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Protecting Assets with Entities vs. Insurance

By David M. Tkacik, Esq.

November 21, 2017

 

Many investors automatically form business entities such as LLCs for every new property they purchase.  However, many others maintain real property in their own name or in their and their spouse’s names, reasoning that insurance will protect them should anything go wrong. 

Insurance is an excellent way to mitigate risk from hazards such as fires or hail storms.  The amount of insurance needed for fire damage is usually easily determined by the property’s cost of construction.  However, when it comes to protecting against lawsuits for personal injuries it may be very difficult to determine how much insurance is enough.  A tenant personal injury lawsuit could be worth $20,000, or it could be worth significantly more.

Consider the following scenario: husband and wife own a property in their own names and rent to a tenant.  The tenant suffers from diabetes and is on disability.  The lease is very clear that the tenant is responsible for snow and ice removal in winter.  However, on a snowy day the tenant slips and falls on the entry stoop to the home which is covered in sheet of ice.  The tenant has to undergo multiple surgeries, and ultimately suffers permanent injuries.  The tenant then locates a plaintiff’s personal injury attorney and sues the husband and wife on the theory that the landlord failed to maintain the property’s gutters, which in turn caused water to drip onto the front stoop, thereby causing the ice.  The tenant testifies that despite his diligent efforts at snow and ice removal, he could not prevent the ice because the landlord did not maintain the property.  Husband and wife have a 100/400 liability insurance policy, which means they have only $100,000 of liability coverage for each incident.

After a trial a jury finds that tenant’s pain and suffering, lost earning potential, and medical bills are worth $200,000.  The insurance company then pays the policy limit of $100,000 to the tenant, ending their involvement in the case.  Next, the tenant’s attorneys look to the personal assets of the husband and wife, which include their home, vehicles, savings – basically everything they have worked hard all their lives for.  Husband and wife now are left with some difficult choices to make, including possibly filing for bankruptcy. 

Had the husband and wife in the above example had simply purchased that property with an LLC instead, they could have avoided the tenant’s attorneys from reaching their personal assets. A judgment against an LLC is, absent some very unusual circumstances, only collectible against that LLC.  If the property had been owned in an LLC, the worst case scenario is that the tenant’s attorneys look to the equity in the property for their recovery.

Thus, the best way to protect your personal assets is to have both liability insurance and own the property in an entity such as an LLC.  Setting up an LLC is quite easy and can be done in a matter of days. 

If you have questions about forming an entity for real estate investment such as a limited liability company (LLC), limited partnership (LP), or corporation contact David M. Tkacik, Esq. at DTkacik@TkacikLawOffice.com or at 412-414-9644.

David M. Tkacik, Esq. is the owner of Tkacik Law Office (www.TkacikLawOffice.com), a real estate and civil litigation law firm.