Is Insurance Enough? - Posted by Jeff M.

Posted by Bill Bronchick on March 18, 2005 at 17:23:55:

Not necessary so.

SCENARIO #1: Claim is for slip and fall, because the property was mismanaged. The owner was negligent is failing to maintain the property. If the owner is an LLC, the LLC, and not the members would be liable

SCENARIO #2: Property owned by LLC. It’s member shows a property and discriminates. Member is liable personally and so is LLC. In that case, LLC won’t help.

SCENARIO #3: Property owned by LLC. Property manager, agent or employee shows a property and discriminates.
Property manager, agent or employee would personally be liable, and so would the LLC, but NOT the members of the LLC.

Also, don’t forget the TENS OF THOUSANDS (in some cases HUNDREDS of thousands) in estate taxes saved!

Is Insurance Enough? - Posted by Jeff M.

Posted by Jeff M. on March 18, 2005 at 08:25:16:

My REIA group offered little cups of green beer for free to celebrate St. Patty’s Day last night, and I’m beginning to think that leprechauns spiked it with something, because a conversation I had with a fellow investor went against everything I’d been taught so far.

As I said, I was talking with an investor of over forty years about investing in rental properties, namely multi-families like apartment complexes and such. I told him that I would like to acquire a four-plex or more to establish some cashflow, but I haven’t formed an LLC or any other entity to protect myself against litigation.

His response was, “Entities are for people who have millions of dollars in real estate. Don’t worry about forming a private entity when you’re first starting out. Just make sure you have proper insurance on the property.”

Doesn’t that go against what most people preach about? I then asked him why I SHOULDN’T form a private entity when starting out. What if someone sued me? What if someone got injured on my property? He answered both of these questions as follows:

“If someone gets hurt on your property, your insurance policy is there to provide medical aid for that person. And if someone wanted to sue you and put a lien against your property, it won’t be beneficial to them unless you have a great amount of equity in the property. Starting out, you won’t have that, and when you do get it, you should refinance to pull money out for other investments, anyway. That way your equity doesn’t look so great to an attorney, but your cash flow will increase with the more property you own.”

Now I swear I only had two little 6oz. cups of the green beer over a three-hour period, so I know I was nowhere near drunk, but this sounded very strange to me. Maybe Lucky slipped some of his Lucky Charms into that beer, because you’d have to be high to put a rental property in your name and just rely on your insurance, right?


Re: Is Insurance Enough? - Posted by GL(ON)

Posted by GL(ON) on March 18, 2005 at 15:33:57:

You have to use your common sense here. If you are a beginner I suggest you dont get hung up on this issue until you buy one or 2 properties.

You should protect yourself once you have something worth protecting.

I will say that I have never bothered with any asset concealing or protecting schemes and have never had a problem in 30 years, on the other hand I dont live in the Excited States and here in Canada we do not have the same problems or at least not as bad.

NEVER enough - Posted by Bill Bronchick

Posted by Bill Bronchick on March 18, 2005 at 12:00:40:

Insurance is good, have lots of it. But, let me give you a little insight about how the insurance industry works, since my first job out of law school was doing insurance litigation.

First, understand that insurance has limits. So, for example, if you have a $1,000,000 policy and you get sued for $2,000,000, you are SOL for the difference. These days is isn’t hard to convince a jury that a permanent injury is worth more than $1M. Forget the equity in the property - if you have personal assets, you’ll lose those, too.

Second, insurance has many EXCLUSIONS. Insurance companies are good at two things: collection premiums and denying claims. If they weren’t, they wouldn’t stay in business. The first thing an insurance adjuster does when the claim is filed is he asks his legal dep’t if there are any exclusions or loopholes to avoid paying the claim. Insurance companies have teams of lawyers who work on this day and night (I know, I was one of them).

For example, someone is injured midly, but you neglect to tell your insurance co about it, you will not get coverage when you are sued a year later. Also, many insurance companies are not covering mold, asbestos and other similar hazards.

Third, there are many things insurance simply does not cover, such as intentional acts, breach of contract, mispresentation, discrimination, acts of your employees, agents, partners, etc.

I recently attended a CLE seminar for lawyers on the topic of asset protection. One of the nation’s top attorneys in this field started his speech by saying he thought it was MALPRACTICE for an attorney to draft a deed putting his client’s name on a rental property without first advising his client to form an LLC.

I couldn’t more. It is so simple to incorporate your business that only a fool proceed in any high risk business without incorporating for forming an LLC.

Also, a totally overlooked point is the estate planning benefits of holding assets in LLCs - you could save yourself a $100,000 in estate taxes by some good planning using LLCs rather than dying with assets in your own name.

Re: Is Insurance Enough? - Posted by Randy (SD)

Posted by Randy (SD) on March 18, 2005 at 10:54:39:

Your wise old investor was right. Often times as beginning investors we get “hung up” in setting up LLC’s or putting properties in land trusts and like you, feel we have to set up the LLC or trust before we began… some never get started. The fact of the matter is that you cannot generally buy a property in the name of the LLC, your lender won’t permit it even though you are personally responsible for the mortgage, title must be held in your name initially. You can always transfer the property into a land trust sometimes an LLC post closing. If you have a litigation where someone is suing you, they will find you even though your property is held in LLC or land trust, your liability insurance is your ONLY protection. The one possible advantage to multiple legal entities and multiple properties is the litigator can only “go after” the one property held in that specific legal entity. So suppose you own two apartment buildings, each held in a separate land trust with the beneficial interest held by your LLC. Someone sues building “A” and the respective land trust, building “B” is insulated from that litigation. But if building “A” doesn’t have insurance sufficient to satisfy the liability a good lawyer can and oftentimes will breach the corporate veil. So my answer is no you weren’t drinking too much green beer neither was your seasoned professional.

Bill - Do you call individuals? - Posted by Jeff S

Posted by Jeff S on March 18, 2005 at 13:07:44:

Ive been trying to get some info about several things. Had a couple of very particular questions that I would like to speak to you about personally.

?? - Posted by Bill Bronchick

Posted by Bill Bronchick on March 18, 2005 at 12:09:06:

“If building ‘A’ doesn’t have insurance sufficient to satisfy the liability a good lawyer can and oftentimes will breach the corporate veil”

–> I hear people say all the time that lawyers can get through entities, so why bother? This is simply not true. The entity protects the owners from liability - that is the law. The EXCEPTION to the law is where the plaintiff can PROVE the entity was used for gross wrongdoing and/or was grossly underfunded and/or disregarded all formalities. These cases are few and far between and the PLAINTIFF HAS THE BURDEN PROVE IT. That means you go into court as the defendant LLC or Corp on the winning side. Why not use the entity if it helps? The cost is minimal.

Do plaintiffs sometime pierce the veil? Sure, but most times, they DON’T. If you learn how to properly keep corporate records and follow the rules, you most often will WIN.

It’s like saying, “Don’t wear a bulletproof vest because, after all, you can get shot in the head”.

Re: ?? - Posted by Ron (MD)

Posted by Ron (MD) on March 18, 2005 at 15:21:20:


Most RE investors are small operations. The principal deals directly with the public…buyers, sellers, tenants, contractors, etc.

Isn’t it true that if any time I deal directly with the public, I become personally liable? I can have a rental property in a c corp, but if I am a hands-on landlord, my tenant can sue me personally…and prevail (in addition to suing my co.)

Given that, isn’t it true that much of the use of entities for asset protection for the small business owner is false comfort (and real expense)?

Ron Guy