Too often, we only tell the crazy success stories. The people who did everything perfectly on the way to a fortune. We love to write and read these stories, but they present a false image. The instagram filter of financial independence.
I’ve always learned as much (or more) from the mistakes made along the way, the detours, the barely-avoided disasters. While I certainly share the wins, I also want to share the mistakes.
So, I’ll share how we almost lost everything by being underinsured.
I haven’t talked about this before (ongoing lawsuit) but am ready to share now in the hopes it helps someone avoid the mistakes we made. Especially since we barely managed to avoid disaster.
Table of contents
What Does It Mean to Be Underinsured?
Being underinsured means your insurance coverage is inadequate to cover the potential expenses of a claim.
Merriam-Webster simply defines underinsured as “inadequate insurance.” Simple, but not that helpful. Let’s dig a little further.
While being uninsured is technically being underinsured, underinsurance is generally used when someone has insurance, but not enough for the situation.
Examples of Underinsurance
When used for health insurance, being underinsured can mean that your claim is partially covered, but your insurance leaves you with significant out-of-pocket expenses.
In auto insurance, you may have liability insurance that is insufficient in the case of a bad accident. Claims against you may be more than your insurance covers AND you are not insured for the replacement of your own vehicle.
Many homeowners are underinsured by coverage that won’t fully replace their house in the event of a total loss.
In our case, we were underinsured because our liability insurance was insufficient to protect our assets in the event of a claim against us as landlords. Let’s get into it.
The Mistake – How We Came To Be Underinsured
In our lifestyle inflation phase, we made one of our biggest financial mistakes: buying a house that was larger and more expensive than we needed.
In order to make that mistake, we needed to rent out our reasonably priced house. We were close to being underwater on it (this was during the later phases of the housing collapse) and didn’t have time to sell.
We went with a property management company recommended to us by a colleague who owned several rentals. We got an insurance policy with liability coverage of $300,000.
Then, here’s where I made a mistake. We considered getting umbrella coverage on the rental, but decided against it. Here was our reasoning:
We are diligent people and the property was well-maintained. There were no safety issues and we’d be the type of landlords that approved maintenance requests automatically.
We were using a professional property management company recommended by a colleague who had several rental properties that he’d operated for years.
Finally, and perhaps most importantly, we had no measurable net worth at the time. We had very little to risk and the extra cost on a property that wasn’t cash-flowing didn’t make financial sense. At the time. (Foreshadowing!)
So, we were insured, but with a liability cap of $300,000 without an umbrella policy.
The Situation – Why Being Underinsured Mattered
After almost ten incident-free years as landlords, our tenants filed a lawsuit against us. I won’t go into all the details (legal advice), but here’s a simple summary of the situation.
There was an accident on the property. Though it was unrelated, the accident happened to occur near a spot where we had approved a repair. We had gotten multiple bids for the repair from reputable construction companies, but hadn’t selected the highest bid.
The highest bid included some inflammatory language about the repair. The estimating contractor had spoken with the tenants, and they recalled the conversation years later. (The bid we selected included assurances from a licensed contractor about the safety of the repair – so we were not acting negligently.) However, the tenants remembered this conversation when the accident happened several years later.
This formed the basis of their lawsuit, using a local personal injury attorney. The first thing we learned is that it’s almost inevitable that personal injury filings against landlords assume the holding of an umbrella policy. The requested settlement amount was seven figures.
(Quick note, we feel awful that our tenant was injured and they recovered fully by the time this story ends. This is not an anti-tenant-protection screed. Landlords do have responsibilities and should take them seriously.)
It’s never fun being sued. Unfortunately, as a school administrator I’ve been named in multiple professional lawsuits. I’ve become better than I’d like at assessing risk and am comfortable working with attorneys. My initial assessment was that we were not at much risk.
I was wrong.
Our property manager had failed to do a critical inspection that would have supported our case. Our contract with the property management company was not clear enough to claim negligence against them.
Furthermore, the two attorneys I spoke with – one provided by the insurance company and another independent consult, explained that in our county juries almost universally find against landlords. I was told “If you lived 5 miles to the east (in another county) you’d be fine. Here, you’re in trouble.”
While both doubted damages would end up in the seven figure range, both advised it was very possible they would exceed our liability cap.
We hadn’t adjusted our insurance to keep up with our current financial situation. Since the initial decision our assets had grown considerably. And they were now at risk.
We were underinsured. A huge mistake.
The Resolution
The process dragged on for almost a year. I didn’t write about it because it’s very unwise to speak publicly about active lawsuits. To have made such significant financial progress in the last five years and have that at risk was stressful and demoralizing. I felt foolish and my feelings of financial insecurity were stronger than ever.
Three factors ended up working in our favor.
