The liability limits on the owner’s/landlord’s insurance policy are perhaps the most important part of the overall insurance package. This is where you do not want to just ‘check a box’ and say, “Liability Insurance – Yes I’ve Got That!” This is where everyone needs to look at the policy limit and decide if that is enough protection, or if perhaps this is where you ask your insurance agent how much it would cost to purchase stronger protection limits.
Suppose you currently have liability limits of $ 300,000 on your rental property. (That’s relatively LOW for a rental.) And suppose you could more than triple that amount to $1 million for about $2.00 a month? Most owners or property managers would vote in favor of the $1 million. But wait … there’s more ! What if you found out that you could increase the protection level to $2 million for a very small additional amount? There are thousands of Arizona investors who have $2 million of lawsuit protection on every one of their rental houses.
It is important to note that we’re talking about the base liability limits on the rental property insurance policy itself, not the total with help from an umbrella policy. Somehow, Umbrella Policies have the reputation for being an inexpensive cure-all for almost every malady. Nothing could be further from the truth. Umbrellas have crept up in cost, and everything they extend to adds to the cost of the policy. And, many insurance companies will only extend coverage from a personal umbrella to a maximum of 4 rental units. Plus, many companies have limitations on extending an umbrella in your personal name to include properties held in an LLC. Of course, no-one can say that even $2 million (or any specific amount for that matter) is enough protection, but $2 million is certainly better than $1 million.
Some people look at their insurance policy, check the liability limit, and see a large number. But many times they are looking at the “aggregate limit.” That is not what we have been talking about. The ‘aggregate limit’ is the maximum number of dollars your insurance company will pay for all liability claims during a policy year. It is NOT the maximum amount your insurance company will pay for a single, specific claim. This entire article is about the “per occurrence” limit or the maximum number of dollars your insurance company will pay for one claim.
Two more important things to be aware of: (1) most insurance companies do not charge a deductible for claims that only involve liability, and (2) most insurance companies pay all legal defense costs from their corporate budget, so lawyer and court costs do not reduce your policy liability limits.
Does it sound like you may have heard some of this before? I discussed liability in a July 2017 article. But this continues to be the most important insurance subject for rental property owners and managers, even over 3½ years later.
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Clark Sanchez is a 40+ year Arizona insurance agent and longtime member of AZREIA. He answers all questions at firstname.lastname@example.org