Think_Realty_Magazine_March_2020

INVESTOR RESOURCES

INSURANCE

Insurance vs. LLC

THE RISK IN RELYING SOLELY ON INSURANCE TO PROTECT YOUR ASSETS

by Clint Coons, Anderson Business Advisors

M any real estate investors are told to avoid the use of entities like LLCs to hold their real estate and instead purchase a large insurance policy for asset protection. Such advice, when weighing the initial investment to set up an LLC, might seem like a great plan. Spend a little more to increase your coverage and you will avoid paying an attorney to set up an LLC, deeding your property into the LLC, opening a LLC bank account to deposit the rent, getting your tenant to make the rent payment to the LLC, and changing over your insurance to name the LLC as the insured. Not to mention, if the LLC is set up with another person there is the annual tax return to consider. It’s no wonder why bumping up an insurance policy can be so alluring. However, before you fall prey to this mistaken belief, consider what an insurance policy will or will not cover. The risks for real estate investors go beyond just bodily injury to tenants or their guests. The reality is many people never read their insurance policy and have no idea what is or is not covered. As a real estate investor, the liabilities are plentiful and the ones most likely to get a person sued are the ones not covered under these policies. Consider what happens if an appraiser comes out to a vacant rental you recently spent two months rehabbing and falls tearing two rotator cuffs. Do you think you are covered? The answer is probably no. Many policies exclude properties that are vacant for more than 30 days unless you purchase a Vacant Landlord Policy. It is situations like this, not having an LLC will drop the liability bomb square in the investor's lap. Imagine if the appraiser was paralyzed from his fall. The damages from such a claim could extend into the millions and with it goes all your present and future assets.

Bodily injury is easy to appreciate its magnitude but here are some of the more likely types of claims real estate investors face that insurance will not cover: • Environmental lawsuits from tenants exposed to toxic mold in your property • Contractual claims brought by sellers or buyers for deals gone bad • Damage to property due to animals • Wrongful eviction claims • Tenants injured while performing some service for a rent reduction • Loan defaults • Joint venture partner disputes Ask yourself - do you really want to put your security solely in the hands of your insurer? Insurance is a requirement, but it should not be your only defense. Setting up the proper entity to limit your liability exposure is critical for all real estate investors. Once a lawsuit occurs it is too late to protect your assets if you have not done so already. Sage investors will tell you I would rather have it and not need it than need it and not have it. •

As a founding partner at Anderson Business Advisors & Law Group, Clint Coons is a real estate asset protection expert and an avid real estate investor. He wants to help every investor create a well-balanced plan so they can continue to grow their portfolio and have their capital and investments protected.

98 | think realty magazine :: march 2020

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