Yet another Umbrella Policy Topic

[spideyrdpd]

I still the think the point of the llc is to as you say "make things harder" I am sure that makes things easier to settle.
I still would really know of some cases to show that the llc wouldnt protect you . Most of the cases I read they had issues with the llcs. Like co mingling funds. Or the one case with the single member llc.

By the way Mike if the judgement was against you
then the llc isnt going to matter.
They can sue you if you were personally responsible.

 

[Martha]

I still the think the point of the llc is to as you say "make things harder" I am sure that makes things easier to settle.
I still would really know of some cases to show that the llc wouldn't protect you . Most of the cases I read they had issues with the llcs. Like co mingling funds. Or the one case with the single member llc.

By the way Mike if the judgement was against you
then the llc isnt going to matter.
They can sue you if you were personally responsible.

As a general principal, if a business is owned by a LLC, then you as an owner are not personally liable for the debts of the entity unless:

--you personally did the bad act that resulted in liability. For example, you were driving a car on LLC business and had an accident, you and the LLC would be liable;

--you personally guaranteed the debt at issue. For example, the LLC borrowed money from a bank and you guaranteed the bank debt; or

--you ignored "LLC formalities" and treated the LLC as if it were yourself (for example, no books are kept, you mix LLC money with your own money and don't keep separate account, etc). This doctrine is called piercing the corporate veil and is actually rare.

The next question is whether an LLC or partnership or other entity would be liable for your personal debts unrelated to the business. There also is a related question: can you use an LLC or partnership or corporation to protect your assets from your own creditors? First of all, if there isn't a business purpose for the LLC or partnership or a corporation then a court would probably find that creating an entity to hold personal assets is ineffective to protect those assets from your creditors. If there is a business purpose for the entity, then the issue is a bit complex. Generally speaking, under corporate and partnership law, entities are not liable for the personal, non business debts of their owners. But, a creditor or a bankruptcy trustee will step into your shoes as an shareholder/partner/member of the entity involved and have the same rights that you have. So, if you own shares in a publicly traded company, the trustee would sell those shares. If you are the sole owner of a LLC, the trustee would step into your shoes as owner and sell either the LLC or its assets and use the proceeds to pay your debts. If you are one of several owners, it gets a bit stickier, but if the LLC/partnership/corporation has value, one way or another the trustee/creditor will either sell your interest in the company or, if you are a majority owner, force a sale of the company. If there isn't a lot of value, the creditor or trustee may decide it is not worth all the work and litigation and will settle or abandon the asset, but if there is real value there, the trustee or a tenacious creditor will find a way to realize on that value.

 

[ziggy29]

Cybrmike, I don't know where you got your information, but putting your assets in an LLC is a terrible strategy. It would have no effect on anything.

One of the best uses for LLCs is if you own several pieces of residential real estate. If you put each one under a separate LLC, any claim against ONE of those properties puts that one at risk, but the others are likely protected (as are your personal assets outside the LLC). As with any kind of law like this, it can vary considerably from state to state.

Asset protection laws vary a lot, too. Some states barely protect some retirement assets and a homesteaded personal residence. I happen to live in Texas, for example, which provides as much protection as any state in the union. As 80% of our net worth comes from our homesteaded personal residence and retirement accounts -- which are virtually judgment-proof in Texas -- we aren't likely to be devastated by a lawsuit against us...but it's still worth having the umbrella to us, since it's cheap (about $150 a year plus the underlying costs of higher liability limits on auto and homeowners coverage for a $1M policy) and it basically provides legal representation (from the insurance company) in the case of very large lawsuits. In that sense it's almost like paying a retainer fee.

 

[retiringby50]

I have one for $1M that I bought about 15 years ago, but I also wonder if I should up it now. My assets consists of mutual funds (non-IRA), two homes, and various vehicles that totals about $2.3 million. From this discussion, is the consensus that I should be purchasing 2x my assets? $5M policy sounds like a lot of money! I was reading some of the threads, and then it got off topic, so I skipped a bunch. Plus, the thread is about 9 months old, so maybe y'all have different opinions now.

 

[haha]

I have one for $1M that I bought about 15 years ago, but I also wonder if I should up it now. My assets consists of mutual funds (non-IRA), two homes, and various vehicles that totals about $2.3 million. From this discussion, is the consensus that I should be purchasing 2x my assets? $5M policy sounds like a lot of money! I was reading some of the threads, and then it got off topic, so I skipped a bunch. Plus, the thread is about 9 months old, so maybe y'all have different opinions now.

