By Clark Sanchez | State Farm
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 limits and decide if that is enough protection, or perhaps this is where you ask your insurance agent how much it would cost to purchase stronger protection limits.
For instance, 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, 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. Also, note that umbrella coverage does not extend to your property manager, so if your management contract specifies a specific liability limit, that is without an umbrella.
Some people look at their insurance policies, check the liability limit, and see a large number. But many times, they are looking at the “aggregate limit.” However, 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 they 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.
Does it sound like you may have heard some of this before? I discussed liability in a similar article previously, but this topic continues to be the most important.
Clark Sanchez is a 42+ year Arizona insurance agent who provides landlord policies for investor-owners of rental property. He can be reached at (602) 803-2179.