"Umbrella Insurance: What It is and Why You Should Have It"
Umbrella insurance kicks in when your liability coverage is spent, and could cover multiple properties. Think of this as a form of blanket liability protection.
For example, if you have a $500K umbrella policy and a $500K liability policy, and you are successfully sued for $700K, your liability policy pays the first $500K and your umbrella policy picks up the remaining $200K.
WHY YOU SHOULD HAVE IT
Because umbrella insurance coverage only kicks in when your "regular" liability coverage runs out, it is not considered as risky from the insurer's perspective and is typically very cheap – perhaps $200 or so a year for a $1MM policy.
In fact, a $1MM umbrella policy is the recommended minimum, but I would suggest that you buy more coverage if you can afford it.
So there you have it. You'll need property and liability coverage for each property, with a blanket umbrella policy on top that covers all your properties.
Here is a picture that illustrates the concept of umbrella insurance as it relates to property investing:
POLICY CLASSIFICATION WARNING
One more thing to keep in mind is that your umbrella policy must typically match the classification of your other liability policies.
For example, if you have 3 duplexes, all of which are insured via standard, non-commercial insurance policies, then the blanket umbrella policy that covers all 3 must also be of the non-commercial variety. Similarly, if all 3 have commercial policies, then your umbrella policy must also be commercial.
However, if 1 of your duplexes has a commercial policy, and the other 2 have non-commercial policies, then you will not be able to apply umbrella coverage to all 3. In this case, you could:
- Convert the 2 non-commercial policies to commercial, and then get a commercial umbrella policy to cover all 3 properties.
- Or, you could raise your liability coverage on the commercial policy to $1MM or more, and then get a non-commercial umbrella policy on top of the other 2 duplexes.
The first option will likely be more expensive, but your choice will depend on your specific situation. So if you find yourself with mixed-categorized policies you should definitely seek guidance from your insurance agent. I only bring it up here so that you are aware of this potential issue as you shop for umbrella insurance.
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