Whether you just closed on your first single-family house or your first 48-unit complex, one question you should ask is how to make sure a tenant claim doesn’t cause me to lose your investment an all your personal assets.
You accomplish this via an umbrella insurance policy. However, determining your liability limit is not an exact science. Ask the most seasoned professional how much is enough and you’ll get many different answers.
How can a tenant claim become a multi-million dollar settlement?
At the time of this article, if you Google settlement calculators, you will get 26 million results. Or, should I say your tenant will get that many results. Once they finish that search, they will do a second search for “personal injury lawyer” and come up with 31 million results. There is no shortage of resources or lawyers willing to try and take your hard earned dollars. Many attorneys will file a lawsuit on a contingency basis.
Here are some sample of questions typically found in a settlement calculator:
Medical Expenses: Enter the total of your medical bills, even if you didn’t pay them out-of-pocket. _____________
Property Damage: Enter the amount of damage (e.g automotive damage in a car accident case). ____________
Lost Earnings: If you missed work because of your injuries, input the sum of your lost income here. If you used available time-off benefits (PTO), enter that value as if it were unpaid. __________
Loss of Future Income: If you will be missing more work due to ongoing medical treatment, or an inability to continue working at your current job while you recover, enter an estimate of the loss of earnings here. __________
Estimated Future Medical Expenses: If you will require ongoing medical treatment for your injuries, enter an estimate of the cost of that treatment here. __________
Multiplier for General Damages: The multiplier is used to estimate your general damages — your “pain and suffering.” The more serious, long-lasting, and painful the injuries, the higher the multiplier. (Between 1.5 and 5) _________
SETTLEMENT VALUE ESTIMATES
Economic Damages __________
This is the sum of your “special” damages or economic losses.
Non-Economic Damages (Pain and Suffering) ____________
This the payment for your general damages (pain and suffering) based on the multiplier you’ve chosen, and there is also a $1,000 “nuisance settlement” value.
YOUR TOTAL SETTLEMENT VALUE ________________
Example of liability for personal injury
Let’s consider an example of how things can go terribly wrong when it comes to personal liability:
One of your tenants has invited family members over to your rental property to watch the Macy’s Thanksgiving Parade, and there are several young children in the group. One of the children is playing on your front porch and suddenly falls several feet because a portion of the railing was not secure, and fractures her arm.
The suit against you damages will likely include:
- ER and hospital bills
- Expenses for resetting the fractured arm and any surgery expenses
- A lump-sum award for pain and suffering
- A lump-sum award for partial or permanent disability
In this case, a minimum of $1 million liability is required because of the continuing increase in health care costs and the aggressiveness of personal injury attorneys. Since most liability claims involve injuries, a $50,000 award for 20 years for a child losing partial use of her arm, will likely result in a $1 million claim.
How can you limit this scenario from happening to you?
The answer is to purchase an umbrella liability policy with the appropriate limits. Here are seven question to determine the liability limit:
- Blue Collar or White Collar Tenants – Replacing the income of a lawn maintenance contractor is a small percentage of a trial lawyer.
- Property Ownership – Personal or LLC – If your properties are in your personal name, you not only want to protect the equity in your rental property but all of your personal assets as well.
- Is the municipality Pro Landlord or Pro-Tenant? There are some cities that are so risky; insurance companies will not insure properties in that municipality.
- How many units at that location? With a single unit, if there is a fire, you are likely to have one lawsuit. A claim at a 20 unit building may generate 10-20 claims, on the one occurrence.
- How well is the property managed? If you can drive past the property on your way home from work, or even self-manage, the small issues will most likely be noticed and you can take care of them. But if you are an out of state owner and relying on others to take care of the property, the smallest time sensitive problem can become a big issue if not acted upon quickly.
- Equity of the entity holding the deed – If you have a lot of equity within the properties you need to defend, you will want a higher limit umbrella. If there is little to no equity, you may want to just shut down the LLC and bankrupt the property.
- If you have a property manager involved – This goes back to how closely the property is being watched and if small issues can grow into large issues and the property manager should also have additional insurance policies to defend you.