Should you get an umbrella policy for your rental property?

Almost any kind of accident on a rental property can lead to a personal injury claim by a tenant, vendor, or guest. According to the legal resource website Nolo, some of the most common kinds of claims include slip and fall cases, dog bites, and assault and battery.

Unfortunately, these are all potential situations that a landlord may become involved in at one point or another. To help protect themselves from lawsuits, many landlords purchase an umbrella policy for rental property as an extra layer of protection for their business and personal assets.

Key takeaways

  • Umbrella policies provide additional coverage after the coverage limits of underlying policies such as landlord liability insurance are reached.
  • An umbrella policy may protect a landlord against claims from a tenant or guest injured on the property, or from injury suffered by a squatter if the property is vacant
  • Unlike property-specific insurance policies, an umbrella policy can provide coverage for multiple rental properties in different cities and states.
  • While some investors form an LLC to help protect personal and business assets, an umbrella policy may complement the protection provided by an LLC.
  • Umbrella insurance policy premiums for rental property generally between $150 and $300 per year, depending on factors such as the property type and location, and the deductible amount.



What is an umbrella policy for rental property?

As the name suggests, an umbrella policy for rental property covers or lies on top of any existing insurance policies. An umbrella policy provides landlords with additional liability protection against business and owner liability, injuries of tenants, guests, or vendors, and libel and slander.

In order to obtain an umbrella policy, a landlord must have one or more underlying liability policies, such as a landlord insurance policy. Coverage from the umbrella policy begins when the limits of all policies underneath the umbrella policy have been exhausted.

To illustrate, assume a tenant who is injured at the rental property makes a claim and the landlord is found liable. The landlord’s liability insurance policy will pay the initial claim. If the payout is more than policy provides for, the umbrella insurance policy will normally cover the remainder (up to the policy limits).


Umbrella insurance policy vs rental property LLC

One of the reasons real estate investors set up an LLC (limited liability company) is to help protect personal property and other business properties. If an investor lives in California and owns a single-family rental home in Phoenix and another one in Austin, an investor might create an LLC in Arizona and another LLC in Texas.

Now imagine that the tenant in the Phoenix property trips and falls on the backyard patio and sues the landlord for medical expenses, emotional distress, and mental anguish. 

If the investor is found liable for not maintaining the property, the landlord’s insurance for the Phoenix rental would settle and pay out the maximum coverage amount, with the landlord’s Arizona LLC needing to cover the remainder of the tenant’s claim. In most cases, the investor’s personal assets along with the rental property in Texas would not be affected by the claim.

The potential problem with only using an LLC for protection is that the assets of the LLC are still at risk. In this example, the investor may be forced to sell the rental property in Phoenix at the worst possible time to raise cash to pay for the remainder of the claim.

On the other hand, by having an umbrella insurance policy, the investor would pay the deductible and the umbrella policy would cover the remainder of the claim that was not covered by the underlying landlord insurance policy on the Phoenix rental property.


How an umbrella policy for rental property works

Let’s look at another scenario of how an umbrella policy for a rental property might work. 

Imagine an investor with a personal net worth of $500,000 recently purchased a rental property for $250,000 and hasn’t had time to form an LLC. 

As luck would have it, shortly after the transaction closes the tenant breaks a hip on the property, sues the investor, and is awarded damages in the amount of $750,000. 

The investor’s landlord insurance policy on the rental property would cover the claim up to the maximum coverage amount. Any remaining balance would be covered by the umbrella insurance policy, less the deductible. 

However, if the investor did not have an umbrella policy on the rental property, the balance of the claim would need to be personally paid by the investor. Being personally liable for the remaining claim could potentially force the investor into bankruptcy, losing not only the rental property but all personal net worth as well.


What does umbrella policy cover?

An umbrella policy for rental property kicks in when the liability coverage from other insurance policies runs out. Unlike property-specific insurance like a homeowners policy, an umbrella policy covers multiple rental properties owned in different states.

Some situations that are typically covered by an umbrella policy include:

  • A tenant or guest of the tenant suffers grave personal injury because the home is not properly maintained, such as getting shocked due to a faulty electrical system.
  • A landlord is sued by a third party, such as the next door neighbor, for damages caused by the tenant.
  • A former tenant breaks into the home and steals or damages the existing tenant’s property because the locks were not changed in between tenants.
  • A trespasser or squatter in a vacant home sues the landlord for injuries sustained while on the vacant property.
  • A tenant or guest is injured in the common area of a multifamily property, such as the laundry room or parking lot, and sues the landlord.
  • A landlord is sued and has to pay for legal defenses, even if the landlord is found not to be at fault.


Items an umbrella policy does not cover

Most umbrella policies for rental property provide a broad scope of coverage. In other words, if a specific incident is not excluded from the policy, it may be covered. 

However, no insurance policy covers literally everything. Some of the items an umbrella policy probably won’t cover include:

  • Damage to the property, because an umbrella policy is a liability policy. Investors may wish to increase the coverage limits of the homeowners insurance and landlord liability policies.
  • Damage intentionally caused by the landlord or a related party. For example, a landlord may be sued by a tenant for performing an illegal eviction, such as locking the tenant out of the home prior to the eviction process running its course.
  • Personal injuries or expenses sustained by a landlord, along with punitive damages that are awarded under certain circumstances in addition to actual damages.
  • A personal umbrella insurance policy may not provide coverage for business activities, such as a rental property owned under an LLC. Instead, a business or commercial umbrella policy is normally required.


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Typical cost of an umbrella policy

The cost of an umbrella policy for rental property will vary based on factors such as the needs of individual investors, the type of property and where it is located, property value, and amount of deductible.

According to the Insurance Information Institute, the cost of a $1 million umbrella policy will run between $150 and $300 per year, and increase between $50 and $75 for each additional million in coverage.

One of the reasons why an umbrella policy for rental property is relatively affordable is because it provides coverage only after all underlying policies have reached their limit. In most cases, an investor may need to have the maximum liability coverage on underlying policies in order to purchase an umbrella policy.

Many insurance companies offer real estate investors discounts for having more than one policy. For example, a landlord insurance policy may offer the option for adding on an umbrella policy for a small annual fee. As with any insurance product, investors may wish to shop around to get several quotes.


Excess liability policy vs. umbrella policy

Although “excess” and “umbrella” are often used interchangeably when describing liability policies, they are actually two different things. 

An excess liability policy increases the limit of an existing liability over a single specific line of coverage, such a premises liability. By comparison, an umbrella policy generally provides coverage over multiple lines of coverage and can also provide blanket umbrella coverage for rental properties in multiple cities or states.


Final thoughts on this topic

Whether or not to obtain an umbrella policy for rental property is a decision that every real estate investor makes. Some investors may decide that the layer of protection offered by landlord liability insurance and an LLC is sufficient, while other investors may choose to purchase an umbrella policy to provide additional coverage. 

Many investors go through their entire careers without being sued. However, it can be good business sense to be aware of the benefits of having an umbrella policy for rental property, especially as additional homes are added to an investment portfolio.


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This article, and the Roofstock Blog in general, is intended for informational and educational purposes only, and is not investment, tax, financial planning, legal, or real estate advice. Roofstock is not your advisor or agent. Please consult your own experts for advice in these areas. Although Roofstock provides information it believes to be accurate, Roofstock makes no representations or warranties about the accuracy or completeness of the information contained on this blog.
Jeff Rohde


Jeff Rohde

Jeff has over 25 years of experience in all segments of the real estate industry including investing, brokerage, residential, commercial, and property management. While his real estate business runs on autopilot, he writes articles to help other investors grow and manage their real estate portfolios.

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