Is Umbrella Insurance for Your Rental Property Enough?

Building up a diverse, profitable portfolio of rental properties is a lifelong dream for many Americans. If you’ve made it, though, you can’t rest on your laurels – you need to make sure your hard-won wealth is safe against lawsuits, creditors, and even messy divorces.

In some cases, landlord insurance can protect you from liability. For example, if a tenant sues you because of injuries they sustained on one of your properties, your landlord insurance will foot the bill if the lawsuit is successful.

However, many landlords also take out so-called umbrella insurance policies. Let’s take a look at what these insurance policies are and explore whether umbrella insurance is enough for your rental property.

What is an Umbrella Insurance Policy?

Put simply, an umbrella insurance policy is a kind of coverage extension – as its name suggests, umbrella insurance rests on top of a foundational insurance policy, providing additional coverage if your first policy's coverage isn't enough for a particular payment.

Say that you have landlord insurance as a successful real estate owner. You have a dozen properties scattered throughout your local area. One day, someone trips and falls on one of your properties, suffering serious injuries as a result.

Your landlord insurance is specifically meant to protect you from liability in this event. If the injured person sues you, and if the lawsuit is successful, your landlord insurance will cover the bills instead of you having to pay for damages yourself or through your rental company.

But say that your landlord insurance only goes up to $200,000. Then, what if the damages you are required to pay are $400,000 in total?

That’s where umbrella insurance can become very helpful. If you have an umbrella insurance policy, you’ll have extra liability coverage for the above situation. Depending on the nature and details of your policy, you might have the rest of the $400,000 total covered by your umbrella insurance.

Put another way, umbrella policies raise your liability limits. That way, if you are ever found partially or fully responsible for something that occurred on a rental property you own, you’ll be less likely to have to pay out-of-pocket for any damages or court fees.

Details of Umbrella Policies

For rental insurance, umbrella policies cover multiple rental properties instead of specific properties. 

It's possible, for example, to take out a property-specific landlord insurance policy. But your umbrella policy covers all of the properties under which you already have a landlord policy (e.g., if you have two separate property-specific landlord insurance policies for two separate properties, an umbrella insurance policy will extend your liability for both properties).

Aside from that, an umbrella policy works similarly to any other insurance policy you can imagine. Let’s again return to an example where someone is injured on one of your rental properties.

If they sue you and you are ordered to pay $1.2 million in damages, your landlord insurance might only cover you for up to $1 million. In that case, your umbrella insurance policy kicks in and covers the remaining $200,000 that you owe. All you have to pay is the deductible for your umbrella policy.

Big Benefits of an Umbrella Policy for Rental Properties

As you can imagine, umbrella policies provide many big benefits for landlords, particularly those who have many different properties and, therefore, a higher likelihood of being partially or fully liable for injuries at some point in the future. These benefits include:

• Umbrella policies are quite affordable extensions to your normal liability coverage. For a few hundred extra dollars per year, you can get hundreds of thousands or millions of dollars in coverage depending on the details and who you work with
• Umbrella policies provide extra peace of mind to landlords. That’s a good thing, because tenants can oftentimes sue landlords for things like personal injuries, property damage, and so much more
• Umbrella insurance is very convenient for landlords since they cover multiple properties at the same time. With this system, you can theoretically take out a single umbrella insurance policy for your entire portfolio rather than having to take out and pay monthly fees for several policies at the same time
• Umbrella insurance is a natural complementary policy to your landlord insurance and a limited liability company, if you’ve created one already

Is Umbrella Insurance Enough by Itself?

At this point, you might wonder whether an umbrella insurance policy is enough by itself if you're a landlord. After all, can't you just cut out the "middleman policy" and ignore landlord insurance if an umbrella insurance policy will cover all the same stuff?

Not necessarily. There are three reasons why umbrella insurance isn’t enough for your rental property or properties.

You Need Another Existing Policy

For starters, umbrella insurance requires you to have an existing policy already for you to take one of these policies out. As a landlord, you need landlord insurance to qualify for an umbrella policy that also covers landlord-related expenses and potential liabilities.

In addition, you probably already need landlord insurance to operate as a legal landlord in your area. There are very few exceptions to this. So, right from the get-go, umbrella insurance is not legally or practically enough for your rental portfolio.

Umbrella Policies Still Have Coverage Limits

But even if that wasn’t the case, umbrella insurance policies still have coverage limits. They aren’t unlimited insurance policies. 

So even if you were able to take out an umbrella policy, you might have the same limitation as if you only held a landlord policy: you could run into a lawsuit or creditor situation where your insurance isn’t enough to foot the bill.

Umbrella policies are only beneficial because they extend your liability coverage and provide you with more money in the event of an adverse legal judgment. If an umbrella policy were to be held by itself, it would lose this primary advantage, and it would essentially turn into a landlord policy anyway.

Umbrella Policies Aren’t Always Enough for Guaranteed Asset Protection

Furthermore, umbrella policies should never be relied on by themselves to guarantee long-term asset protection. As a landlord, you have to remember that, from time to time, there’s a very real risk that you will face an adverse legal judgment and be required to pay court fees, damages toward an injured party, or something else.

If push comes to shove, it’s quite possible that your personal assets, including other real estate properties, could be on the line. Therefore, you need to undertake other asset protection steps at the earliest opportunity.

At Dominion, we highly recommend an offshore asset protection trust. That’s because offshore trusts aren’t beholden to US court rules and case precedent, and – so long as you draft them correctly – they can hold vital assets that you never want to be at risk.

Even if you are found liable for damages, if those assets are held in an offshore trust, you don't own them any longer, and a court can't compel you to give them up or use them to pay fees. They are foolproof ways to preserve your estate and liquid capital against a variety of legal threats.

Contact Dominion Today

Umbrella insurance might be a worthwhile addition to your overall asset protection strategy, but it’s not the only thing you should do to maximize the security of your estate. 

Dominion can help you create an offshore asset protection trust, within which you can keep liquid capital, property, and other key assets in the event of an adverse legal decision.

Get in touch with one of our representatives today to learn more.