Umbrellas are one of the most misunderstood insurance policies. Investors oftentimes assume they don’t need liability coverage if they have an umbrella policy, and that’s simply not the case.
Today, Jacqui Price, EVP of Underwriting at NREIG, is sharing what investors need to know about umbrella policies. Welcome back to the Insured Investors podcast.
What is an umbrella policy?
Umbrella policies are a way to garner additional liability coverage beyond just your underlying policy. They are also a way to provide an extra layer of coverage to the owner, whether it be an entity or a person. It’s a way to get additional liability coverage above and beyond your primary limit of coverage.
It’s important to note that umbrella policies do not eliminate the need for investors to buy primary liability coverage. And they don’t offer any protection for the property itself. It’s strictly liability coverage, not property coverage.
They don’t kick in until after the limits of your primary liability policy are exhausted, which is why you have to have a primary policy for an umbrella to have an effect, because the primary policy has to pay out first.
The terms “excess liability” and “umbrellas” are often used interchangeably, but they’re not the same. What are the differences between the two?
An umbrella policy can extend across multiple lines of business. For example, with a business venture, you could have commercial auto coverage, business owners coverage, and rental property insurance. Those are all different lines of liability coverage. A true commercial umbrella policy can extend over and above all of those different lines of liability coverage. If you have multiple types of liability policies, an umbrella policy may be right for you.
An excess liability policy just extends over one line of liability coverage. So, if the only additional liability coverage you need is for premises liability on your investment properties, then you may only need an excess liability policy.
Outside of excess liability and umbrellas, are there any other options?
There are. Before you purchase an umbrella or excess liability policy, you should consider how much you have as your primary liability coverage. Some insurers will start premises liability coverage at $300,000. If that’s not enough, then you could look at raising that limit. NREIG offers liability limits starting at $1 million per occurrence with a $2 million annual aggregate. That’s our base coverage for premises liability and that is a per location limit, meaning every single location you have insured with us has at least those limits.
We do know that some of our investors prefer higher liability limits. Therefore, we offer up to $2 million per occurrence with a $5 million annual aggregate per location. Increasing your premises liability limits per location can be a better way of protecting your assets than an excess policy. Because if that excess liability policy is exhausted, then the rest of your locations are left without any excess liability coverage. Increasing your limits per property is oftentimes more affordable too.
Are there any misconceptions about these policies?
I think the biggest misconception, which we’ve alluded to, is that you don’t have to have a primary liability policy for an excess liability policy to be valid. This isn’t true. As I said, the primary liability policy must pay out to its fullest extent before the umbrella or the excess liability policy can come into play.
It’s also important to know that in most cases, what’s excluded on the primary policy is also excluded on the umbrella policy or the excess liability policy. In other words, if something’s not covered on your primary liability policy, it’s generally not going to be covered by your excess coverage. So, it’s very important to make sure that you have adequate primary liability coverage.
What should investors know before purchasing an umbrella or an excess policy?
There’s really no right or wrong answer as to whether or not the amount of coverage you have in your underlying policy is right for you. It truly is dependent on the investor and what their appetite for risk is. If you feel like your $1 million/$2 million limit is sufficient and you’re never going to have a liability loss above that, then you may not have a need to go out and get an umbrella policy. However, if you are worried, then that is something that you should talk to your agent about and decide from there.
Investors should also consider how many units are at a location. There are going to be more people on and off the property at a 12-unit apartment complex versus a single-family home, which leads to greater exposure of a slip and fall or some other kind of liability risk.
Another consideration is the area in which you are investing. Some areas of the country are simply more litigious than others and are more likely to grant the claimant a settlement after a slip and fall.
Lastly, consider if the location is owned by you personally or owned by a business entity, like an LLC. If you own the property personally, that means your personal assets are at risk should a loss occur. If I owned a location personally, I know I would sleep better at night if I had a lot of liability coverage on hand. But if my risk was tied into a business venture, I may not need as much liability coverage. However, every investor, every business plan, every person is different. Your agent can almost sell you as much liability coverage as you could possibly want, but it’s not always necessary. It’s up to the individual investor how they feel they should be insured.
Some insurance agents unfamiliar with real estate investing may advise clients to insure their rental property on a personal dwelling policy – which typically includes a $300,000 to $500,000 limit of liability – and purchase a personal umbrella to extend the limit of coverage over both their personal and investment properties. Is that a bad idea?
