Should you get an umbrella policy for your rental property?

Latest update on October 8, 2021.

Whether you are a tenant, vendor, or guest, an injury claim can result from any type of accident that occurs on a rental property. Slip and fall incidents, dog attacks, and instances of assault and battery are among the most frequently reported types of claims, as stated by the legal information website Nolo.

Many landlords purchase an umbrella policy for rental property as an extra layer of protection for their personal and business assets, to help protect themselves from potential lawsuits that may arise in various situations at one point or another.

Key takeaways.

  • Excess coverage is offered by umbrella policies once the coverage limits of primary policies like landlord liability insurance have been met.
  • An umbrella policy can provide protection if the property is unoccupied due to damage caused by a squatter or if the property is damaged by a guest or tenant making claims against a landlord.
  • Unlike insurance policies that pertain to one specific property, an umbrella policy can provide coverage for multiple rental properties situated in different cities and states.
  • While forming an LLC, some investors may opt for a policy called an umbrella policy, which can provide protection to the business and personal assets of the LLC.
  • The amount of the deductible and the location and type of property are factors that generally determine the premiums for umbrella insurance policies, with rental property typically ranging between $150 and $300 per year.
  • The name suggests an umbrella policy that provides additional liability protection for landlords, covering policies and defamation, and injuries to vendors, guests, and tenants. This policy also offers protection for the liability of the property owner and business against any existing insurance policies.

    In order to obtain a policy umbrella, the landlord must have more than one underlying liability policy, as a landlord insurance policy, when the coverage begins to exceed the limits of all the policies underneath the umbrella policy.

    Assuming the landlord is found liable and a tenant who is injured at the rental property makes a claim, the initial claim will be paid by the landlord’s liability insurance policy. If the payout exceeds what the policy provides for, the umbrella insurance policy will typically cover the remaining amount, up to the policy limits. To provide an illustration, let’s assume this scenario.

    What does umbrella policy cover?

    An umbrella policy for rental properties covers multiple states and provides coverage for liability when other property-specific insurance policies, unlike homeowner’s insurance policies, do not.

    Some scenarios that are commonly encompassed by an umbrella policy include:.

  • The guest or tenant of the home suffers a serious personal injury due to a faulty electrical system, which is shocking to them because the home is not properly maintained.
  • The renter’s actions have led to the landlord being sued by a third party, such as the adjacent neighbor, due to the resulting damage.
  • During the transition between tenants, the locks were not replaced due to the fact that the previous tenant’s belongings were stolen or harmed by a previous tenant who unlawfully entered the residence.
  • An unauthorized trespasser in a vacant dwelling initiates legal proceedings against the landlord due to injuries sustained while being present on the uninhabited property.
  • The property owner is being sued and harmed in the shared space of a multi-unit residential property, like the communal laundry room or parking area, by one of the tenants or a visitor.
  • A landlord is sued and has to pay for legal defenses, even if the landlord is found not to be at fault.
  • Typical cost of an umbrella policy

    The cost of an umbrella policy for rental property will vary depending on various factors including the requirements of individual investors, the nature of the property and its location, property value, and deductible amount.

    According to the Insurance Information Institute, the cost of the umbrella policy will increase between $75 and $50 per year, resulting in an additional coverage of $300 million.

    In order to buy an umbrella policy, an investor might be required to have the highest possible liability coverage on underlying policies. Typically, it offers coverage only once all underlying policies have exhausted their coverage limits, which is why an umbrella policy for rental property is comparatively inexpensive.

    The insurance policy for landlords may offer the option of adding a small annual fee for an umbrella policy, which could be attractive to investors looking to protect their investment in multiple real estate properties.

    Umbrella insurance policy vs rental property LLC

    One of the reasons investors set up a limited liability company (LLC) is to help protect other business properties and personal property, as well as to create an LLC in Texas or Arizona, where an investor owns a single-family home rental in Austin and Phoenix, and lives in California.

    The tenant in the Phoenix property sues the landlord for medical costs, psychological suffering, and emotional pain after tripping and falling on the patio in the backyard.

    In most cases, the landlord’s Arizona LLC would cover the rest of the tenant’s claim, utilizing the landlord’s insurance for the Phoenix rental to settle and payout the maximum coverage amount if the investor is deemed responsible for neglecting the property. Generally, the claim would have no impact on the investor’s personal assets or the rental property in Texas.

    In order to cover the remaining portion of the claim, the investor might be compelled to vend the rental property in Phoenix at the most unfavorable moment. The assets of the LLC are still in jeopardy, which exemplifies the potential drawback of solely relying on an LLC for safeguarding purposes.

    By opting for an umbrella insurance policy, the investor would be responsible for the deductible, while the remaining amount of the claim, which was not covered by the underlying landlord insurance policy on the Phoenix rental property, would be taken care of by the umbrella policy.

    Items an umbrella policy does not cover

    Most umbrella policies for rental properties provide a broad scope of coverage, meaning that if a specific incident is not excluded from the policy, it may be covered.

    Nevertheless, no insurance policy comprehensively covers everything. Some of the things that an umbrella policy is likely not to cover include:

  • Investors may wish to increase the coverage limits of homeowners insurance and liability policies. This is because an umbrella policy is a liability policy that covers damage to the property.
  • The process of eviction is taking its course, prior to the landlord locking out the tenant. For example, a landlord may be sued for illegally evicting a tenant. Similarly, a landlord may be sued by a tenant for performing an illegal eviction. In the case of an illegal eviction, the landlord may be sued for locking out the tenant. This pattern continues, with the landlord potentially being sued for performing an illegal eviction and locking out the tenant. The landlord may face legal consequences for unlawfully evicting the tenant and locking them out of the property.
  • In addition to tangible harm, exemplary damages are granted under specific situations for bodily harm or costs incurred by a property owner.
  • Typically, a commercial or business umbrella policy is necessary. However, an LLC owned by a property rental business may not offer coverage for activities such as personal umbrella insurance policy.
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    How an umbrella policy for rental property works

    Let’s consider another situation in which an umbrella policy for a rented property could potentially function.

    Imagine an investor with a personal net worth of $500,000 who recently acquired a rental property for $250,000 but hasn’t had the opportunity to establish an LLC due to lack of time.

    The investor is granted $750,000 in damages, as the tenant injures their hip on the property soon after the transaction is completed and files a lawsuit. As fortune would have it.

    The excess, excluding the umbrella insurance policy, would pay for any outstanding amount. The claim, up to the highest coverage limit, would be taken care of by the landlord insurance policy of the rental property.

    If, however, the investor did not have an umbrella insurance policy on the rental property, they could potentially be personally liable for the remaining claim balance, which could force them into bankruptcy and result in the investor losing all of their personal net worth.

    Excess liability policy vs. umbrella policy

    While “surplus” and “umbrella” are frequently used interchangeably to describe liability policies, they are actually distinct entities.

    An excess liability policy raises the cap of an already existing liability for a particular line of coverage, like premises liability. In contrast, an umbrella policy typically offers coverage for multiple lines of coverage and can also provide comprehensive umbrella coverage for rental properties in various cities or states.

    Final thoughts on this topic

    When deciding whether to purchase an umbrella policy to provide additional coverage, investors in real estate may choose to obtain a policy for rental properties or rely on the sufficient protection offered by the LLC’s liability insurance. It is an important decision that every investor in real estate must make, considering that the umbrella policy serves as an added layer of protection provided by the landlord’s insurance.

    Particularly when more properties are included in an investment portfolio, it can make smart business sense to understand the advantages of possessing an umbrella policy for rental property. Numerous investors manage to avoid lawsuits throughout their entire professional lives.