Underinsurance Part 1 – Why you’re not as protected as you think you are
As a business owner, you face two perils that your employees do not face. First, you run the risk of having your personal assets seized to pay off your business creditors, whether the threat comes in the form of vendors demanding payment or lawsuits arising from your business. And, conversely, you also run the risk of having your business destroyed by a personal creditor who seized upon your business to pay off your personal debt.
To fully protect both your business and personal assets, you need to implement a comprehensive asset protection plan that includes purchasing insurance, using limited liability protections from formal business entity formation, and actively managing your finances to avoid exposure. Think of them as the three legs of the stool that is your asset protection plan.
Why should I worry about asset protection? I have insurance.
While insurance does provide a measure of security—and is essential for some occupations and activities—it cannot shield your assets from all threats. Insurance policies are limited in what risks they cover and how much they pay. Either of these limitations can spell disaster to the small business owner. More importantly, insurance can’t adequately protect you from economic downturns and inability to make payments to creditors.
Insurance can’t cover every risk.
Even though you can buy insurance that will pay off if you are abducted by aliens, most insurance doesn’t protect you against far more probable events. The classic “uninsurable risk” is “punitive damages,” which go beyond merely compensating the person who sues you and “punish” you for conduct that was more than simply negligent. Although punitive damages aren’t the norm, even well-intentioned business owners can be at risk.
- Example: Sally falls on a patch of black ice in your restaurant’s parking lot. At trial, Sally’s attorney demonstrates that the ice was from an improperly located drain pipe and that seven people had already been injured by falling in that very location. Sally is awarded $300,000 for compensatory damages and $500,000 in punitive damages.
Plus, most policies have numerous exclusions from coverage. In one case, a company was stunned to discover that its “business interruption insurance,” would not pay because the fire that rendered the office inaccessible occurred in the building next door. In addition, the amount that your policy will pay is limited.
- Example: Chris slips and falls while shopping in your store. Chris is awarded $1.5 million in damages. Your insurance coverage is limited to $1 million. The $500,000 which is not covered by insurance becomes a lien on your assets. If you are operating your business as a sole proprietorship or a partnership, you can lose everything—all of your business assets and all your personal assets. Plus, that judgment can hang over your head for decades, siphoning away your wealth as you attempt to accumulate it.
So, clearly, in order to fully protect your business and personal assets, you need more than insurance. Read out next blog for further information on the steps you need to take to place your assets beyond the reach of your creditors
