The Importance of Maintaining Liability Insurance for your Property
Insurance is one of those mundane details of owning a property that is easy to forget, but nonetheless crucial. Hopefully years can go by without having to use your insurance policy, but if the time comes that it is needed, you will be glad you have it.
Let me start with an anecdote about my own insurance usage. My wife and I own a few investment properties, multi-family buildings in Chicago. When we purchased these, our lender required us to obtain insurance to approve the loan and we complied and didn’t give it much thought. Come one 4th of July, I get an e-mail from my property manager indicating there was an incident on the property and someone had been injured. I come to find out that an above ground level 1st floor wooden railing broke and a guest fell half a story, her arm landing on a wrought iron fence. She would require hospitalization and expensive rehab. Of course, her father was a lawyer. We feel very bad for her injury, but it was a very stressful time as we hoped that we would not be sued. I spent many nights awake wondering would they take our property? Would they take the other property owned in the same LLC? Could they come after our personal assets? Luckily, the solution was insurance and I was grateful that they paid up to the tune of $350,000! The company declined to renew our policy and it cost twice as much to purchase commercial insurance for the property for the next three years, but we were grateful the incident cost us anything. I went out and obtained an umbrella policy just so we could have extra protection.
Fast forward to this month. I learn of an issue affecting my client who owns a rental property in a high rise building whose washing machine overflowed and water reached units that were 7 floors below. Fortunately, no one was hurt, but sounds expensive. Undoubtedly so, but insurance should take care of it. Unfortunately, he finds out he does not have liability insurance. His insurance will only cover the repair of his unit, not the other damaged units below or their loss of use. This is currently in the process of being sorted out, so stay tuned for an update.
There are separate coverages that property owners can have that cover the property, which usually includes personal property up to a certain limit, and liability. Since liability is potentially unlimited if there is damage to others or injury/death, it is critical to have adequate liability coverage. Lenders might require different things for different properties, but always make sure you have sufficient liability coverage, which probably means more than you think you need.