Do You Need Umbrella Insurance for Your Rental Property? A Complete Guide

Owning a rental property can be a great way to generate passive income. However, landlording also comes with risks that landlords need to manage. Accidents or injuries involving tenants, guests or service providers could result in costly liability claims that eat into your rental profits. An umbrella insurance policy provides an extra layer of protection that landlords should consider.

Below is a complete guide on umbrella insurance for rental properties including what it covers, how it works, what it costs and whether you need it.

What is Umbrella Insurance?

An umbrella insurance policy provides additional liability coverage above and beyond the limits of your other insurance policies. It is designed to kick in when the coverage limits of your underlying policies are exceeded in the event of a claim.

Umbrella insurance protects your assets by providing extra coverage for situations like:

• Bodily injury or property damage liability claims
• Personal injury claims like libel/slander, invasion of privacy, wrongful eviction
• Lawsuits from events covered by your auto, watercraft or recreational vehicle insurance

Your underlying insurance policies may include:

• Rental property or landlord insurance
• Homeowners or renters insurance
• Auto insurance
• Boat insurance

Umbrella insurance acts as a safety net, providing extra protection when you need it most in case of a major liability incident.

How Umbrella Insurance Works

Umbrella insurance works in conjunction with your other liability insurance policies. Here is a simple overview of how rental property umbrella insurance functions:

1. A liability incident occurs at your rental property, such as a slip and fall accident where a tenant is injured.

2. The injured party seeks damages that exceed the liability limits of your existing landlord insurance policy.

3. Your landlord insurance covers the loss up to the policy limits.

4. Your umbrella policy kicks in to cover the additional costs above the limits of your landlord policy. This provides a second layer of protection for your assets.

5. You only pay the deductible of the umbrella policy, saving you from major financial losses.

Without the extra umbrella coverage, any amount not covered by your landlord policy would come directly out of your own pocket, putting your personal assets at risk.

Umbrella policies provide coverage in increments, usually $1 million. So you may purchase a $1 million policy, or opt for $2 million or more in higher coverage.

Do You Need Umbrella Insurance for Rental Property?

Umbrella insurance is not mandatory, but it does provide an extra safeguard for landlords. Here are some key factors to consider when deciding if umbrella insurance makes sense for your rental property:

High Policy Limits on Underlying Insurance – Most umbrella insurance carriers require you to carry liability limits of at least $300,000 on your landlord and auto policies before purchasing umbrella coverage. Have high enough limits on your other policies first.

Multiple Rental Properties – If you own several rental units, your risk of a liability claim rises. Umbrella insurance efficiently covers all your properties in one policy.

High Net Worth – If a liability loss would significantly impact your personal assets and net worth, umbrella coverage brings added peace of mind.

Litigious State – In more litigious states like California and Florida, umbrella insurance helps cover your increased liability.

Risk Factors – Properties with potential hazards like pools, trampolines or large dogs may benefit from extra liability protection.

Asset Protection – Umbrella insurance provides an additional layer of protection beyond an LLC structure if you own rentals within one.

While not mandatory, umbrella insurance is relatively affordable and worth considering for these situations.

What Does Umbrella Insurance Cover?

Umbrella rental property insurance provides broad liability coverage. It covers claims after your underlying policy limits are reached, such as:

Bodily Injury – If a tenant or guest suffers an injury on your property and sues for damages, umbrella insurance helps cover costs above your landlord policy limits. For example, if a visitor trips on a loose step and breaks their hip.

Property Damage – Covers claims for damage to a third-party’s property that exceed your underlying policy, like if your tenant’s cooking causes a fire that spreads.

Personal Injury – Umbrella policies often cover personal injury claims like libel, slander, wrongful eviction or invasion of privacy that your landlord insurance does not.

Watercraft Liability – Damages from the use of a boat or PWC that go beyond your watercraft policy limits.

Auto Liability – Excess coverage above your auto policy if an accident injures others or damages their property.

Legal Defense Costs – Provides coverage for legal expenses even if you are found not liable in a lawsuit related to your rental property or auto use.

With robust excess liability protection, umbrella insurance safeguards your assets from the unpredictable.

What Umbrella Insurance Doesn’t Cover

While umbrella policies provide broad, additional liability coverage, there are some exclusions. Umbrella insurance typically does not cover:

• Intentional damage you directly cause
• Business pursuits, unless you have a commercial umbrella policy
• Personal injury/damage sustained directly by the policyholder
• Acts deemed illegal by the policy
• Punitive damages in excess of coverage
• Damage to the covered properties themselves

Fines, penalties, and punitive damages above covered costs are also generally excluded. It’s important to read the policy details.

Umbrella Insurance Cost

Umbrella insurance is relatively affordable because it only covers expenses that exceed your underlying policy limits. Umbrella policy rates depend on:

• Amount of coverage desired
• Your limits on underlying policies
• Where the rental property is located
• Your driving and credit history
• Claims history
• Number of rental properties you own

According to the Insurance Information Institute, you can generally get a $1 million umbrella policy for $150 to $300 per year. Each additional $1 million in coverage typically costs $50 to $75 more.

Bundling your umbrella policy with the same provider as your other insurance may earn multi-policy discounts. Higher deductibles also reduce costs, but leave you covering more initial liability costs.

Umbrella vs Excess Liability Insurance

Umbrella and excess liability policies both provide additional coverage above standard policy limits, but are not interchangeable:

Umbrella insurance – Broad coverage that sits above multiple liability insurance policies like auto, rental property, watercraft, etc. Covers diverse incidents.

Excess liability – Increases limits for a specific policy, like augmenting just rental property liability coverage. More narrow focus.

For broad liability protection across policies, umbrella is generally preferable for landlords. But excess liability that is more tailored may also have benefits in certain situations.

Final Takeaways

Umbrella insurance is an affordable way for landlords to protect their personal assets and rental investments. For high-value properties, multiple units, high net worth owners, and other liability risk factors, umbrella coverage brings valuable peace of mind. It provides an added layer of financial protection above your underlying insurance when you need it most.

Review your current policies, evaluate your risks, and talk to an insurance professional to decide if adding an umbrella policy to your landlord insurance makes sense. While not mandatory, umbrella insurance offers security for rental property owners against the unknown.

More Landlord Insurance Resources

Need to buy or review your landlord insurance coverage? Roofstock and Obie make it easy:

Roofstock – Roofstock makes landlord insurance simple by providing instant quotes online from top national insurance providers like Liberty Mutual, Travelers and more. Get covered in minutes!

Obie – Obie is an online insurance broker offering fast quotes for landlord insurance from leading global carriers. Check out Obie’s website for affordable coverage options to protect your rental property investment.