A common question we receive: “Is an umbrella policy adequate protection from lawsuits? Or, should there be additional limited partnership entities existing? Our real-estate assets are in a living trust.”
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 $1,000,000 per occurrence limit and $2,000,000 aggregate limits (1/2 GL policy). With these limits you can have one claim totaling no more than $1,000,000 and/or multiple claims totaling no more than $2,000,000. In the event you have exhausted your limits, you could be held liable for any damages above your policy limits.
An umbrella policy is used to increase the limits of an underlying liability policy, thereby providing higher limits and additional coverage. If you purchase a $5,000,000 umbrella, and you have a primary or underlying general liability limit of 1/2, then your new liability limits are $6,000,000 per occurrence and $7,000,000 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 $500,000 in liability. If you have a $5,000,000 umbrella that begins at a minimum of $1,000,000, you will have a gap of $500,000 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. Whether 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 name your policy entity as a named insured. In the event your LLC is named in a lawsuit, 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.