Rental Properties in an LLC -- how this affects insurance.

By
Services for Real Estate Pros with Warner Insurance Group LLC

Hello-

Many of my clients purchase rental properties or inherit rental properties.  Attorneys are telling these people that they should be putting the property in the name of an LLC to protect the owner - which is a very wise suggestion.  All of those people without LLCs are just opening up their liability exposure and will be personally sued if there is ever a claim on the rental property involving personal injury/death etc.  I am not an attorney and will not get into the legal ramifications of all of this but I agree that the more protection you have the better.  The LLC is a wise choice for any rental property and I suggest that you speak with your real estate attorney about this option.

That being said -- how does this affect insurance?  If someone buys a 1-4 family rental property, many insurance carriers who handle personal home insurance will be able to give a quote on these properties under a policy called a Dwelling Fire policy.  It's a policy that includes coverage for the house itself and will many times include the liability and other additional coverage that protects the owner.  The majority of the insurance companies don't like to write the rental properties for you unless they have your primary home as well.  Some will extend liability from the primary home to cover the rental property (at an additional fee).  This is all assuming the home is in the name of the owner.

When someone actually puts the home into an LLC name it drastically changes the dynamics of how an insurance company looks at the risk.  Most insurance companies now view LLC properties as pure investment properties and go on the assumption that it could be one of many properties to come for that owner.  So what's happened is that a good majority of the insurance companies will now tell you that the rental property in the name of an LLC has to be put on a commercial policy.  The commercial policy can provide greater coverage for the owner but generally the cost of these policies is much greater than a personal policy.  Many consumers get a little bit of sticker shock as they are not expecting to be put on a commercial policy at a higher rate.

There are a few remaining insurance companies who will allow an LLC property to be put on a personal policy but generally they want to be assured that it's a single-member LLC or a couple who just happens to have the one rental property and who are not in the business of buying investment properties.  The people who are planning on buying multiple properties really are better off going the commercial route anyway as the coverage can be much more broad and offers greater protection overall.

So the bottom line here is if you are buying a rental property or selling a rental property -- consult your attorney about the LLC and talk to your insurance agent about the proper coverage.  Over the years I've known people who have owned rental properties in their own names - there were deaths from fires and the owner was named personally in the lawsuits.  Your attorney can explain the benefits of having such properties in an LLC to protect against losses like this.  Just know that once you do that the insurance products that will be available might be commercial products vs. personal insurance products - which is not a bad thing.

One last key point is some insurance carriers will add the LLC on to the Dwelling Fire policy as an additional insured.  This is something you want to avoid.  In that scenario - both the owner and the LLC will be subject to any liability claims.  You want to make sure that the insurance can be put solely in the name of the LLC if you decide to have the property in an LLC name.  As always consult your attorney and your local insurance agent for proper guidance.

Pete

 

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Harold

Thanks for sharing the info. I have a few propertes in an LLC and insured under the LLCs name, except for one that was wrongly insured under my personal name. Well, this one has a sinificantly lower premium! Is it safe to retain the policy this way? Or is there something else I can do that best trade offs costs, risks, and liability?

Oct 19, 2008 01:10 AM #1
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Pete

To:  Harold  In response the property in your personal name -- you can do a quitclaim deed and get it into an LLC name which is a safer option or you can just make sure that you carry high liability limits.  I'll explain below.


There are a few options out there for investment properties that I didn't spell out in my blog.  For cost purposes, it's always easiest to have all investment properties under a single LLC name -- you can have one commercial insurance policy that covers all locations and it braodens the coverage that you would get separately.  Also if there is a claim at one location, the insurance carrier is less likely to cancel the policy as it's a larger premium policy with multiple locations.  I have a current client with 4 rental properties - she has them all in her personal name with separate policies with the same insurance carrier.  She had a fire at one of the locations that caused significant damage - now the carrier is non-renewing the policy on that location and will most likely non-renew all the other properties.  Had they all been on one policy under an LLC name it would be less likely that a non-renewal would be sent out.  Having all the locations on one policy or on a single commercial policy can allow you to increase liability to a million dollars -- most home policy are capped at $500,000.

If you choose to keep any investment property in your own name, I highly recommend having a separate umbrella policy (excess liability policy that covers auto, home and any rental properties) and having the limits at an amount your comfortable with - best to consult an attorney on this but 2 million is a good start.

Rental properties have higher claim frequency than a standard owner-occupied home and with your name on the property - you take a big chance.  Another huge recommendation is to require tenants to carry renters insurance as part of the lease agreement.  I would even go as far as having you pay for it -- factor that cost into the rents.  I would require that they carry $500,000 in liability on that policy.  A typical renters policy here in CT can range from $125 up to $250 -- depending on how much personal property they want to insure -- but for an extra $8-$20 a month -- you can have added protection from their policy with property damage.  So in my example above -- the renter falls asleep with a cigarette and a good portion of the home burns.  The landlord's policy responds but will attempt to go after the renter's insurance policy to get their liability to pay for the damages.  The $145,000 claim was picked up by my client's policy, the tenant had no insurance, the landlord's $1800 insurance policy is canceled - and now she's forced to buy insurance through excess lines insurace at $4000 a year.  The simple requirement of a tenant carrying a policy would have avoided all this.  I suggest this to all clients - they don't always heed the warning and claims such as this occur costing the landlord much more money and aggravation.

Hopefully that adds something for you to think about.  Any changes in ownership of home, creating LLCs for properties and determining the safest route for your properties should all be discussed with an attorney.  But overall - protecting yourself is a priority and if structured properly it won't cost a lot more than insuring the properties under a personal policy and will provide much better peace of mind.

 

 

Oct 19, 2008 10:31 AM #2
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Mark Chang

Hi Peter,

In the last paragraph of your post dated 5/2/08, you mentioned under the scenario where the LLC is named as an additional insured "In that scenario - both the owner and the LLC will be subject to any liability claims. "    Can you please clarify as I don't seem to understand this.    The NAMED INSURED is who the insurance protects.  So if I have the insurance and the property under my name (I am the NAMED INSURED), then transfer it to the LLC and then name the LLC as the additional NAMED INSURED, wouldn't the LLC and I be both protected?   Why will both the LLC and I be subjected to a liability claim if the title of the property is under the LLC name and any lawsuit would go after the person who is on title, which is the LLC.

Jul 20, 2009 07:27 PM #3
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Pete

Mark-

Always seek advice from an attorney with any legal matter -- however -- I was told by an attorney here in CT that if your name appears on an insurance policy -- even alongside the LLC name, it's something that ties you personally to that property.  If there's a lawsuit - there is potential for what's called "piercing the corporate veil" of the LLC and the suit could come through to you.  Again - this is not my area of expertise and you should seek the advice of a real estate attorney. 

The whole reason you are told to put the property in an LLC is for protection.  Attorneys will even say place each and every of your separate properties in their own LLC name to avoid one affecting the other.  Why would you want your personal name associated with any part of the process if the goal is to avoid anything coming through to you personally?  Don't give anyone that opportunity and deed and insure the property in just the LLC name and there won't be any question. 

I know people purchase them in their personal name to get the better financing etc -- but once you change the entity to a Corporation -- you've made it a business venture and it really needs to be protected as such.

Thanks

Pete

Jul 21, 2009 07:52 AM #4
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John White

Pete,

Do insurance claims for a rental property that is owned solely under an LLC effect the LLC owner's CLUE report?

Oct 19, 2014 11:13 AM #5
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Peter Morandi

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