Insurance as Your First Line of Defense

Believe it or not, insurance is one of your best asset protection tools.

Many people want huge expensive legal structures so that they have a “bullet proof shield” to protect their assets.  Lawyers are more than happy to take their money.  Many lawyers have ongoing costs associated with the asset protection shields they create.  There isn’t any such thing as a bullet proof shield in asset protection, but there is something you can easily do that will take care of the vast majority of asset protection issues. There is no question that LLCs, ownership changes, trusts, and many other legal tools can help with your asset protection plan, but the  simplest thing you can do to get a pretty good asset protection shield is buy a good insurance policy.

Insurance is a nasty word, understandably, but it handles the majority – the vast majority – of scrapes people find themselves in.  Insurance is a nasty word, because the insurance companies work hard to get out of paying claims.  But, if you have good coverage, insurance is a great asset protection shield, and it’s probably cheaper than a lawyer.

Don’t get me wrong.  Lawyers are necessary, and as an attorney, I love the idea of big legal fees.  You shouldn’t totally rely on insurance as your asset protection plan.  You need a legal structure to act as a safety net and legal asset protection plan if the insurance doesn’t work for some reason, but you need to maximize your insurance options first.

BUT, the insurance company’s job is to get out of paying your claim, and they are good at it. Your policy has to cover the risk. People are getting into trouble with insurance, because they buy a policy and then it doesn’t cover the risk. In their mind the risk was covered, but that isn’t true in the insurance contract.

Make sure you are insuring the risks you have.  People often file a claim or need help from the insurance company only to find out that the risk they are facing isn’t covered by their policy.  Policies are famous for their “exceptions.”  There are two traps that people often find themselves in.

One trap that is commonly encountered is the auto insurance that doesn’t cover the accident, because the car wasn’t being used for the purposes that the policy was purchased to cover.  Most people get a personal policy.  That covers the car when it is being used for personal uses.  As soon as your kid becomes a Pizza Hut delivery boy, your insurance goes out the window whenever he has a pizza in the back seat.  That’s a business vehicle at that point, and your insurance only covers a private vehicle.

It becomes a little more subtle than that.  Whenever you have an accident the police and/or the insurance agent will always ask why you were in the car.  If you say that you were going to the fast food place, you’re covered.  If you say you were going to the fast food place to get sandwiches for the office meeting going on in the boardroom, you’re not covered.  Be very careful what you say, and know what your policy covers.

Another place real estate investors get into trouble is playing the asset protection game.  They buy property casualty insurance on their rental unit.  They insure an individual investor owned rental unit.  To beef up their asset protection, they later change ownership of the unit to an LLC.  This is actually a good thing to do in many cases.  However, the insurance has to be changed.  The unit is no longer an individual owned investment property.  It is a property owned by an LLC – a commercial property.

Somehow insurance companies think commercial properties have a lot higher risk than individual owned investment properties, so they won’t pay your claim when it is filed.  They didn’t insure the risk of a commercial property.  When you go to get the proper insurance after you move the property into the LLC, you’ll find that commercial property insurance is three times as much as individual investment property insurance.  Some insurance companies recognize that the risk isn’t really changing, and those few insurance companies won’t increase the policy premiums, but other companies really soak you for the new insurance when the property is in an LLC.

Real estate investors often void their insurance policy when they attempt to do asset protection planning. The shocker comes when they try to cover their risks and find out that their asset protection plan just tripled their insurance costs.

You really need a great insurance agent.  Mine is a third generation member of a family owned insurance company.  He has been in the property causality business for over 40 years.  He has saved my skin on several occasions by knowing the policies inside and out.  It isn’t your job to read the 500 page insurance contract, but somebody has to know exactly what it covers.  If you don’t have a great agent, you’ll have to start reading the policies.

Don’t leave your asset protection up to chance. Make sure you are covered, and make sure you are covered well.

For a comprehensive explanation of how to set up your assets–business and personal–for maximum protection, see my book, Protecting Your Financial Future.