Q: I have a town home that is paid off in California. I am worried if an earthquake hits I will lose my entire investment. How do I adequately insure my town home?
A: Ironically — or perhaps I should say tragically — you sent me this question about a week before an earthquake hit the Napa Valley area. I live in Washington, D.C., and for years, we never concerned ourselves with earthquakes or earthquake insurance. However, in August 2011, an earthquake with a magnitude of 5.8 occurred in the Piedmont area in the Commonwealth of Virginia. According to published reports, the quake was felt across numerous states and by more people than any other quake in U.S. history. I remember sitting in my office and feeling the floor rolling momentarily. The Washington Monument and the National Cathedral were damaged, and they were only recently completely restored.
I have researched this and have no real conclusion. It is expensive, and typically the deductible is 10 to 15 percent. That means if your house is worth $500,000, you may have to pay as much as $75,000 before the insurance carrier will even send you a check. Contrast this to typical insurance policies where the deductible is generally in the $5,000 to 10,000 range.
But insurance is meant to compensate you for events that might occur in the future. Some people take out airline insurance; others take a chance that the plane will land safely. Most car rental companies try to push accident insurance on you, and you have to decide yea or nay.
And it’s the same with earthquake insurance. Yes, it’s expensive; but restoring your house if it is demolished by another quake would also be expensive.
My suggestion: first, it does not make a difference whether your home is paid off. Your lender most likely does not require quake insurance, but what will you do if the house is damaged? Will you abandon it and let the lender sue you or file foreclosure? That’s not a good result.
Next, regardless of whether you have a loan on your house, talk with insurance companies that issue earthquake insurance. You can find them on the Internet, but make sure they are licensed by your state insurance commission. Get quotes, and then decide.
Q: I own a four-unit property, and it is in the name of my limited liability company. I am concerned about personal liability in case one of my tenants sues me for whatever reason — legitimate or frivolous. How can I protect my other assets?
A: That’s an excellent question. The concept of a limited liability company is primarily — if not exclusively — to have the same protection as if the property was in title in the name of a corporation, only with fewer hassles and red tape.
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There are several mandatory things you should do (or not do) to preserve the protection that an LLC is supposed to give. If, for example, a tenant sues successfully, the assets in the LLC can be attached, but if it’s done right, no other assets are in trouble.
First, if you own more than one investment property, set up separate LLCs for each one. I know that my California readers have told me that this can be expensive, so you have to make a business decision on this. Why do I recommend this? If two or more properties are in the same LLC, and there is a judgment against that LLC, all properties are subject to attachment.
Second, do not commingle funds. Set up a separate checking account for every LLC, and make sure that all funds from the property (and only those funds) go into that account, and all disbursements relating only to the property go out of that account.
Third, your checking account and all stationery should list the name of the LLC.
Fourth, when you sign anything — a check, a letter, a lease — add the word “member” or “managing member” next to your name. You want the world to know that you are signing in your capacity as a representative of the LLC and not personally.
As an added precaution, make sure that you have more than adequate insurance coverage, including an umbrella policy.
Benny L. Kass is a practicing attorney in Washington and Maryland. No legal relationship is created by this column; [email protected].