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When
I present seminars on the topic of "Asset Protection," a common
question I hear is "now that I am incorporated, should I cancel my
insurance?" To the other extreme, a common remark made by ignorant
tax professionals and attorneys is, "don't bother with corporations,
just buy a lot of insurance." Both of these approaches are
dangerous.
Insurance should never be overlooked as a means of protection.
Insurance will cover many claims of a "tortious" nature (slip &
fall, negligence, etc). The fact that you have insurance to cover
these types of claims will help if your corporation is
undercapitalized. If you do not have insurance and someone who is
injured sues your "shell" corporation, then a court may think you
were not "playing fair." This is particularly important if your
business is engaged in activities that are dangerous or hazardous
to the public.
Insurance will not typically cover breach of contract claims, but
courts are less likely to set aside a corporation for these types
of debts. However, claims such as sexual harassment, employment
discrimination, wrongful termination and fraud are almost never
covered by insurance.
Another benefit of insurance is that the duty of an insurance
company to "defend" (pay for your legal defense) is much broader
than its duty to "indemnify" (pay for a judgment against you).
Legal fees alone can be painful, especially for frivolous
lawsuits, even if you win in court. They rarely award the
defending party legal fees and the plaintiff's lawyer is often
working on a contingent-fee basis, so that the plaintiff himself
has nothing to lose by suing your company (have you ever heard the
expression, "never get into a fight with an ugly person because he
has nothing to lose?").
The following is a brief summary of available insurance for your
protection:
General Business Liability Insurance.
This type of insurance can be reasonable and will cover a wide
range of lawsuits from personal injury claims to copyright
violations. Obviously, the higher the deductible, the cheaper the
insurance. It may be worthwhile to keep an insurance policy with a
large deductible and high limits to substitute for having to keep
excess capital in your corporation.
Malpractice Insurance.
Lawyers, doctors, engineers, architects, real estate brokers and
other professional can obtain malpractice or "errors & omissions"
insurance. This insurance covers goof ups that you and your
employees make in dealing with clients. This insurance can be very
expensive, depending upon the kind of business which you are
involved. In addition, the coverage is weak because the policies
are often "claims made"; that is, it only covers claims made in
the year the policy is in effect. Regular liability insurance will
cover you if you are sued years later for events that occurred
during the policy period. In many states, the statute of
limitations for malpractice is six years, so a lawsuit years later
will not be covered if you do not maintain continuous coverage.
Director Liability Insurance.
Director liability can be so precarious that many people refuse to
serve on the board of any corporation without director liability
insurance. This insurance is expensive and may not be necessary
for a small corporation.
Umbrella Liability Insurance.
An umbrella policy is one that kicks in after all other underlying
coverage is exhausted. For example, if you have a general
liability policy with $100,000 and a judgment is rendered against
your corporation for $500,000, the umbrella policy kicks in the
extra $400,000. Umbrella insurance does not cover other claims
that are otherwise not insured (e.g., breach of contract claim).
Most insurance companies require that you maintain all of your
insurance with their company before they will issue an umbrella
policy. Umbrella policies are quite reasonable, and can cover your
business for up to several million dollars.
Extended Homweowner's Insurance.
A typical homeowner's policy will cover basic liability claims
against you regarding the property. It will not cover general
liability claims unrelated to your property. For example, if you
injure another while riding your jetski on a nearby lake, this
claim will not be covered unless your homeowner's policy has a
special endorsement.
Review your policies with your insurance agent as to coverage
issues and policy limits. If cost is an issue, increase your
deductible. A lower deductible on a policy is general more
expensive than a higher coverage limit for liability.
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