I own a rental property. How much liability insurance should I carry?

Liability insurance is more complicated to calculate than property insurance. Not only do you have to consider the value of the property, you also have to defend against potential claims resulting from that property or your own behavior. Since every property is different, the exact values are going to vary from one rental property to the next.

Liability insurance protects you against incidental claims as well as actual ones. For example, if someone broke a leg on your property, the liability insurance would cover their medical care. If that person then turned around and sued you over the injury, the liability policy would pay for the legal costs as well, up to the value of the policy. If you have a claim filed against you for more than the value of your insurance, you are personally liable for the additional costs, which could cause a severe financial hardship.

Since determining exactly how much insurance you might need is difficult, it is usually better to look at the option of an umbrella liability policy to increase your total protection. That way, if the claim exceeds the liability portion of your landlord insurance policy, the umbrella policy would kick in to cover the rest.

Umbrella liability is much less expensive than increasing the liability on each property you own, and has the advantage of working across all of your existing liability policies. For instance, you could use part of it to pay for a large landlord insurance claim, and then use the umbrella policy to pay for injuries and damages in a car accident with excessively high costs. Umbrella policies get their name from the fact that they work like an umbrella, protecting all of your liability needs with a large blanket policy.

What is important to remember is that a liability claim could very easily be for much more than the actual damages. Anyone who suffers an injury or loss because of you or your home may decide to file a civil suit against you along with the medical bills, and some people have lost everything because the liability coverage they had fell short of what they needed it to be.