Is an umbrella policy adequate protection from lawsuits or should there be additional limited partnership entity existing? 

In order to answer this question, we need to first understand what an umbrella policy is and how it works. An umbrella policy is also known as excess liability, or you can think of it as extra coverage for an existing policy. A standard property policy, for all property types, provides coverage for the two facets of risk every landlord faces - property and liability coverage. An umbrella policy, or excess liability, will only affect your underlying primary liability policy and limits.

As an example, your primary apartment general liability (GL) policy will have a 1 million per occurrence limit and 2 million aggregate limits (1/2 GL policy). With these limits you can have one claim totaling no more than a million dollars and/or multiple claims totaling no more than two million dollars. In the event you have exhausted your limits, you could be held liable for any damages above your policy limits.

An umbrella is used to increase the limits of an underlying liability policy, thereby providing higher limits and additional coverage. If you purchase a 5 million umbrella, and you have a primary or underlying general liability limit of  1/2, then your new liability limits are 6 million per occurrence and 7 million aggregate (6/7 GL policy). An umbrella will not provide any additional coverage if there is no primary general liability policy.

When considering an umbrella policy, you must review the underlying general liability policies limits on all locations to ensure there are no gaps in coverage.  As an example, apartment buildings of 4 units or less can be insured with a modified homeowner’s type policy. These policies carry a maximum coverage of 500K in liability. If you have a 5 million umbrella that begins at a minimum of 1 million, you will have a gap of 500K before the umbrella provides protection. 

To protect yourself from liability risk, your entity type is less important than the type of coverage and limits you have. Weather you own your assets as an individual, an LLC, an LP or in a trust, your general liability policy will cover you as the named entity. However you must make sure your policy names the entity as a named insured. In the event your LLC is named in a law suit and the LLC is not a named insured on the policy, the LLC may not be covered under the policy. The policy will only provide protection to the named insured’s and additional insureds on the declarations page. 

In summary, an umbrella will only increase the general liability limits to your current policy, and can be used to cover multiple locations and various asset types. Your legal ownership type will provide some protection to your personal assets, however your best bet is to make sure you have the correct type of coverage, limits and all parties are covered under the policy.

Paul C. Tradelius Jr.

Lic# 0D85955