I used to have an umbrella about equal to my assets. Then I got divorced, and voilá the policy was twice my assets. But I think I will leave it that way, as the extra coverage does not cost proportionately as much as the base policy, so to me it seems like a good buy.

Ha

 

[Martha]

Welcome to the board, retiringby50. There are a lot of threads regarding umbrella policies. Some are collected in the FAQ regarding protecting assets from creditors.

There is no consensus that the amount of your umbrella limits needs to be directly correlated to the amount of assets you are trying to protect. Certainly, if you have no assets the need for an umbrella is minimal because you have nothing to lose. But beyond that, I think that if you have assets that are not exempt from seizure by a creditor, it is important to review your insurance policies and consider an umbrella policy. The policy limits should be based on risk. What is the risk of you being sued for and losing $5,000,000? Do you engage in a risky activity? Do you own rental property? What kind of personal injury verdicts do juries come out with in your part of the country?

Odds are, five million will be high.

 

[emilylynn]

What I would do if I represented a creditor or was a bankrupctcy trustee, I would step into your shoes as an owner of an interest in the LLC and sell your interest. If you owned the entire LLC I would have the option of selling off its assets. You would have no control over the LLC, the trustee would have control. Your interest in the LLC would not be exempt from creditors unless the value was really small. In some states, depending on the structure of the LLC, there may be barriers to selling your interest, but the trend in bankruptcy law is to find a way to liquidate the asset.

I suspect that the law on this point varies from state to state. In my jurisdiction, a creditor cannot become a "substituted partner," and I suspect the result is the same for members of an LLC. The creditor gets a "charging order" entitling him to whatever distributions are made, but I am not aware of any mechanism for forcing such distributions to occur. Consequently, a charging order is not an especially effective collection tool in this state.

 

[Martha]

I suspect that the law on this point varies from state to state. In my jurisdiction, a creditor cannot become a "substituted partner," and I suspect the result is the same for members of an LLC. The creditor gets a "charging order" entitling him to whatever distributions are made, but I am not aware of any mechanism for forcing such distributions to occur. Consequently, a charging order is not an especially effective collection tool in this state.

Yes, there is state variability, but there also is federal bankruptcy law which often trumps state law. For example, most states have adopted the Uniform Limited Partnership Act. The Uniform Limited Partnership Act provides that a creditor cannot take assets of a limited partnership to satisfy the debt of a limited partner. Basically, the partnership isn't liable for the debts of the individual limited partners. It also provides that a creditor of a limited partner can "charge" that partner's interest to pay a judgment, and that the creditor will be treated like an assignee of the partnership interest. This does not mean that a creditor cannot take a limited partner's interest in the partnership to satisfy that partner's debt.

Some states do, however, limit the ability of the creditor to "take" the partner's interest. This is where your charging order comes in. The creditor will get an order of the court requiring any distributions to the partner be paid to the creditor. The creditor just sits and waits or settles with the debtor or other partners.

However, the trend (at least it was a trend a couple of years ago when I last checked) is to allow the liquidation of partner's interest in a partnership if the creditor's judgment cannot be satisfied by the charging order. Bankruptcy courts are especially likely to allow the liquidation. Because of this trend and the fact you can't be sure where you will get sued and what state's law applies, there is always the risk that a creditor or bankruptcy trustee will successfully obtain ownership of the limited partner's interest. My experience is that determined bankruptcy trustees do not let go of valuable assets and one way or another, manage a recovery for creditors.

The practical problem still remains, however. Even if the creditor gets ownership of the limited partnership interest, it is going to be hard to force a distribution. Nevertheless, a determined creditor or trustee will likely be able to squeeze something out of the partnership interest.

It is worse for the debtor if the debtor is both the general partner and a limited partner. Or even just a general partner. Say dad sets up a limited partnership. Dad is the GP and is a LP along with his kids. Dad ends up in financial trouble and files bankruptcy. As trustee, I would step into his shoes as GP and force a distribution to the LPS.

In any entity, if the debtor has controlling interest, a bankruptcy trustee will likely be able to exercise that controlling interest and force a sale of the controlling interest, or the entity itself or its assets.

