Ask Terry Questions LLC or Umbrella liability policy

LLC or Umbrella liability policy

By Terry Savage on September 07, 2021 | Insurance & Annuities

Hello,
I enjoy listening to you on WGN radio. Always very informative. We have a 3flat in McHenry that is used as a rental property. I’ve delayed and delayed in getting an umbrella policy to protect us personally if something happens at the apartment. I met with my insurance agent and was told I would need 2 umbrella policies, 1 business for the apartment and then another for personal home. I also once heard that the better bet would be to put the apartment in an LLC and we would be protected personally and the cost to do that would be minimal. Any thoughts? If we go the LLC route, do I need to hire someone, do I create in Illinois or another state, what costs are involved and how would that affect my income tax filing? DE I think I heard has easy rules to set up LLC.
This is a very confusing topic for me so I’d appreciate any suggestions.

Terry Says

Your agent is correct that you would need two separate umbrella liability policies. They must each coordinate with the underlying policy limits. It’s wise to have an umbrella for your personal home, and the cost is very inexpensive.
As for the rental property, I’m not quite sure what additional protection an LLC would give you. That depends on the coverage limitations of the underlying and umbrella policies on the rental property. Typically the umbrella protects against suits for physical damages related to the rental property (ie, the water heater explodes and someone is injured and you are sued for an amount beyond the underlying coverage).

An LLC is typically used to protect the owners of an OPERATING business — not for personal property. You can gain some insight by reading this article from LegalZoom. Unless you think your tenants could create some liability for you as the landlord (perhaps running a meth operation that you should have noticed before it blew up!!) then you probably don’t need an LLC for protection.
But consult your attorney in any case, and it should be an attorney in the state where you have the property. (Delaware is for C corporations because of its legal protections for traditional corporations.)

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