The Mistake of a Business Owner Regarding Insurance

Insurance is often undervalued and misunderstood by the business owner. Most insurance policies are relatively inexpensive. However, if something bad happens and you do not have insurance for that event most likely your business will go under.

Hypothetical: Lovers Nots, LLC owns a commercial building outright without a mortgage. The LLC decides that they cannot afford their insurance policies that protect against natural disasters. So, they cancel it. Then, a fire breaks out in the electrical panel and destroys the building. Rebuilding will cost $2,000,000. The land is worth $200,000.

Analysis: Most likely the LLC will have to sell the land because it does not have the funds to rebuild. A more than $2,000,000 asset is now worth at most maybe $200,000.

Hypothetical: Broken Glasses, Inc. has 20 employees. One of their supervisor’s  sexually  assaults  another  employee.  However,  the Corporation’s general liability insurance does not cover this fact pattern. Generally, an employment practices liability insurance (EPLI) policy would need to be separately purchased to cover this type of fact pattern.

Analysis: The corporation will want to settle this matter as quickly as possible to try to minimize the amount of the funds that will need to come out of the corporation’s coffers to pay for the supervisor’s sexual misconduct. If the corporation had EPLI, then the insurance coverage would cover this type of matter up to the policy limits.

Hypothetical: Wheels Are for Circles, Corp. is a taxi company that is owned equally by three individuals. The business decided to set the insurance limits to the minimum coverage required by the state. One of the taxi drivers, through reckless driving, causes a 30-car pile-up with severe injuries to several people. The claims are in the millions.

Analysis: When the injured people find out that the insurance limits are set at the state minimums, most likely, their attorneys will ask the court to pierce the corporate veil because the corporation is underinsured. If the corporate veil is pierced, the owners’ personal, non-exempt assets will be seized to pay for any business judgment. Had the business set insurance limits that were proper and purchased relatively inexpensive umbrella policies the business and its owners would not be in such a mess. It is important to know that just because there are minimum insurance limits does not mean that minimum insurance limits are proper (nor is it wise as it does not protect either the business nor its owners).

Spangler and de Stefano, PLLP assists business owners to put themselves in the best position possible in the event that something bad happens.

The material contained herein is for informational purposes only, and is not intended to create or constitute an attorney-client relationship between Spangler and de Stefano, PLLP and the reader. The information contained herein is not offered as legal advice and should not be construed as legal advice.