out of the roadway so people didn't get hurt.  If someone had gotten hurt and sued for $1mm then these coverages would have kicked in.

Having been thru the claim process on a total loss. The following are the key items I would recommend investors pay attention to:

A.  Personal Property coverage- furniture, lawnmowers, signage, etc.  Make sure you have enough coverage.  You could be overinsured on the building and lose money on not enough Personal property coverage.

B.  Lost Income- normally 18 to 24 months.  Make sure you have this covered.  Since you will go from say 100% occupancy down to zero if a total loss.

C.  Clean-up costs- make sure you have sufficient coverage.

D.  Have an Insurance adjuster rep work for you in settling the claim with the insurer.

E.  Understand Replacement cost versus original building costs.  Most properties today will probably cost twice as much as 5 years ago due to inflation.  Also, if this is a regional flood, Fire, Tornado or Hurricane issue; replacement costs will be even higher.

F.  Make sure your Insurer is industry specific and not just your personal insurance.  The policy below would be twice as high if we used our Personal insurer since they don't have the experience mods for Self-Storage.

G.  Deductibles- make sure your deductibles are as high as possible.  This will help to reduce the premiums.

Self Storage – “Company” Liability/Property insurance.

Below is a summary of our Storage insurance for one location for your information. This location is in a 1mm population metro area, 230 units, and cost is about $1,800,000 all in.

Limits of Insurance: Coverage:

Liability and Medical Expenses

$2,000,000/$4,000,000 Occurrence/Aggregate Comprehensive Business Liability

$2,000,000 Any One Person Personal & Advertising Injury

$4,000,000 Aggregate Products Completed Operations Aggregate

$2,000,000 Any One Fire Fire Damage

$25,000 Occurrence Customers' Goods Legal Liability Deductible: $0

$25,000 Aggregate Sale and Disposal Liability Deductible: $1,000

$10,000 Any One Person Medical Payments $1,000,000 Occurrence Hired Non-Owned

$300,000 Each Employee Employee Benefits Liability

$25,000/$25,000 Per Claim/Aggregate Employment Practices Liability

Loc Class Desc Coverage Limit Ded Valuation Type 1 Self-Storage

Blanket Building & Business Personal Replacement Cost Property $2,100,000 $25,000

Earthquake Included

Sinkhole Included

Windstorm or Hail Included 5%

Business Income Actual Loss Sustained 24 Months

Pollution Clean-Up & Removal $100,000

Employee Dishonesty $15,000

Money & Securities - Inside $10,000

Money & Securities - Outside $5,000

Accounts Receivable $25,000

Electronic Data $20,000

Valuable Papers & Records $25,000

Fine Arts $10,000

Employee Personal Property $10,000

Limited Pollutant Removal $25,000/$100,000

Cosmetic Loss Limitation Included

Equipment Breakdown Protection Included

Premium, Fees, and Taxes: BOP Premium: $ 7,760.00

Optional Terrorism Premium: $ 31.00

Total Premium: $ 7,791.00

Key notes:

a. The above insurer specializes in Storage units. If you go with your traditional family insurance premiums will be about twice this, since they don’t specialize in this market.

b. Flood insurance was taken out from last year. I will have a separate topic on Flood damage.

c. We offer their Customer insurance and follow the state Lien/Auction laws.

d. Earthquake, is not offered if you are in a fault zone.

e. Hail insurance went significantly up. Talking with an adjuster, Companies were buying hailed properties, holding them for a year or two, switching Insurers, then making a claim, when another hail storm came through.

f. Business Income loss is 24 months. If you think about the time it takes you to clean up and repair. Then go through rent up phase, the 24 months is pushing it.

g. Between the “Replacement” cost $2,100,000 and the Pollution Clean up and removal $100,000; it looks like I am covered, with an all in cost of $1,800,000. If you back out the cost of land $1,800,000 less $200,000= $1,600,000.

Followup points:

1. I need to check if the “Replacement” cost covers clean up also. If a tornado was to hit our operation, the $100,000 would not cover removal.

2. I need to check if the $100,000 cleanup and removal is just for Pollution or does it cover material debris.

3. If you see any holes in coverage or other followup items, please comment. Also expand on any insurance shortfalls you have had through a claim process. Greatly appreciate that.

It could easily cost $300,000 in clean up, debris haul/disposal, security guard during cleanup, etc. Make sure your insured beyond just replacement costs. Also claim as much as possible. Your roofs might look good, but they might leak later.  Will do a separate topic on going through a Flood.

