Bill was a landlord and had a single family rental. He had great tenants who had been there for two years. They paid rent on time. They never complained. He rarely had to go over there. The wife has bad knees and told Bill she had trouble navigating the stairs. She reported to Bill a week ago that the handrail was loose and he went out there and put in some new screws and now it’s solid. He left the place patting himself on the back for being such a responsible landlord. He was feeling great until he got the call today.
It’s the tenant, who is calling Bill from the hospital. The rail broke off last night and she fell, breaking her hip. Now she needs surgery and she doesn’t know how she will pay for it because she doesn’t have health insurance. She wonders if Bill could help her with the cost. Bill asks around and finds out it could be around $50,000! He certainly doesn’t have that kind of money sitting around, so he calls her back and tells her he will drop by with some freezer meals and get the railing fixed but he can’t pay her bill. Now, she starts talking about lawsuits because Bill obviously didn’t fix the railing and is clearly at fault and didn’t even apologize. Bill is scrambling to look for his insurance policy, the one he got when he bought the house and lived there. It was cheaper to just keep that then reporting it to his insurer when he started renting. Where did Bill go wrong?
So, So Many Ways
First, it looks like Bill took his eye off the ball on this property. With these tenants, though he described them as great, they often don’t complain, and small problems can get larger. Of course, you don’t want them complaining about every little thing, but not notifying you of problems is a problem itself.
Second, Bill opted to do the repair himself. When starting out there is a HUGE temptation to DIY as much as possible. When a contractor charges $200 just to set foot in the place, it seems like a great idea to hop on YouTube and DIY the heck out of the railing. When you pay that $200, part of it is for insurance, which would likely cover the lawsuit from doing it incorrectly. A licensed and insured contractor is expected to know how to put in a railing if that contractor puts himself out there to do so, and this protects the owner. That $200 is probably looking like a steal to Bill, now.
Third, and most importantly, his insurance plan was completely screwed up. His insurance policy, like all residential policies, states that it is for an owner-occupied home, not a rental. Insurers know that there are increased liability costs when a tenant is in the home. These policies cost more. It’s likely Bill’s insurance will not pay a dime because it was the wrong insurance. Even if he did get standard commercial insurance, without an umbrella policy, he could still have a large out of pocket expense.
Why Get an Umbrella Policy
Sadly, it has a lot to do with your net worth. That’s our society now. The lawyers aren’t likely to go after you if you have little money. So, if you have a very low net worth, an umbrella policy might not benefit you too much. But, as a landlord, you have a lot more to lose, so get the policy already.
Bill’s liability coverage would have probably been $1M if he had gotten commercial insurance. In some areas, that might be enough but the extra $1-2M coverage of an umbrella policy gives a lot more protection. The umbrella is for those major payouts. Bill’s tenant has a large medical bill, but it could be vastly eclipsed by ‘pain and suffering’ noneconomic damages. If that went over $1M, the umbrella policy would kick in. Is the extra $1-2M enough? That’s something you’ll have to consider for yourself. If you are a very high net worth individual, it might not be.
I recommend getting $1M in umbrella coverage. This policy can go over multiple properties covered by the same company. It might be $500 a year, which is pretty cheap for the peace of mind.
Take a moment to consider whether the umbrella policy is right for you. Hint: it is.
