Small Investors and Umbrella Insurance...Waste of Money?

[Daren H.]

I currently own 6 single family rental homes in my own name (value ~700K total). I have landlord policies on each. The general/personal liability coverage on each policy is $100K. I also have the general/personal liability coverage extended from my primary residence policy to all of my rental policies which offers another $1M in coverage. On top of this I have a $1M general liability umbrella policy. In order to have the umbrella policy I am required to have full auto insurance coverage at $250K each person/$500K per accident (which drives up my auto policy significantly by the way). I don’t have auto loans so I could be saving money with just carrying liability auto insurance instead of full coverage. In my opinion and assessment, there is significant coverage in place for claims before the umbrella policy would be necessary making it an unnecessary expense or at least a very very low probability of being used. It feels like insurance companies are making easy money (low low low risk) with umbrella policies which is further aided by higher auto insurance premiums in my particular case.

I could increase my primary residence liability coverage at a much cheaper rate than having the separate umbrella policy. I could then drop my auto insurance coverages to save money. For most small investors, are umbrella policies really necessary if you can get adequate coverage extended from your primary residence general/personal liability? What are your thoughts?

[Rob Beland]

@Daren H.one thing that hasn't been discussed from what I can see is your net worth. You have $700K worth of real estate but what is the total value of your mortgages? What is the value of your "cash on hand", stocks, 401K, automobiles, etc... How much equity do you have in your primary residence?

Consider this scenario. An investor has 7 SFRs with a total value of $700K. The properties combined have 75% debt on them leaving $175K in equity. The investor has a $25K car with no loan. The primary residence is worth $400K with 75% debt. The total of other investments and cash is $200K (stocks, 401K, savings).

The above investor essentially has a net worth of $500K. Let's say the investor is sued by a tenant and found grossly negligent in the lawsuit. The investor could be sued for $1M or he could be sued for $10M. The reality is that if he liquidates every asset he has, there is only $500K available for the tenant. What is the point in having $2M worth of liability insurance if you are only protecting $500K worth of assets?

@Elizabeth Colegrove

@David Dachtera

@Joseph Weisenbloom