Everything You Need to Know About Commercial Liability Umbrella Policies

Source: Bigger Pockets
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A commercial liability umbrella policy (CLUP) gives you extra liability coverage to help pay costs such as legal fees, medical bills, and damages that exceed your general liability limits.
A CLUP should not be confused with a personal umbrella policy (which you may initially want to secure if you are just starting out). A personal umbrella policy will generally cover up to four rental units and can be most easily secured from the company that insures your automobiles.
In essence, a CLUP will help you coordinate gaps in insurance coverage between all of your individual policies such as health, auto, homeowners, and rental.
Here’s the kicker: Since the CLUP provides this extra coverage for certain types of liability insurance (by extending the primary policy), if you don’t have a primary policy in place in the first place, then a CLUP can’t extend that liability.
While you can secure a CLUP at pretty much any time on your investing journey, CLUPs are more expensive than personal umbrella policies. Discuss with a qualified agent to decide the most appropriate time to make the switch from a personal umbrella policy to a CLUP.
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The Importance of an Umbrella Policy

In the case of real estate, how do you know when it’s worth it to get a CLUP?
If your business interacts with clients and customers (aka tenants), naturally your liability risk will be higher.
Commercial umbrella insurance would help with the costs for their medical expenses, lawsuits, and judgments against your business. Your premium will be impacted by the underlying policy coverage, type of business, and business size (the larger the business, the more coverage you need). According to Hartford Insurance, the most costly property and general liability claims for small businesses include:

  • Reputational harm
  • Vehicle accidents
  • Fire damage
  • Product liability
  • Customer injury or damages

Without umbrella coverage to extend your underlying liability policy, you would have to find a way to pay for any costs that underlying liability policy doesn’t cover. This can put your business and property at serious financial and legal risk.
In short, a landlord, like yourself, should consider purchasing commercial liability umbrella insurance if they think the cost of a claim (business or personal) could ever exceed their liability limits.

Securing a Commercial Liability Umbrella Policy

Like securing a homeowner or rental insurance policy, securing a CLUP is a relatively straightforward process. Follow the steps below to secure a CLUP for your situation.

  1. Find a good insurance agent.
    • Ask other investors or business owners who have secured a CLUP policy
    • Ask your current agent for your homeowner policy for a referral
    • Post on BiggerPockets for a referral
  2. Interview your top three referrals and ask how they will coordinate the following aspects of your umbrella policy.
    • The liability and medical coverage between your homeowner policy
    • The liability and medical coverage between any rental policies
    • The liability, medical, and uninsured motorist coverage for any auto policies
    • If you hold rentals in an LLC, ask if they can cover the passive activities of that LLC
      • Generally, a CLUP will not cover any businesses that produce active income and a separate business policy can be secured.
    • The aggregate limit of the policy
      • Most insurers will start at $1 million in coverage and scale from there.
  3. Create a spreadsheet of all metrics of your quotes so you can compare apples to apples, such as:
    • Liability coverage
    • Personal injury coverage
    • Medical expenses
  4. Decide which policy gives you the best coverage for your current situation.
    • While it is tempting to go for the highest coverage amount, this may prove to be cost-prohibitive.
    • Note that you can always expand your coverage as your rental business expands.

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Pulling It Together

If you are just starting out with rental real estate, you may consider using a personal umbrella policy over a CLUP for your first few rentals.
But securing an insurance policy is not a “set it and forget it” transaction. As your portfolio grows, you will need to adjust your coverage needs as your liability risk expands, which makes a CLUP a great tool to help coordinate all of your different coverages.
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