We take some exception to claims made by Al Aiello in his article, "Real Estate Investors: 13 Items Your Insurance Won’t Cover." We think it's too sweeping.
We understand the point the author, Al Aiello, is attempting to make; however, the idea that there isn't (hopefully Al isn't intending to say it, but the article's wording leaves it in doubt) liability insurance available to help transfer the risk of loss concerning a number of the risks cited by Al Aiello is actually inaccurate and could mislead inexperienced real-estate investors.
If our lawyer told us not to form an LLC or corporation to protect ourselves, we'd get a new lawyer. If our lawyer tried to downplay the importance of insurance with respect to forming an LLC, we'd get another lawyer. In either case and if we weren't already insurance brokers ourselves, we'd find a professional insurance broker to help us procure appropriate insurance protection.
For example, here's an area where Al's article falls short. Construction risks are protected by properly drafted contracts and by requiring liability insurance from contractors naming one (a landlord in this case) as additional insured, which is essentially procuring coverage.
General liability is essential when procuring construction and maintenance services on an owned or leased property because there are non-delegable responsibilities that cannot always be transferred to others. Also, builders-risk coverage properly coordinated with first-party property coverage is an important protection mechanism for accidental damage to projects under construction.
First-party property coverage can also protect a building owner from the results of faulty construction, and the carrier may have a right of subrogation after the carrier pays for the loss.
Here are a few other quick observations (not exhaustive):
- Loss of rents caused by fire and other perils should be covered by property insurance.
- Environmental – pollution coverage is available but not in a general-liability policy.
- Personal-injury protection is an important protection for false-eviction claims.
- Abuse-and-molestation coverage is not necessarily easy to procure; however, it is important liability protection.
- Disputes with partners and shareholders should be covered in management-liability policies (i.e. Directors & Officers liability coverage).
- Too much insurance inviting lawsuits is a "wives tale" and readily debunked.
On the other hand, we do certainly recommend a properly filed and managed LLC or corporation be maintained in order to provide insulation from personal liability in addition to a properly designed insurance program. One may have his or her LLC and liability coverage too and should.
If you are an investor in 1-4 unit properties in Arizona, California, Nevada, Oregon, Utah, or Washington, please do the financially responsible thing and make sure you have proper Landlord Insurance with PropertyPak™. We love focusing on real estate and the economy in general, but we are also here to serve your insurance needs.
Hill & Usher (PropertyPak™ is a division) has many insurance offerings. See our menu above for more info and links.
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Note: This blog does not provide legal, financial, or accounting advice. Seek professional counsel.
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The laws that tie our tongues, so to speak, are designed to keep the public from losing confidence in the industry and the regulatory system overseeing it. Insurance commissioners around the country work very hard to analyze rates and to not allow the industry to be damaged by bad rate-settings and changes in coverages. The proper way for people in the industry to deal with such matters is by adhering to the laws, rules, and regulations of the applicable states and within industry associations where such matters may be discussed in private without giving the industry unnecessary black eyes. Ethics is very high on the list in the insurance industry, and we don't want to lose the people's trust. That said, the industry is not perfect; but what industry is?
For our part, we believe in strong regulations and strong regulators.
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