Owen Rosen · Answer

Umbrella insurance will never come into play for Property damage (fires, storms, floods, etc.)

It is liability coverage only.

I'm an insurance agent and have seen umbrella claims from fatal car and boat accidents.  These were not specifically related to owning rental properties but the clients' assets (including any owned property) was better protected due to having umbrella coverage.

That is the purpose of umbrella insurance.  If you are involved in a fatal car accident do you want your rental property assets exposed?

Owen Rosen · Answer

Nathan-

Every state has different laws believe it or not.  Different insurance minimums, maximums, etc.  Even different standards for lawsuits and what can be sued for.

It's really not important for me to explain the "circumstances" behind these claims.  We're talking about FATAL car and boating accidents.  What is that pain and suffering worth?  $300,000?  OK, good luck with that if you have easily accessible assets like a home you don't live in.

Meanwhile, what are the odds a term life insurance policy pays out?  What are the odds your house burns down or gets hit with a tornado?  The odds are VERY low thankfully otherwise insurance could not exist.  Even so, most people choose to buy coverage for things even if there's a 99% chance they won't need it.  Do you?

Does that mean everyone needs an umbrella?  Nope.  You asked if I've seen them come into play and I have several times.  I recommend them when they are appropriate as any good agent should.

Nathan Gesner · Answer

Thanks, Dan, but that's not helpful since it (a) involved a car, not an investment property, and (b) wasn't even used.

The advice from almost every investor is to protect your investments with an LLC or umbrella insurance. I have tried for over a decade to find an investor that saved their bacon because of an LLC, but I get crickets. Now I'm looking for someone that used their umbrella insurance. So far, nothing.

The point is that I believe people spend a lot of money, time, and effort protecting themselves against a non-existent threat.

Dan H. · Answer

I had a case where it looked like the umbrella policy could get used but 1) ended up Not being needed 2) was vehicle related, not RE related.

Our Son’s girlfriend was driving one of our vehicles and got into an accident.  Our coverage was a little light for the extent of the accident.  We got both primary auto and umbrella insurance on it.  Our primary auto and her auto insurance ended up being sufficient.

I was glad I had the umbrella policy as I did not worry about anything.  I did not know early how things were going to end up.

Our auto coverage is now at an increased level so if this happened today it likely would not result in any involvement of the umbrella policy.

The way I look at it the insurance is not for being used but for protection and to alleviate any stress. It accomplished both of these.  I just let the insurance handle it.

I hope to never need the umbrella insurance, but it provides peace of mind that I have extensive coverage.  It likely would require something grossly negligent with huge consequences to have a chance to go beyond my coverage and we are not that negligent.

By the way a year ago the same umbrella policy that I had brought in on the car  accident stopped covering vehicles in CA.  They were discounting my policy cost for no longer covering vehicles.  However I wanted the vehicle coverage.  I spent much a day trying to get a new umbrella carrier.  I ran into 1) not covering RE in CA 2) not covering vehicle in CA 3) requiring all our insurance to be with the insurer providing the umbrella policy.  I had few options so our cost doubled.  I suspect I spend more for the umbrella policy than virtually everyone.  However, I am glad I have it.

Jonathan Greene · Answer

This is a good question because I've had an umbrella policy across everything for years, but have never used it. I'll be interested to see who responds.

Marc Winter · Answer

Hi @Nathan Gesner, does 'balloon' = 'umbrella' insurance?  I've used an umbrella policy to cover our rentals for some time.  Never used it.

In 30+ years we've been sued 1x (legal blackmail over a tenant's drunken trip/fall) which the insurance company settled for $1,500.00).

We've been using some privacy tactics to keep our names off the county recorder and the target off our backs.

Further, we review our insurance coverage and premium annually, just to keep on top of any changes.

As with all insurance, it seems to be a waste of money... until you NEED it!

Nathan Gesner · Answer

HEY! It's an insurance agent! Surely you know some answers to these questions:1. What were the circumstances surrounding these claims? If the insured driver was sued for more than their car insurance covered, the accident must have involved negligence. Or did they crash into a zoo full of endangered species?2. I believe the standard vehicle liability is $300,000 while the average settlement is less than $60,000. What are the odds of a vehicle accident resulting in a settlement greater than vehicle liability will cover? They must be very low odds because insurance companies are in the business of making money, not paying out maximums.