 

[emilylynn]

Some very good points have been made here. If I could add a few more:

1. Contrary to popular myth, large "windfall" verdicts are the exception, rather than the rule. Damages require actual proof of loss, and juries are notoriously stingy these days. Sure, it's possible that somebody could slip on an icy walkway and end up a paraplegic, but the far more likely situation is a rear-end whiplash injury where, even with a lot of claimed disability, damages are not likely to exceed the $12-$20,000 range.

2. Plaintiffs' lawyers who want to stay in business typically do not take cases to litigation unless proof of liability is strong and damages are substantial. The cost of running these cases (replete with medical experts charging at the rate of $400 per hour on up) can be very high, and the plaintiff's attorney often does not get paid until the case is resolved.

3. A plaintiff will have to choose between settlement and a lawsuit. He cannot have both. In the event the plaintiff chooses to settle, payment will normally be contingent upon his execution of a full and complete release. Any insurance company that attempted to resolve its own liability without a release of claims against the insured would most likely end up on the wrong end of a lawsuit by the insured for "bad faith."

4. Where a plaintiff's damages approach, and potentially exceed, the amount of insurance coverage available, an insurance company has a strong incentive to offer a settlement in the amount of policy limits. This is because under many states' laws, the company will be on the hook for any excess damages if it does not.

5. Plaintiffs' attorneys are rarely enthusiastic about going after an individual's assets. Collection is often a difficult and uncertain proposition, as many defendants would sooner declare bankruptcy and quit working than have the better part of their wages garnished for the next 20 years. That being so, a plaintiff's attorney would in most cases be crazy to advise his or her client to forgo a reasonably good settlement for policy limits in favor of a chance to spin the wheel of fortune.

Just a few things to think about.

 

[Martha]

Good points, emilylynn. My prior experience in the bankruptcy biz was that rarely was a bankruptcy the result of a claim arising out of a personal injury suit. And as you say, most PI claims against individuals are in fact small.

But if you are well to do, and have non-exempt assets, I would have umbrella coverage, especially since the policies are so cheap.

 

[Martha]

BTW, welcome to the forum. I assume you are a PI lawyer?

 

[emilylynn]

But if you are well to do, and have non-exempt assets, I would have umbrella coverage, especially since the policies are so cheap.

I agree completely, and actually got myself an umbrella for the first time this last week! However, I would not assume that a policy need cover every last dollar of an insured's assets, because a plaintiff will necessarily have to weigh the cost of foregoing a substantial settlement in the amount of policy limits against the expense and risk of trying to eek out a few extra dollars. That was my main point.

P.S. Great info about the charging of an LLC interest. That whole area remains something of a mystery to me.

 

[emilylynn]

BTW, welcome to the forum. I assume you are a PI lawyer?

Thanks a lot, Martha! I'm glad to be here after lurking for quite a while. No, I don't currently practice, but I was involved in a few PI and med mal cases during the first few years out of law school, prior to getting into commercial litigation. My best friend does plaintiffs' work, so I've sort of lived the life vicariously. Hope to be able to add something to this board from time to time, although these days I'd rather be thinking about gardening than law!

 

[retiringby50]

Welcome to the board, retiringby50. There are a lot of threads regarding umbrella policies.

There is no consensus that the amount of your umbrella limits needs to be directly correlated to the amount of assets you are trying to protect. The policy limits should be based on risk. What is the risk of you being sued for and losing $5,000,000? Do you engage in a risky activity? Do you own rental property? What kind of personal injury verdicts do juries come out with in your part of the country?

Odds are, five million will be high.

Thanks! I did read through some threads but will continue as well since there is so much material... one of my other question has to do with paying off the mortgage or not, BUT I'm already smart enough not to ask! I'll read through some of the old threads instead.

Of course, as a conservative, law-abiding person, I'm thinking that I won't ever be in a situation where someone will sue me for something, but one never knows. I do have 1 rental property (single family home), I have a child who will be of driving age in several years, and I live in litigious CA. I'll look into a $2M instead.

 

[haha]

Of course, as a conservative, law-abiding person, I'm thinking that I won't ever be in a situation where someone will sue me for something...

Plenty of conservative law abiding people have had judgments entered against them. Good that you are going ahead with the umbrella.

Ha

 

[FinanceDude]

One thing I didn't see mentioned. Generally the FIRST million of umbrella is the most expensive. Each million you add is about half the cost of the first million.

