Posted by Zach on September 22, 2004 at 20:14:31:
Your best bet is definitely to form a corporation or LLC.
Failing that, an Umbrella policy is your next step.
Advantages of an Umbrella Policy:
Personal catastrophe coverage applies to your home(s), auto(s), boat(s) if included in the policy, etc. Cost is generally $100-200 per million in coverage. Your insurer will go to bat for you (and its money) in court.
Disadvantages of an Umbrella Policy:
As with any insurance policy, read the fine print. There are some things it will cover, and some things it wont. One item of importance: they generally DONT cover business property or business liability, and one can make a case that real estate investing is a business and property an investor owns is busines property. Also: if you own a $2 million policy and you are sued for $3 million, you are personally on the hook for the other million.
With an LLC, insured or not, the liability of the LLC is limited to assets. If someone sues your LLC for $20 million, and only one dollar in assets exist, there is no one or no other assets to attach for the remaining 19.9 mil. Your personal liability is zero.
It is true that LLC’s have some formation costs, and they have some yearly costs depending on your state, they offer so much more protection than a simple Umbrella policy.
In some cases, an LLC can be formed for as little as $500. When you consider that your insurer may require high limits on your other policies to qualify for an Umbrella, your actual savings by using an Umbrella may be as little as $100.
My advice: LLC all the way, but the Umbrella is better than nothing at all.