While cottage ownership comes with many rewards, it also comes with some financial and legal risks. Accidents and injuries that happen in the cottage, on the dock, or on surrounding waterfront property can expose a cottage owner to legal and financial liability. Cottage owners should be diligent in maintaining the property, but also diligent in establishing the proper protections to keep the cottage in the family for generations to come.
One important protective measure is umbrella liability insurance. The umbrella policy is often written for $1 to $5 million worth of coverage and will pay for all fees and costs associated with a cottage owner's liability. For approximately $200 a year, a cottage owner can buy $1 million worth of coverage, with an increase of $100 - $125 for each additional $1 million in coverage. The rates per million decrease as coverage increases.
Another protective measure is to hold the cottage as a Limited Liability Company ("LLC"). This would limit a cottage owner's personal exposure to liability from accidents and injuries that occur on the property. An LLC confers limited liability on all owners (known as "members"), and each member will generally have personal liability for only their actual contribution to the LLC. In contrast, a cottage held personally could expose the owner to extensive personal liability.
The LLC does not confer liability protection against all accidents and injuries. A cottage owner may still be personally responsible for any carelessness that contributes to an accident or injury. For example, a cottage owner hosting a party where a person gets injured by falling through a loose board on the dock may still be sued personally if the injury can later be attributed to the owner's carelessness.
The best protection for a cottage owner is a combination of care, consideration, and coverage. Be aware of potential dangers on the cottage property. Consider holding the cottage in an LLC, rather than personally. Purchase adequate insurance coverage to protect from unforeseen dangers that may arise. These protective measure can provide security for yourself, your loved ones, and your beloved family vacation home.