Understanding Liability Coverage
Welcome to today’s episode where we’re diving into a crucial, yet often overlooked topic for real estate investors, liability insurance. As a real estate investor, protecting yourself from potential risks and legal claims is key to safeguarding your business’s future.
In this episode, return guest, Casey Carter is sharing why liability coverage is vital and the types of liability coverage you should consider to ensure you’re fully protected.
Importance of Liability Insurance for Investors
When investors are purchasing insurance, they may see multiple different lines of coverage. One line of coverage is liability, which protects you financially from being sued for someone else’s injuries or property damage. There are multiple types of liability, but it is, in fact, one of the most important coverages you can obtain. In many cases, property damage costs are minimal compared to liability claims. Everyone knows how expensive lawsuits can be. And liability coverage is what’s protecting your finances.
Significance of Liability Limits
I think the biggest importance is the out-of-pocket expenses. If someone is injured, or God forbid, dies on your property, you could be looking at a half-a-million to a million-dollar lawsuit. Slip and falls are common liability claims and those range between $10,000 to $50,000. Those aren’t small chunks of change and not everybody has that lying around. So, again, liability coverage is there to protect you financially.
Types of Liability Coverage
When you’re looking at your policy documents, you’re going to be looking to the right side of your certificate of insurance. You may see numbers like $500,000/$1,000,000 or $1,000,000/$2,000,000 and have no idea what those mean. Those are your limits. The first number is per occurrence, which is the amount that your policy will pay out at any given occurrence. So, if someone slips and falls that is one occurrence. At NREIG, everything we sell has a minimum of $1,000,000 per occurrence limit. So, at any given occurrence, you could receive up to $1,000,000.
Now, if someone slips and falls the next month, that’s when we get into aggregate limits. Multiple occurrences in a policy term can add up to your aggregate. For example, if you have two separate slip and fall accidents in a policy term, both those occurrences would add to your aggregate.
Additional Liability Coverages
There are few. First, let’s say you’re a real estate investor and you’re acting as your own property manager. In this case, you could obtain professional liability, also called errors and omissions (E&O). It covers professional acts. So, if you are the property manager, any acts surrounding that could potentially be covered under professional liability. Another liability coverage investors could find useful is Products and Completed Operations. Lastly, investors may want personal and advertising injury.
Determining Liability Coverage Amount
There are a lot of different points we could discuss, but I’ll highlight the most important, consider your risk exposure. Do you have a single-family residence where a mom, dad, and two kids are renting out a property from you? Or do we have a 20-unit apartment complex where we have 20 different families living at this location? Liability limits aren’t typically per unit but per location. And a 20-unit apartment carries a lot more risk exposure than a single-family home. So, for a 20-unit apartment, you may want to look into an excess liability or umbrella policy to provide more coverage.
Understanding Risk Exposure for Property Owners
When evaluating your risk exposure as a property owner, it’s essential to consider various factors such as the location of your property. Is it in the middle of the desert, where extreme heat and dry conditions pose risks, or is it in a place like Montana, known for ice and snow that can increase the likelihood of slips and falls on the property?
The level of risk associated with your property will determine the amount of liability coverage you should have. Higher risks require more extensive liability coverage to protect yourself in case of unforeseen events.
Game Segment: Liability Loss Scenarios
We’re going to share some lawsuit scenarios, and you’ll let us know if liability coverage would come into effect.
Scenario 1: A tenant or visitor slips on an icy sidewalk and sustains injury. They sue you for medical expenses and damages, claiming that you neglected property maintenance.
In this scenario, liability coverage could potentially come into effect if the dangerous situation was known to you, and no steps were taken to rectify it. As an investor, it’s crucial to mitigate risks on your property and ensure a safe environment for occupants.
Scenario 2: A pipe bursts in your rental unit, causing severe water damage to the tenant’s personal belongings. The tenant sues you for not maintaining the plumbing system properly.
In this case, property coverage would likely cover repairs if the issues were not known beforehand. The tenant’s belongings may be covered under a contents policy, either purchased by them through renters insurance or provided by the property owner through a tenant protection plan.
Scenario 3: A tenant claims that you improperly evicted them without following legal procedures, and they sue you.
The coverage for this scenario would depend on the policies you have in place. Property premises liability may not cover this situation, but a professional liability policy could offer assistance. Understanding the laws regarding evictions in your area is crucial for landlords to avoid such scenarios.
Scenario 4: You, a house flipper, replace the roof on the property yourself. After the home is sold, the new owners discover significant leaks due to improper installation, leading to property damage.
If you are conducting the work yourself, having a Products and Completed Operations policy is essential to protect yourself from liability. Products like FlipShield from NREIG can provide coverage for DIY work and safeguard against potential issues after the property is sold.