My insurer was "running a deal" on umbrella upgrades, so I went from $2 million to $5 million for only 25% more than I was paying, so I guess I am "overinsured"..............

 

[WanderALot]

Before I signed up for my $1M umbrella policy, I had to increase my liability limits on my auto policy to $500k. Now, my understanding of the policy limits are that if I were to get in a car accident that had damages, the first $500k would be covered by my car insurance policy and my next $1M is covered by my umbrella? If this is the case, isn't my effective liability coverage $1.5M, provided of course that the damages are caused while I was driving.

 

[Martha]

Yes.

(Edit, it appears that many insurance policies do in fact treat the underlying coverage as the deductible and deduct it from the total coverage)

 

[WanderALot]

Thanks Martha! For those people who don't have any rental property or running a business, I would think that driving cars are the biggest source of liability.

 

[EarlyRetiree1978]

Homes are a liability also. A property in the neighborhood I use to live in never shoveled there snow (they lived a couple homes down). They also had a walkway that was uneven. A women fell in the winter time walking up to there front door and broke her hip. The home owners had to pay for that ladies lost wages, and medical expenses (operation, physical therapy, etc).

 

[Peaceful_Warrior]

no matter the amount you might be sued for, your umbrella policy will have to foot the bill up to the stated amount ... the greater that amount, the more
"enthusiastic" will be the defense they mount on your behalf.

I was going to point this out as well. Even at $1MM, the insurance company has a LOT invested in protecting you and/or settling for the lowest possible price. Even if you have $2MM in assets, they'll do their damned best to win and/or keep the total liabilities below $1MM so they can pay as little as possible.

I have a single rental property right now and am quite comfortable with a $1MM umbrella policy.

 

[emilylynn]

Insurance companies are perplexing in terms of how they handle claims. It used to be that they would spare no expense in mounting a defense, but over the last decade that has changed dramatically. Often the law firms hired by insurance companies to represent insureds are "bargain basement" firms that stick their associates in cubicles and churn them in and out so fast that nobody even bothers giving them nameplates. The last few attorney fee statements I've seen coming from these firms have been ridiculously low in terms of both the hourly rates charged and the amount of time billed. This would suggest that there are enormous pressures on these firms to do the absolute minimum on cases so as to keep the cost to the insurance company down. I would also note that although the attorney hired by the insurance company is supposed to represent the insured's interests, there is--at least in my experience--little doubt about who the company is aiming to please. I wish I had happier news for the insureds out there who need (and are deserving of) a top-quality defense. I'd be curious about Martha's experience in this regard.

 

[samclem]

The last few attorney fee statements I've seen coming from these firms have been ridiculously low in terms of both the hourly rates charged and the amount of time billed. This would suggest that there are enormous pressures on these firms to do the absolute minimum on cases so as to keep the cost to the insurance company down.

That sure seems like false economy on the part of the insurance company--save a nickel on lawyers and spend a dollar on the award/settlement. I guess they've figured it all out and it makes sense to them (or else they haven't done the cost/benefit analysis, which is improbable).

 

[cute fuzzy bunny]

Next they'll be outsourcing the settlement lawyers out to India.

I had $1M for years. Most suits in my area were averaging under $800k. I upped it to $2M because it was only an extra ~$100 per year.

I figure its a good idea to protect yourself from predatory people and small mistakes. If I do something that a judge feels is worth more than $2M, then I did something tremendously stupid and oughta pay for it.

 

[Martha]

Insurance companies are perplexing in terms of how they handle claims. It used to be that they would spare no expense in mounting a defense, but over the last decade that has changed dramatically. Often the law firms hired by insurance companies to represent insureds are "bargain basement" firms that stick their associates in cubicles and churn them in and out so fast that nobody even bothers giving them nameplates. The last few attorney fee statements I've seen coming from these firms have been ridiculously low in terms of both the hourly rates charged and the amount of time billed. This would suggest that there are enormous pressures on these firms to do the absolute minimum on cases so as to keep the cost to the insurance company down. I would also note that although the attorney hired by the insurance company is supposed to represent the insured's interests, there is--at least in my experience--little doubt about who the company is aiming to please. I wish I had happier news for the insureds out there who need (and are deserving of) a top-quality defense. I'd be curious about Martha's experience in this regard.

Absolutely agree.

Insurance defense work is not very desirable work.

In my former firm, our large business clients often would have us look over the shoulder of the insurance defense firms who were defending PI claims brought against our clients.