When it comes to investing in real estate—and particularly in multi-family properties—one of the most important, no-brainer prerogatives is a rock-solid liability insurance policy. Investors are encouraged to shop around for the best possible coverage, as the ideal policy covers the widest range of potential pitfalls.

However, just as is the case in the automobile or homeowners’ insurance realm, various scenarios will likely not be covered by the liability policy, leaving an investor vulnerable to a massive court judgment. Likewise, establishing a corporation for property investments doesn’t always shelter the investor, who may be held personally liable in certain situations. The following provides a glimpse into some of those situations, as well as general liability issues to consider throughout the course of the real property business venture.

The perils of exclusions

Even the most savvy real property investor can’t predict every would-be liability-inducing scenario, particularly if the investor is a “hands-off” participant who chooses to leave the daily management tasks to a landlord or management company. However, investors must be mindful of the most common liability policy exclusions, and take as many preventative measures as possible.

When it comes to property liability exclusions, one of the most common perils that ensnares investors is that of unkempt, poorly-maintained common areas (i.e., areas considered to be the responsibility of the property owner/landlord). While a policy will generally cover the costs of liability for injuries occurring due to accidents or even the negligence of the injured party, it will likely not cover injuries occurring due to unmaintained fixtures and property features. For instance, the property owner could bear sole responsibility for an injury that occurs in an uninspected elevator or dilapidated swimming pool, as liability policies generally exclude injuries caused by “failure to look after” the property.

Furthermore, investors may also find themselves on the hook for injuries occurring due to conditions they “should have”known about, assuming they engaged in reasonable due diligence and inspection of their property.

Your best bet? Make regular inspections of the areas that are most ripe for injuries, including swimming pools, stairwells, elevators, and entryways. Likewise, ensure proper security measures are in place at all times, particularly in areas prone to crime or vandalism. Turning a blind eye to a problem (known as “intentional ignorance”) won’t help alleviate exposure any more than willfully ignoring the problem.

When the corporation won’t help

Unfortunately, setting up a property investment company as a corporation or liability-limiting entity does not always insulate an investor from personal liability. In some circumstances, an injured plaintiff may be able to “pierce the corporate veil,” thereby holding a corporate owner personally liable for damages incurred while engaging the services—or accessing the property—of the owner. While piercing the veil is generally considered a difficult legal burden to meet, a court will not hesitate to hold a property investor personally liable if the facts suggest the corporation is actually a facade or front set up solely to avoid corporate debts or to otherwise defraud clients or customers.

For the property investor, chances are good that the corporate setup will insulate against personal liability (i.e., a judgment attaching to one’s personal home and assets). However, the court will consider the following factors when making the decision:

• Lack of distinction: A corporate entity should be wholly distinct from its owners. If owners are paying bills from a personal account or ignoring corporate formalities, the court may decide the corporation is bunk.

• Fraud and deceit: A judge will likewise not uphold the liability protections of a corporation if the entity is found to be engaging in ongoing fraud and financial abuse.

• Undue harm: If a corporation is so broke and bereft of assets that its creditors (such as an injured plaintiff) would be unduly harmed by keeping the entity protections in place, the court may pierce the veil to ensure that the creditors get paid.

In sum, it takes some pretty egregious conduct for a property investor to face personal liability. However, liability loopholes are constantly lurking in the background—particularly if a property is poorly maintained. To avoid these pitfalls, entrust your property with a knowledgeable, detail-oriented landlord—or conduct regular inspections yourself. And should you find yourself embroiled in a liability suit, get help from an attorney who specializes in such issues.