We would like something else, probably 1 million to start, that would help protect us from other potential lawsuits (unlawful evictions, injury, death, etc)I'm unsure which type of policy would be best to blanket cover our on LLC and would allow us to increase our coverage as the portfolio of properties increase.

Your "friend" is also running the risk of damage to "his" tenant, which would result in lawsuits (and attorney's fees) and damages payable to the tenant.

If anything, at least pay an attorney a small flat fee to do the paperwork and explain all the procedures and required disclosures to you so you don't end up in a lawsuit down the road.

She bought it cash with a lawsuit settlement and I do not think she has the $ the pay the taxes and has a new BF, rumor.   

It's also possible that you can pursue a civil lawsuit using an attorney you hire.

What state will the lawsuit be filed in?

You are setting yourself up for a lawsuit and it is just not a nice thing to do.

You can still be personally named in a civil lawsuit, despite the business transaction taking place under the umbrella of an S-Corp.

Maybe even ADUs (Mother-in-Law Suites)? 

In a home with a mother-in-law suite, you can live in one and rent the other.