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umbrella insurance in conjunction with LLC?

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  • umbrella insurance in conjunction with LLC?


    I've read about the pros/cons of getting umbrella insurance vs placing a rental property into an LLC, and I was wondering a couple things:

    1) does personal umbrella insurance cover properties already inside an LLC? how can someone utilize both of these tools in combination on a property inside an LLC for example?
    2) does commercial umbrella insurance have a role in physicians owning real estate (or help w/ the above situation)?


  • #2
    An LLC for rental property can often be pierced in a lawsuit, making you personally liable, unless you meticulously separate the business operation of the LLC. You need separate bank accounts and bookkeeping for the LLC. You cannot commingle funds between personal accounts and the LLC or the LLC protection could be pierced in a lawsuit.

    If you have personal umbrella coverage, that would not cover you for property held by an LLC. The LLC is a corporation and would require a second umbrella policy. Otherwise your entire property could be at risk. If you have minimal equity, then a basic landlords policy might be enough. Once you have substantial equity in the property, you then need a higher level of protection.

    I have a very high limit umbrella policy and own my rental properties directly, no LLCs. The umbrella policy is my secondary protection after the owners insurance on each property. If I had the rental properties in an LLC, I would have to pay yearly taxes and fees for each LLC, pay for a second umbrella policy for the LLC, and have the hassle of keeping careful business records and avoid any commingling of funds to prevent piercing the LLC in a lawsuit. All of that is too complicated, time consuming, and expensive for me, when a very high liability limit umbrella policy is sufficient and simple.


    • #3
      thank you for your input.

      1) so what I'm hearing is that a personal umbrella policy (in a situation where all your rental properties are in LLCs) would only cover your own primary residence + other personal things (ie. car, pets, etc.). any other things it would cover?

      2) would a 2nd umbrella policy for a LLC mean like "commercial umbrella insurance"? and if one has multiple LLCs (each with 1 property in it), does that mean one would need to purchase umbrella policy for each one?

      3) what would you consider a "very high umbrella limit" and what would be the typical cost of that? what do companies look at in terms of calculating policy limits or premiums/cost (ie. is this similar to us getting "vetted" by disability insurance companies)?



      • #4
        Having an LLC is a very different form of protection from an umbrella insurance policy. If a client has an LLC, I normally also encourage proper insurance coverage. If you have questions and think an LLC or trust might benefit you, seek out a competent estate planner. Good ones are up to speed on asset protection as well. It pays to manage your LLC properly, else as stated above, the limited liability shield can be pierced so it doesn't end up helping much. It's really a long conversation (or 2 or 3 . . .) about what steps a person needs to take to properly administer an LLC. Regarding insurance, it sounds like, from your recent post, you'll want to talk with one or more insurance professionals to get quotes. It'll be very asset specific what your premiums and coverage are. Also insurance company specific.


        • #5
          Thanks for the input.

          So I've done some more research and this is what I believe may be prudent going forward (please correct me if I'm wrong on something):

          1) If property is owned under personal name->purchase personal umbrella policy of at least $1M (including auto policy as well in that, same carrier).

          2) If property is owned inside an LLC->purchase commercial umbrella policy; plus any other forms of liability coverage for LLC properties?



          • #6
            I wouldn't want a rental property in my personal name. I'd always put it in a limited liability entity. Often this is an LLC, but not always. I can't give you an exact recommendation, although you probably want some insurance on a rental property in an LLC. Before a client starts spending large amounts of money on property, insurance, etc., coming up with a holistic plan is best so all the components of a person's personal and business actions are thought out.