I received a question from a reader the other day in regards to whether product liability insurance is necessary for a business even if one is protected by limited liability via an LLC or corporation. Specifically, he wanted to know whether it was worth paying for insurance for a pass through entity like an LLC or S Corp which carries no profits within the business. Whenever someone asks me this question, I always say yes no matter the nature of the business but it largely depends on your risk tolerance.
Especially if you are running a business in the United States, the chances of getting sued are higher than you think and it really doesn’t take much for someone to take you to court.
There’s also a common misconception when it comes to limited liability with an LLC or corporation that most people may not be aware of. For one thing, limited liability doesn’t apply in the following circumstances.
- You have acted in a negligent or irresponsible manner.
- You have done something illegal with your business whether you are aware of it or not
- You have signed a personal guarantee for a loan
- You have mixed your personal expenses with your business expenses. In other words, you are not treating your business as a separate entity
What Do You Stand To Lose?
Let’s say that you don’t fall into any of the categories above and you run your LLC or corporation by the book. What do you stand to lose? With a pass through entity, you might not think that you have much at stake but think about it this way.
If you lose a lawsuit, your entire business is at risk. The plaintiff can take away your website, your business and all of your business assets. Even worse, you will lose a piece of your mental health. After all, you worked hard to get your business up and running and insurance will help prevent it from being taken away from you.
What Else Isn’t Covered With An LLC Or Corporation?
The other thing that is often overlooked is the major hassle involved if you do in fact get sued. If you don’t have insurance, you have to go through the trouble of responding to the complaint, possibly hiring a lawyer and handling everything yourself.
If you have business insurance however, you just let your insurance company know about the complaint and they will take it from there. Often times, they have lawyers in house that will respond and handle the paperwork for you similar to how a car insurance policy works. Having this peace of mind is absolutely worth it.
In general, business liability insurance protects your small business in the event of a lawsuit for personal injury and/or property damages. It will cover the damages from the lawsuit in addition to any legal costs involved.
What Are The Different Types Of Insurance?
- Product Liability Insurance: This is the category that our wedding linens business falls into. If you sell or manufacture products, product liability insurance will protect you in the event that a customer becomes injured while using your stuff. For our wedding linens business, you might think that it would be difficult for someone to get injured using our napkins or handkerchiefs. But for example, someone could sue us if they weren’t happy with the quality of our product which in turn might have ruined their wedding and caused them mental anguish. It’s ridiculous I know, but it could happen. The amount of coverage and the level of risk depends on your business type. For us, we don’t have to pay as much for insurance because our business is considered fairly safe.
- General Liability Insurance: General liability insurance is the main coverage that protects your business from injury claims, property damage, and advertising claims. As the name implies, this is an all encompassing policy for your business and might be the only thing you need depending on what your business sells.
- Professional Liability Insurance: If you provide business services of any kind, you should probably get professional liability insurance. This coverage protects your business against malpractice, errors, negligence and omissions. Depending on what you do, you might be legally obligated to purchase this insurance. For example, all doctors are required to carry malpractice insurance.
Don’t Risk It
There is more at stake than you think when you don’t purchase insurance. If anything, you should consider your mental health. Are you willing to risk losing all the hard work you put into your business? Are you willing to deal with all of the hassle involved if you do in fact get sued?
Think of your LLC or corporation as bankruptcy insurance. Sure, you can’t lose it all but you sure can lose enough for it to be extremely painful. Check with your local insurance company to see if the costs are worth it.
Personally, we use Legal Zoom whenever we have questions of this nature. For a small fee, you can get advice on whatever your situation may be without breaking the bank.
Also, if you have any other questions, feel free to send me an email and I’d be happy to provide you with my opinion.
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