It is a bad idea. I remember my early days of insurance dealing with this exact situation, and I was very confused at the time. So, this is definitely something that I’m passionate about because I didn’t understand it at first.
Let’s say you have your personal home and your personal auto insured with your favorite insurance agent, and you have a personal liability policy in place with them that covers your personal assets. Then, you start investing and insure those investment properties with the same agent who insures the properties under a dwelling policy. You most likely have liability coverage starting at $300,000, which typically isn’t enough for a rental property. So, you purchase a personal umbrella. However, personal umbrellas oftentimes have exclusions for business ventures, like rental properties. If a loss occurs beyond that $300,000 liability policy, that umbrella policy most likely isn’t going to help.
That example is how I wrote my first commercial lines umbrella policy several years ago. The investor had four or five investment properties insured and he had to do a personal umbrella and a commercial umbrella. It sounds like a lot, but personal lines and commercial lines coverage are completely different when you’re talking about liability coverage.
Let’s recap. What is an umbrella policy and when should investors consider having one?
An umbrella policy provides additional liability insurance coverage that goes above and beyond the limits of your primary liability insurance, providing an additional layer of coverage to those at risk of being sued with an extra layer of liability coverage. For investment properties, a commercial umbrella is what you will want to purchase, should you choose to utilize an umbrella policy.
There’s no right or wrong time to purchase an umbrella and not everyone needs one. One thing to consider, if you’re faced with a wrongful death lawsuit, are you comfortable with the per occurrence limit of liability coverage that you have? If the answer is no, I would talk to your agent about getting more coverage. If the answer is yes, then that is fantastic.
— Game Segment: Q & A–
We pulled questions from the BiggerPocket’s Forum, where investors ask for advice about all things real estate investing. In this case, we found questions surrounding umbrella policies. Jacqui is going to share some general advice regarding the situation. Please note, that information is limited and does not apply to all situations.
Question #1: I have been investing in single-family and small multi-family for the past 15 years and have grown to approximately 40 doors in Nebraska, Iowa, and Missouri. I am concerned about liability protections. Currently, all of our properties are owned by an LLC. I have general liability insurance and a personal umbrella (which I don’t think will cover me as I may need a commercial umbrella). How have others structured their insurance and property ownership to maximize liability protection?
Answer #1: This is someone who needs to talk to an agent, but they’re on the right track. They know they probably don’t have as much coverage as they need because they have 40 doors and a mix of single and multi-family. If all the properties are in one LLC, one bad loss could take down their entire business venture.
So yes, they’re they are correct. Their personal umbrella is not going to come into play should a loss occur at one of their investment properties. Now, here’s where they have a lot of options. As we’ve discussed, if you have other commercial liability coverages, they might want to look at an umbrella so that they have an umbrella to go over multiple lines of coverage. If they don’t and are only concerned about these properties’ premises liability, then they potentially want to look at an excess liability policy. They should know that if they have a $1 million excess or umbrella policy, the 40 doors share that excess coverage. So, a $1 million excess or umbrella policy may not even be enough, and they may want to increase that coverage amount to help them feel better about their risk. They could also see if they could increase their premises liability coverage per location, which would likely give them more coverage than an excess liability policy would.
My advice for them is to consider how much coverage they have per location, consider how much coverage they think they need per location, and then find the best way to garner that much liability coverage.
Question #2: I have liability coverage on all my landlord policies. I have five rental properties. Should I also get a separate umbrella policy? If I get an umbrella policy, should I remove liability coverage from the landlord policies?
Answer #2: This is a very common question. So, they have five rental properties, and we are going to assume that they are all single-family. It’s up to them and their risk appetite on how much coverage they think they need. If they only have $300,000 in liability coverage per location. Then, I would suggest considering an increase.
To answer their second question, you get an umbrella policy to go above and beyond your liability coverage. If they remove their liability coverage, their umbrella policy is moot. So, even if you get a $5 million umbrella, you still have to keep that primary coverage in force, or else you don’t have any coverage at all.
I would advise this person to talk to their agent and see how much additional coverage would cost and to make sure they keep all of their liability coverage intact.
Watch the full interview here!
