Understanding Umbrella Policies: What Investors Need to Know
Umbrellas are one of the most misunderstood insurance policies in the investment world. Many investors mistakenly believe that having an umbrella policy eliminates the need for primary liability coverage, but this is not the case.
Jacqui Price, EVP of Underwriting at NREIG, sheds light on umbrella policies and why they are essential for investors. Welcome back to the Insured Investors podcast.
What is an Umbrella Policy?
An umbrella policy provides additional liability coverage beyond your primary policy. It offers extra protection to the policyholder, whether an individual or entity, by extending liability coverage above the primary limit.
It’s important to note that umbrella policies do not replace the need for primary liability coverage and do not cover property damage. They only kick in after the limits of your primary policy are exhausted.
Differences Between Excess Liability and Umbrella Policies
Umbrella policies can cover multiple lines of business, while excess liability policies only extend over one line of coverage. Investors with various liability policies may benefit from an umbrella policy, while those needing coverage for a specific line may opt for excess liability.
Exploring Other Coverage Options
Before purchasing an umbrella or excess liability policy, consider the coverage limits of your primary liability policy. Increasing primary liability limits may be a more cost-effective way to protect your assets than relying solely on excess coverage.
Common Misconceptions About Liability Policies
One common misconception is that an excess liability policy can stand alone without a primary policy. In reality, the primary policy must pay out before the excess policy comes into effect.
Factors to Consider Before Purchasing Coverage
Investors should assess their risk tolerance and property exposure before deciding on coverage limits. The location, number of units, and ownership structure can all impact the amount of liability coverage needed.
Personal vs. Business Liability Coverage
It’s crucial to differentiate between personal and business liability coverage. Personal assets are at risk with personal property ownership, making higher liability limits essential. Business entities may require different coverage levels based on their risk profile.
Avoiding Common Insurance Pitfalls
Insuring rental properties under personal dwelling policies with low liability limits and relying solely on personal umbrella policies is not advisable for investors. It’s important to have adequate coverage tailored to the specific risks of real estate investments.
Understanding the Importance of Umbrella Policies
When I first started in the insurance industry, I encountered a situation that left me confused. It was about the need for umbrella policies, and why they are essential for investors. This topic is something I feel strongly about because I personally experienced the confusion surrounding it.
The Difference Between Personal and Commercial Umbrella Policies
Consider a scenario where you have your personal home and auto insured with an agent, along with a personal liability policy. Now, you start investing in properties and insure them under a dwelling policy with the same agent. In such a case, your liability coverage may not be sufficient for rental properties. Purchasing a personal umbrella might seem like a solution, but it often excludes coverage for business ventures like rental properties.
I recall a situation where an investor had multiple investment properties and needed both a personal and commercial umbrella policy. This highlights the distinction between personal and commercial lines of coverage, especially concerning liability protection.
When Should Investors Consider Umbrella Policies?
An umbrella policy offers additional liability coverage beyond your primary insurance limits, providing an extra layer of protection for those exposed to potential lawsuits. For investment properties, a commercial umbrella policy is recommended to ensure adequate coverage.
Deciding on whether to purchase an umbrella policy depends on individual circumstances. If faced with a significant liability lawsuit, it’s crucial to assess if your existing coverage is sufficient. Speaking to your agent can help determine if additional coverage is necessary.
Q&A Segment: Addressing Common Concerns
Here are responses to common questions about umbrella policies posed by investors:
Question #1: An investor with multiple properties in an LLC is concerned about liability protection. They have a personal umbrella but are unsure if it provides adequate coverage. How should they structure their insurance for maximum protection?
Answer #1: The investor should explore options for commercial umbrella coverage considering the number of properties and potential risks. An excess liability policy or increased premises liability coverage per location could offer additional protection.
Question #2: A landlord with five rental properties wonders if they need a separate umbrella policy and if liability coverage from landlord policies should be removed.
Answer #2: It’s advisable to maintain primary liability coverage even with an umbrella policy to ensure comprehensive protection. Consulting with an agent to assess coverage needs is recommended.
For more insights, watch the full interview here!