First – the insurance company support was fantastic in a number of ways. They accepted responsibility without hesitation and appointed a fantastic local lawyer to our case. I’ve been guilty in the past of griping about insurance companies (and many have a history of trying to avoid paying claims) but in this case, I have nothing but positive things to say about State Farm.
Second, we had a clearly documented history of approving all maintenance and repair requests quickly and consistently. We always got multiple bids. In this instance, we had a documented chain of communication confirming that we’d been diligent about the choice we made. While that wasn’t sufficient to fully protect us in a jury trial, it was likely to limit the damages.
Finally, the process turned up other questionable information about our tenants. While this was yet another failing by our management company, it also had an impact on the risk assessment by both sides.
The range of outcomes was still far too risky for me, but it was narrowing. Neither side wanted to go to trial given the range of possibilities. This is not unusual – a very high-percentage of tort claims are settled without going to court. (Estimates range from 73% – 95%) The question – where would a settlement fall?
In the end, the case was settled without a claim against our assets, but it was close. The case is closed and all claims are dismissed, which is the only reason I’m writing this with even vague details.
We’d (barely) escaped our mistake without a personal financial cost. It did cause us lost sleep and anxiety for ten months. If we’d had the umbrella policy, our personal assets would never have been at risk and we could have relaxed.
How to Avoid Being Underinsured
It was foolish of us to be underinsured and we made several other mistakes. For now, we’ve moved back into our rental and chosen to exit the landlord game. We haven’t sworn off owning rental real estate forever, but the experience certainly has given us pause.
Here’s how I’d do it differently going forward.
Protect Yourself as a Landlord
The first mistake was me, an amateur, just winging the whole landlord situation originally. Consult someone you trust about how to protect yourself.
Personally, I’d consider owning real estate in an LLC. That’s not always necessary, but does offer a layer of protection.
At the very least, I’d learn the risks of your local context. There is no way I’ll own a rental in our area again without having the appropriate umbrella policy. A few hundred dollars a year would have saved us so much time and stress.
Review Your Insurance Regularly
My biggest regret in the whole process is not updating our insurance coverage as our net worth rose. Even if the original choice was defensible (which is dubious at best) it simply didn’t hold up once we had significant assets.
Find an insurance agent you trust, and do a regular review of your insurance. Assess your insurance coverage for both risks and your current financial situation.
Though we no longer own a rental, we now carry a personal liability umbrella policy.
Review Your Property Management Contract
Our property manager dropped the ball on several key things. Unfortunately, our contract didn’t spell out their responsibilities clearly enough in the relevant areas.
We’d been complacent because of the strong recommendation and our initial experience with them. As a result, we didn’t follow-up to ensure they were doing everything they’d promised verbally. Yet another way I was foolish.
If you use a property manager, ensure the contract clearly outlines everything you expect of them. Have a lawyer review the contract. Then, make sure the property manager follows through. Identify failures before they put you at risk.
Summary – Being Underinsured Was a Big Financial Mistake

Everyone makes mistakes on the path to financial success. We just don’t talk about them enough.
We almost lost years of financial progress by being underinsured. We managed to escape unscathed only through luck.
I hope sharing our mistake helps others avoid loss of sleep and potential loss of money.
To avoid being underinsured:
- Consult the appropriate professionals
- Choose the appropriate protection
- Review your insurance coverage regularly
- Ensure contracts include clear and complete language
Awesome post! As a 28 year old looking to eventually own rental properties, this gave me something to think about. I would imagine many novice landlords have found themselves in a similar position. Thanks for sharing.
Glad you liked it. You’ll do it better than I did simply because you’re already paying attention to these things before getting into it.
nice post and i’m really glad you wrote this one. we probably are due to take on some kind of umbrella policy as our money grew substantially in the past 5 years alone. i was thinking of writing a post about “all the finance stuff i don’t know” and insurance would be the top one.
we just had a little discussion on the blog about possibly renting our house (paid off) versus selling it but stuff like this makes me not want to take on tenants…ever. i’m glad you got out from under the mess and learned the lesson.
Yep, as a poor kid who never had money to worry about, thinking about how to insure wealth was way off my radar. Almost paid for it, but glad we didn’t. I’d love to read that post – I’m sure it’ll trigger lots of learning for me to do.
Whew, I’m glad to hear it worked out. You guys dodged a bullet there.
We live in a county that’s anti-landlord too. The rent has been going up too much over the last 20 years and renters are mad.
Umbrella insurance is a very good idea for landlords. I also don’t trust property managers. IMO, they take on too many clients and couldn’t do good work for everyone.
Also, I hear regular homeowners shouldn’t tell people you have umbrella insurance. That way you can avoid people suing for minor issues like tripping in front of your house.
Yeah, wise words all around. I think you hit it right on with the property manager. We survived the mistake after some stress and embarrassment and will do it differently next time. (If there is one.)