Risk management: Why you need umbrella liability insurance

Much of risk management involves purchasing a combination of insurance policies to protect against a variety of outcomes. A typical landlord will purchase landlord insurance (a souped-up version of homeowner’s insurance, which may not pay a claim if your carrier learns the property is being rented) and insurance against acts of God (e.g. flood, fire, earthquake, hurricane, windstorm & sinkhole insurance).

These coverages are designed to protect the owner against the risk of hazards to the property and against liability in the event that someone is injured or killed on the property.

Typical Insurance Policies Held by Landlords

A typical property manager or community manager may not hold these policies on the buildings and land specifically, but they’ll still need their own coverage, including:

• Errors and omissions insurance
• Workers’ compensation insurance
• Employment practices liability insurance
• Cyber risk insurance
• General business liability insurance
• Business interruption insurance
• Key person insurance
• Life insurance for key individuals
• Criminal practices liability insurance
• Car insurance for company-owned vehicles
• And more—the list goes on and on

However, you can’t cover everything. Events occur that no one could have anticipated, and damages can overwhelm base policy limits. It would be prohibitively expensive to carry a huge maximum insurance benefit on so many policies at the same time—and that’s where umbrella liability coverage comes in.

Why Purchase Umbrella Insurance?

Umbrella insurance provides extra liability coverage over and above what’s provided by your base policies. This is important for a couple of reasons:

1. There are limits to base policies—and these limits are designed for typical cases, not for worst case scenarios.
2. These base policies don’t cover everything; your umbrella liability insurance can help you fill the gaps.

Here are a few notable cases where property managers would be on the hook for enormous sums of money, following judgments that would overwhelm any standard liability policy:

A brother and sister were murdered in their Florida apartment complex in 2005. The Florida Supreme Court found the property owner liable for negligence after repeatedly failing to repair the complex’s security gate, which had previously led to an armed robbery and an assault. The Court ruled that property owners have a duty to address security issues and known property defects, and the family was awarded $4.5 million.

In another Florida case, a man was murdered by another tenant. The killer’s background check revealed that he had been evicted from his previous residence—owned by the same property manager—for making death threats and causing disturbances. Apparently, the background check had been conducted but was never read. The company, charged with negligence, settled the claim for $1.5 million; had it gone to trial, it could have been much more.

In 1991, a Texas property manager was held liable for negligence after a criminal gained access to their office and searched their (unsecured) files until he found a single female resident with a lucrative job listed on her lease. Using the copy of her key that the office kept on a pegboard—with her apartment number printed on it—he entered her townhouse, where he assaulted and robbed her. The plaintiff had previously requested a lock for her door that would only open from the inside, which management had refused, citing the need to be able to access all of their units. The judgment against the property manager was for $14 million.

Umbrella vs. Excess Liability Insurance

Umbrella coverage and excess liability coverage are very similar, but there’s an important distinction: An excess liability insurance policy will provide coverage over and above the maximum limits on base policies, but only for hazards covered by the base policy. Umbrella liability insurance typically provides much broader protection; for example, it may cover claims not included in the underlying policies.

Occurrence, Claims-Made & Prior Acts Coverage

When it comes to liability protection, it’s important to understand the difference between occurrence and claims-made coverage. A claims-made policy covers claims that are pressed by plaintiffs during the time the policy is in effect—even if the incident occurred beforehand. An occurrence-based policy provides coverage based on when the incident occurred that gave rise to the claim, though this not always easy to define.

If you do purchase an occurrence policy (ask your agent which kind you have if it’s not clear from the policy language), consider purchasing a ‘prior acts’ rider. This extends coverage to incidents that may have taken place before the policy was in effect—incidents that you may not even know about yet!

Tip: Try to arrange coverage so that your umbrella insurance coverage and other liability insurance policies have the same expiration date. That makes policy management much easier, and it eliminates needless litigation as insurance companies fight amongst themselves over who should pay the claim—delaying your settlement in the process.

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The Bottom Line

While it’s generally not mandatory, a robust umbrella liability insurance policy is a critical safety net that can protect your company against worst case scenarios. They are a shield against truly catastrophic claims that generally only arise because someone has been grievously harmed by your company’s unintentional actions or inactions.

For this reason, umbrella liability insurance doesn’t just protect you—it also protects your clients, staff, and residents. Even if the worst should happen, the financial resources are there to compensate these individuals and their families.