Managing Liability Risks In Residential Rental Property Using An LLC

If you own real estate, such as residential rental property, then you may have thought about managing liability with an LLC. In other words, going completely bare of insurance. The strategy is to pocket the money normally spent on insurance premiums. The LLC shields your liability exposure.

Tired of Paying Insurance Premiums

For most REI (real estate investors), the cost of insurance is an expense. The majority of business owners use liability insurance coverage to protect their LLC against the unexpected liability of an accident. Insurance companies are in the business of accepting risks and have experience in litigation.

Although insurance is not exactly cheap, it’s far more cost-effective than nearly any other form of protection. The strategy of not carrying insurance doesn’t make sense in our opinion. While insurance premiums go directly against the bottom line, coverage is far less expensive than one slip and fall claim.

If you’re thinking you might stop buying insurance for liability and using an LLC to shield the consequences – Don’t.

A Properly Set Up LLC Needs Insurance

Although an LLC can protect your personal assets if properly set up and maintained, an LLC is not a substitute for liability coverage. Insurance policies tend to provide you and your LLC with an attorney if a liability claim springs up. The cost of this defense with a paid attorney is more than worth the cost of the premiums you pay.

Know What Your Policy Covers

One mistake REIs make is assuming that because the LLC pays premiums for insurance that there is coverage. Unfortunately, that’s not always the case!

Our legal background has heavy emphasis in insurance coverage litigation. Insurance is a contract. You have to read the policy to know what’s covered and what’s not! You shouldn’t assume that because you pay premiums that you have coverage.

In our insurance law blog, we discussed a legal decision from the Oklahoma Supreme Court. This case is the prime example of a real estate owner that thought there was insurance when none existed.

What about you?

What would your LLC do with a serious liability claim and no insurance? Would your company survive? The question of insurance coverage should be explored before a claim, not after.

In the Siloam Springs Hotel case, a motel had an indoor pool. The heating system malfunctioned and carbon monoxide resulted in injuries to guests. The liability claims were reported, but the insurance company denied payment. The Supreme Court ruled no coverage existed, however, the injured parties could still sue the hotel for the damages.

While the case involved a hotel, the point remains the same. If you find out there’s not insurance after an accident, it can be disastrous. Residential rental property owners need to understand their liability coverage to properly manage the risks of the LLC.

Steven V. Buckman is an Oklahoma attorney helping business owners with legal advice, LLCs, and insurance matters. He helps REIs and property owners with LLC set-ups, maintenance, and LLC liability issues.