One of the first discussions I have with new business clients is about how their assets are held and if they have sufficient insurance for the risk that they have in the operation of the business. Oftentimes, businesses don’t recognize that they are at risk because insurance agents are not required to tell you what insurance you need to protect yourself from specific risks. Unless you pay an insurance professional a separate fee to advise you on what insurance coverages you need, there is no liability for failure to give proper insurance advice. If an agent fails to advise you of available coverage, they are not liable to you for the failure to do so. In a complex operation (say where a company handles production and its own logistics of delivery), there can be multiple areas of potential liability that may or may not be covered by a standard policy.
As an example: If you are running a snowplow business, a normal policy will cover you and your drivers while they are plowing the snow. However, a business such as a snowplow business needs what is known as “completed operations coverage,” which covers the failure to do the work properly that leads to an injury later. For instance, if you don’t salt a slippery area and someone slips and falls after you have completed the operation (the actual plowing), you do not have coverage unless you have the add-on completed operations coverage. The injury did not occur while the snow plowing was being done but was after the operation was completed. That’s why it’s called completed operations coverage.
This is just one example. However, I am often surprised at how companies worth millions of dollars do not have adequate insurance, and the owners do not carry personal liability umbrellas. Review of your insurance and its coverage is necessary in order to protect yourself. In addition, business owners should look at making sure that they are operating either as corporations or limited liability companies to ensure their personal assets are not at risk.
In our legal system, corporations and limited liability companies are separate individuals for legal purposes. The owners are generally not liable for actions of a corporation or a limited liability company. Therefore, we recommend that each of a person’s assets, including individual pieces of real estate and businesses, be separated out into different entities. This is particularly true if you have an existing business that has several operations. In that example, you can have a holding company with subsidiaries that help isolate any liabilities that may attach to any given business operations that are not related to the operations of the other business areas.
An example of that would be where you have one part of the company doing manufacturing and another part of the business doing the delivery to end customer. There are risks associated with the manufacture of the product, but those risks are different in scope to the liabilities involved in having drivers and delivery. Under those circumstances, there may be a benefit of separating out the two operations so that the liability and insurance associated with those two operations are separate and distinct.
This is certainly not an exhaustive discussion of what you need to do in order to protect yourself with insurance coverage and limited liability entities, be it either corporations or limited liability companies. But the issues raised should heighten your awareness so that you know what questions to ask in terms of insurance coverage and the setup and formation of your operational entities so you can truly judge your risk. In deciding to do what is best for you and your business, a good independent insurance consultant, an accountant, and a good lawyer are essential to protect your hard-earned individual assets and the continued viability of your business.