TBT: Ask Marco – How to Best Insure Using Umbrella Insurance?

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Okay, Shaw, I’m going to do my best to answer this question. It may not be a complete answer that you definitely need to work with your insurance agent and a competent and knowledgeable insurance agent because not all insurance agents understand how to set up these umbrella policies, the way they should be for real estate investors who have an asset protection hierarchy like you have. And it’s really not that complicated. It’s just some insurance agents just don’t offer it and some companies don’t offer it like State Farm. One of my insurance companies, they’re not really familiar with this commercial umbrella policy structure. And in some cases, it’s not something they offer, but they do have it. It’s just maybe not what you need. So let me take a stab at this. First of all, congratulations on what you’ve built and the structure you have, keep on building it. And certainly, let my team know how we can help you with that.

So just some quick definitions to throw out there for people listening. So they have an idea of what’s going on here. A personal umbrella policy provides an additional layer of liability coverage above and beyond the liability limits that you have in your existing policies. Now, this applies to both auto insurance, as well as homeowner insurance. So an umbrella policy is just an extension of the liability coverage. So if you run out of coverage and your existing policy, the umbrella policy kicks in and continues that coverage, commercial umbrella policy provides additional liability limits over and above the primary limits in your commercial policies, such as general liability, employment liability, whatever it may be. So the only difference there, I mean the insurance policy themselves, what these being covered is pretty much exactly the same. The only difference is does it apply to you on your personal policies or your commercial policies? And that’s really the main difference.

The other subtle difference is that commercial policies tend to have higher limits compared to personal umbrella policies, umbrella insurance policies typically tap out at one to $2 million. Whereas commercial policies can go to 5 million and beyond in terms of additional coverage or what they refer to as excess cover. So umbrella or excess policies, this type of coverage is what they call in the industry form following, and form meaning your insurance form. What that means is that the coverage, the exclusions and the conditions applicable to the underlying primary policy that which is attached to your real estate will also apply to the umbrella policy or multiple policies. So it’s an extension, a continuation. So in that regard, there is little difference between commercial and personal lines of umbrella policies. The main differences in the policy limits and a commercial policy is likely to have significantly higher limits. That’s about it. Lastly, an umbrella policy provides, you know, the first layer of excess coverage over the policy and it pays nothing until that primary policy is exhausted. In other words, if you have a million dollars of liability coverage on your primary policy, you have to exhaust that before the umbrella policy even kicks in. So it’s really just in the background, much like a backstop, and it picks up where your existing policy ends and expires in terms of coverage.

So umbrella insurance policies are on top of your existing coverages. Now the key thing here is that when you have an umbrella policy, you need to name the policies that are being covered or extended within the policy. Now here’s kind of the key thing I want to share with you. If you’re working with an insurance company or insurance agent that can package everything together, it makes things super simple because you can get one policy that covers multiple properties in multiple States, all under one policy, one payment, one document, it’s all there altogether. And that same company can extend umbrella insurance, which just ties to that one policy. It keeps things pretty simple and pretty clean. If you don’t do it that way, which is fine. You can do it other ways where you have different insurance companies and agents insuring different properties in different States. And you basically have multiple policies going on. That’s also covered or can be covered by an umbrella policy, whether personal or commercial, the only complexity or challenge that comes in under that scenario is you need to keep track essentially you and your insurance agent or insurance company on that insurance policy, the umbrella policy of the expiration dates of all your individual policies. Because if you have multiple policies with different carriers, the likelihood is that they all have different start and end dates. They don’t all expire or renew on the same dates. So you need to unfortunately keep track of that and keep that updated on your umbrella insurance policy.

It’s just a little bit more work and a little bit more complexity, but it doesn’t change anything else beyond that. The important thing is, is that you have that documented on a schedule within the policy and you are updating it. And most importantly, all those policies are known and named within the umbrella policy. Now I know that that was all a mouthful, but I think that was pretty clear and should make sense to you. So I believe I answered your question. That’s really how it’s structured. It’s nothing complicated at the end of the day, make sure all your properties and your assets are insured. You have the right coverages for the property. Plus you have liability. I would personally max out your liability coverage on your primary policy. That probably would be about 2 million. And then umbrella insurance is very, very cheap. And if that’s the case, just get, if you can, one master umbrella policy that covers everything under your umbrella or tree, and one last tip, and this is actually very important. And also it’s a key to making this work. And that is this, the umbrella policy has to be covering policies that have the same common denominator owner. So what that means is this those policies that are being covered under the umbrella policy need to have that same ultimate owner, if you will. So whether that is you or your holding company, your top-level, LLC, it has to all come back to one.

So if you have two holding companies that have properties below it also being held in other LLCs, but essentially you have two holding companies. You may need to have two separate umbrella policies, one for each of those holding companies, because ultimately the policy will be in the name of those two LLCs, not necessarily in your name. And this is where you need to talk to a competent and well experienced and seasoned insurance agents or company because this is where the conversation gets into the details and the nitty-gritty of the policies and how they work and what they may or may not cover. If you have all kinds of different owners or entities that split up your assets into these different piles or these different trees if you will. In fact, I just talked to my insurance agent and fortunately, I have this one master policy that covers all of my properties, even though they’re in different LLCs in different States. And they all trickle up into a holding company.

It just makes everything very clean and simple. And I like simplicity. I like to keep things as simple as possible and no simpler. So again, you know, that’s where you get into the weeds with your insurance agent. All right. Well, Shaw, I hope I answered your question. Keep up the good work.

I hope you enjoyed this week’s throwback Thursday episode. If you haven’t already, remember to subscribe so you don’t miss out on a single episode. If you have a question about real estate investing or finance, simply go to passiverealestateinvesting.com and click the Ask Marco button. . I read all of them, I reply to many of them, and sometimes I cover them on the show, and I’m gonna try and do more of that. So, I am going to encourage you to go to passiverealestateinvesting.com and submit your question for Ask Marco.  Lastly, help us share the show with other like-minded people that you know who can benefit from it as well. Just visit us on your platform. Most of you are on iTunes and leave us a rating and review. I would greatly appreciate it. I read them all and I will thank you in advance. And that is it for today. Thanks for listening. I will see you on our next episode.

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