I talk to many clients that think buying an Umbrella Insurance policy is a “no brainer”. I don’t know if I completely agree with that belief and think it’s important business owners understand what they are paying for and actually getting.
Yes…its very affordable, and so for many they think “the annual premiums are so cheap and if it gives me any additional protection or peace of mind- why not?” However, lets talk about that ‘additional protection’ you think you are getting.
Excess not ‘Gap’ coverage
Many people think that umbrella insurance is great coverage because it will ‘fill in the gaps’ and cover me if my regular auto, home owners or rental insurance doesn’t cover me- WRONG. Umbrella insurance is built to be there for ‘excess’ claims that might exceed your regularly insurance policy. Moreover, the umbrella policies oftentimes have very specific provisions that it won’t pay out any benefits until primary policy in place has been exhausted.
Example. You have insurance on one of your rental properties and mold is discovered. Regrettably, our owner policy doesn’t cover the claim, so you think you can rely on your umbrella policy to come to your rescue- Don’t count on it! The umbrella policy doesn’t cover the gaps in your standard policy, only the claims that might exceed it.
Another way of saying it is that your umbrella policy works in ‘concert’ with your other liability coverages (say even an uninsured motorist blindsides you)…your primary insurance may cover the injuries caused by this driver up to a point, but then the umbrella policy takes over when your other liability limits have been reached and covers any excess claims.
What are we actually trying to protect?
Many think an LLC or Corporation is all we need to protect ourselves or our assets from our business operations or rentals. However, that’s not what I’m talking about here. Yes we need to have entities and good asset protection to protect us from our business ventures or the tenants in our rentals, however think about liabilities that don’t involve your business.
Look from a different perspective for a moment. Think of a lawsuit or cause of action that could take away your business. This is liability that isn’t created by your business, but by your personal actions! I call this type of liability “Outside Liability”– Exposure created outside our business that could allow a creditor to take our business or rental property away from us.
Many consider this a unique approach to asset protection because they have never heard it explained in this manner. However, I want you to know this exactly is how courts and judges view asset protection when a creditor is going after assets, and many misunderstand the true methods to protect their assets.
Let me share an example that may bring this home. Recently, I had a client get in a car accident that was clearly his fault (texting and driving). Another driver and passengers were seriously injured and the claims are going to be in the hundreds of thousands, if not over a million.
What makes the situation more precarious is that my client owns a successful business, a few rental properties and a personal home (with equity in it- believe it or not).
To be honest, the case is far from settled, but we are carefully re-assessing his asset protection plan. Regrettably, he and his wife had not taken asset protection that seriously in the past because “they didn’t think it would happen to them”. This is exactly the time an Umbrella Policy would be of great help to my clients. Hopefully, his auto insurance will cover the initial claim, but it’s a good chance the claims could exceed policy limits. That’s when the umbrella insurance could kick in and cover the excess claims. We’ll see what happens in this case and situation, but the jury is still out (no pun intended).
Here is another look at the power of Umbrella Insurance with a video I produced on YouTube:
The truth is that umbrella insurance can be one of the most affordable forms of asset protection and should be one of your front line defenses. However, I want to ask of you to really drill down and interview your insurance agent to make sure you understand the boundaries of YOUR policy and what it actually covers.
Again, it’s such an affordable option to complement a good asset protection plan at a cost on average of $300-$500 a year for $1M to $2M of coverage, so don’t ignore it. Without umbrella insurance, you could be obligated to pay out of pocket for legal fees, medical bills, and damage expenses that exceed the limits of your underlying primary policies.
Bottom line, have an annual review with your attorney regarding all of your asset protection techniques and exposure and implement the most affordable plan expanding it as your assets grow.
The NEBDG Blog, by our Tax & Legal instructor Mark J. Kohler, is "The Real Estate Investment Conversation You Can Rely On." Mark J. Kohler is a CPA, Attorney, Radio Show host and author of the books “The Tax and Legal Playbook- Game Changing Solutions For Your Small Business Questions” and “What Your CPA Isn’t Telling You- Life Changing Tax Strategies”. He is also a partner at the law firm Kyler Kohler Ostermiller & Sorensen, LLP and the accounting firm K&E CPAs, LLP. For more information visit him at www.markjkohler.com. Let us know if there is a topic you would like to discuss!