Insurance Policies Fail to Fully Prevent Business Owner Liability
Many business owners and start-ups are at risk of exposing their savings and property to liabilities that their business incurs. A common misunderstanding is that liability insurance alone will protect a business owner from personal liability. But policy exclusions, capped policy limits and lapses in coverage leave many business owners unnecessarily exposed. Purchasing liability insurance for a sole proprietorship or partnership does not provide the broad shield against business liabilities that the formation of an LLC or corporation offers. According to recent IRS data, only 6.8% of the approximately 25 million sole proprietorships are properly registered as LLCs. Millions of owners are personally responsible for liabilities incurred by their businesses, despite carrying liability insurance, because the business and the business owner are considered the same legal entity under a sole proprietorship or partnership. Business owners can avoid taking unnecessary risks by forming an LLC or corporation, which will also avoid the following three common gaps in insurance policy liability protection:
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Exclusions
Insurance companies routinely use numerous exclusions to limit the scope of their promised coverage. Exclusions are buried in the fine print, vary by insurer, and apply to certain people, types of risks, or specific situations. Too often business owners only consider the scope and effect of exclusions after coverage has been denied and a lawsuit is pending. Exclusions often expose sole proprietors and partnerships to personal liability in circumstances where business owners thought that they were covered. As a result, owners find themselves personally responsible for claims made against their business.
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Policy Limits
Insurance policies are capped, meaning that there will always be a risk that a judgment against the business (and the business owners) could exceed the policy limits. While one or two million dollars in liability coverage may cover most claims, too often unanticipated risks show up that greatly exceed even the most generous coverage limits. If someone suffers extreme injuries, the capped coverage offers little protection and business owners will personally bear the cost of paying the rest of the damages.
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Lapses in Coverage
Even if a business has an insurance policy with broad coverage, high limits and minimal exclusions, there is a risk that coverage can lapse. If coverage lapses, even for only a short period, the business and its owners will be left exposed for that time and they will be solely responsible for any liability that arises during that window. Many business owners put their faith and trust in liability insurance, but in doing so they miss out on a much stronger way to protect themselves and their personal assets. Ask the experienced business attorneys at Skufca Law how we can help you protect your assets by choosing the business entity structure (LLC, Corporation, or other structure) that fits your needs. For more information or to schedule a consultation, please contact the attorneys at Skufca Law at 704-376-3030.