Yesterday an individual, who I will refer to as Derek, called me with one question – “Can you set me up an LLC to protect my real estate investments?” As an attorney specializing in entity formation and asset protection, my answer was as assured as the Sun rising in the East – “absolutely!” But in my best attempt at Mr. Miyagi I followed my forgone response with a “why do you ask grasshopper” question. The answer was startling.
Derek told me an all to familiar Greek tragedy. Our character was working on remodeling his investment property with a close friend. While Derek was operating his backhoe he inadvertently struck the ladder his friend was perched upon. Like a baby hatchling pushed from the nest before its wings are fully formed, the friend fell to earth never to rise again.
Not long after, Derek’s world was inverted when his deceased friend’s spouse filed suit against Derek. Hoping to right this chaos, Derek sought solace and comfort from his insurance carrier with whom he was engaged in a long and monogamous relationship. Unfortunately for Derek, his carrier was only committed to the “in health” portion of their vows. When the “in sickness “ landed on their doorstep Derek’s insurance carrier sought an annulment.
Derek’s tragedy was in believing his carrier was interested in more than Derek’s pocket book. He was jilted when his carrier refused to stand by him in his time of need and instead filed a Declaratory Action in Federal Court to excuse itself from liability for Derek’s tragedy. This tragedy is all to common but from conversations with multiple real estate investors one would think the story had never been told. For if such a tale had graced an investor’s ears one would think their thoughts would compel such action as to prevent a similar occurrence. But alas this is not to be and will continue to write many stories with different characters but similar endings.
When it comes to protecting your assets an undeniable truth is insurance companies are in the business of collecting premiums and minimizing risk. Most people have never read their policy let alone understand what exclusions exist to protect the insurance carrier. (Consider how many policy declarations you receive on an annual basis changing your coverage in subtle ways?) Are you aware that your carrier will not protect you if any of the following occurs:
- Multi-Million Dollar Claims (average policy limit is 500k)
- Environmental Claims
- Business Failures
- IRS Audits
- Contractual Disputes
- Bank Deficiency Judgments
- Governmental Regulations
Each of these can definitely affect your real estate investing so why would anyone consider owning property in their own name when a Limited Liability Company will plugs the multiple gaps left in your policy? The answer is bad advice that typically comes from CPA’s, insurance agents, or attorneys not fully versed in asset protection. As Derek will discover in the upcoming months, it only takes ONE LAWSUIT to dismantle everything you created.
Do I mean to imply that the investor should foreswear off insurance in favor of a plan built solely on Limited Liability Companies for asset protection? Never, but your protection should rest upon the LLC and be augmented by insurance. This is accomplished by purchasing the policy in the name of your LLC. Here are some considerations in insuring your LLC and/or choosing a carrier:
- Always have yourself listed as an additional insured under any policy your take out in the name of your LLC;
- Look for a carrier that specializes in providing policies to business entities;
- Always ask if it is possible to purchase one policy that will name each of your LLCs as additional insured; and
- Obtain a policy with a minimum of 750k coverage.
When entering the market to purchase insurance keep in mind that each carrier has its own peculiar way of issuing policies and nothing is uniform. If you do not like the answer you receive from your carrier regarding insuring your LLC my advice is simple – find a new one.
All the best with your investing and I hope that none of my readers become the subject matter for a future post.