Jul
31
Do I Need Extra Insurance On My LLC?
July 31, 2008 | Comments Off
You insure what you can’t afford to loose. I believe that some insurance is fairly standard:
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Health and Disability Insurance – Above all, you can’t loose yourself.
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Car Insurance – The state will probably force you to take it. And although you can pay for your own car replacement, it is likely you can’t pay for a lawsuit when you crash and injure someone.
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Home Insurance – You do not want to loose, most probably.
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Umbrella Insurance – Because you never know who may want to sue you. In this country they sue people just for looking at them in the wrong way!
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Depository Accounts Insurance – The FDIC does it for you, up to a limit. You do not want to loose your rainy day fund.
- I just wish there where some insurance for the stocks – I think they call them options – but they may end up doing more harm than good.
Can I afford to loose my business?
Some companies you can’t afford to loose them. Loosing them would mean loosing intellectual property, patents, goodwill, and assets they may own. You surely need to insure everything that the business can’t loose including assets and potential liability.
But what about a professional Limited Liability company? (LLC) Yes, one like mine, without any assets on the company name (they are the member’s assets), and little cash in the bank (the cash is quickly distributed among the members). Wasn’t that the main reason to form an LLC: so that if the company does something wrong, they can take away the company if they want to, but your assets are protected?
For sure, if you have employees you need Workers Compensation insurance. Different states have different rules, but you will probably end up paying other types of insurance for employees, including Health Insurance, and the so called Social Security and Unemployment Insurance (neither of which is a real insurance even when the government portrays them as such). But that is if you have workers, what if you don’t? What are your insurance obligations?
There is an interesting word on the title of an LLC: Limited. For the most part it covers almost everything and yes, the worst that could happen if they sue the company is that they take away the company. But what if they could find you personally liable for something. What if you are proven to knowingly do something against your client’s interests: you being personally negligent. Or what if you cause extreme harm to a company due to Errors and Omissions – the most common cause for concern?
Your umbrella may not cover all of the liabilities you may have while conducting business activities (check with your agent, but chances are it doesn’t cover every business situation). Maybe that is why The Hartford group quoted me $3,000 for a comprehensive insurance for my LLC. $2,300 of which went into the Errors and Omissions category and the rest to other insurance categories. It is fairly expensive, but lawsuits tend to be even more so.
I think in the end I will have to take an Errors and Omissions insurance like that one. The risk is not about loosing the company but about loosing personal property if someone finds me personally liable for errors while conducting business operations. And the issue is not if I do things right or wrong, but if the majority of 12 angry men and women in a jury (not all of them technical) would like the big shot lawyer from the corporation more than the cheap lawyer I would be able to afford without insurance.
There is only one thing that has prevented me from getting insurance for the LLC. Most of the business I do is through one or two levels of subcontracting with other, bigger companies. Chances are my personal liability will be diluted along the way while they sue the bigger fish. But as my practice grows, I find myself getting closer to the end customer in business transactions: and that could put a lot of risk on my business.
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