LLC and Liability insurance - Posted by Tim

Posted by Frank Chin on May 08, 2007 at 06:54:46:


I think through these issues often.

I own some rentals as well as a business in an LLC. An LLC is formed to run any business of any form or type, some with negligible risks, to other of very high risk, say, forming a school to teach “sky diving”.

The insurance company must evaluate the risk for each distinct business. For the “repair and tire wholesale business” I got, the insurance runs $12,000/year", for a million coverage, far higher than the $300 or so a year I pay for an umbrella policy for myself, for $3 million coverage.

I do not expect insurance to cover the business for a mere $300/year as many more things can go wrong with car repairs, and tires, as compared to the rental business.

From time to time, depending on the insurance market, I have to get a “commercial” umbrella policy for the rental business, which some years back cost me $1,200/year for a million coverage, compared to a little over $100/year at the time. This is due to companies here limiting personal umbrellas to “6 properties”, and from time to time, the limit is reduced from 6.

I’m also told, that once I go beyond six, get a commercial umbrella, the cost is dependent on the number and risk of the properties. I intuitively understand that they’ll charge more than $300/year if I own 10 shopping centers, 50 office buildings, plus the “Empire State Building”.

There can be a reverse problem as well. For my business in the LLC, I have situations where I have an employee pick up parts in his or her own vehicle. Or, they sometimes go to the bank in my vehicle.

In these cases, personal property is used for a business purpose, and I was told that the insurance carrier can deny claims if the employee, or even myself gets into an accident while getting the part, or going to the bank, and it was found out that they were doing it for business. I tell my employees to say they’re on the way to the store to say, pick up lunch, if anything happens.

Of course, I could get commercial coverage for my vehicle, that’ll cost three times as much as for personal use.

Someone wrote a post here sometime back about someone who bought “a million” coverage for a yacht. He rented the yacht out for a party, the yacht sank, and insurance was denied. The reason was coverage is extended for personal, not commercial use, i.e. renting it out for a party.

Frank Chin

LLC and Liability insurance - Posted by Tim

Posted by Tim on May 07, 2007 at 20:41:20:

I own a handful of properties, and I am in the process of acquiring my first property with a partner (non-spouse). My partner wants to form an LLC for our partnership. We’re both CPAs, and have a firm handle on the tax implications.

I spoke with my insurance agent about a hypothetical scenerio that goes something like this:

We form an LLC. Our first tenant trips on a root and is paralyzed. When he realizes the property is in an LLC, with little equity, his attorney attempts to have the LLC set aside. He succeeds and goes after our personal assets.

My insurance agent told me that my personal umbrella liability policy, which would protect me were an LLC not formed, would not protect me because it was a business activity, corporate activity, or something along those lines. I didn’t really understand his logic, and he repeated on multiple occasions that he could not give me legal advice.

He did say that we could put a liability policy on the LLC to protect the LLC. I see this as another layer of protection, but my question still stands.

I would really like to have a better understanding of this issue that is really bothering me. Any advice that could be offered would be greatly appreciated.


Re: LLC and Liability insurance - Posted by Rich-CA

Posted by Rich-CA on May 15, 2007 at 17:15:29:

I really like Frank’s comments. I might add that the issue with business liability is the number and kind of people involved. Wither personal coverage, it really is about things you are alleged to have done yourself.

With a commercial policy, you are insuring against the greater unknown of other people’s actions. Insurance costs are based on the likelihood of needing to pay. Even in cases where the insurance company does not have to pay, there are still attorney and adjuster costs. So the more likely you are to be sued (when dealing with the public, this becomes greatly more likely), the more expensive your coverage.