I recently heard someone advise people to get more insurance instead of establishing limited liability companies. Such advice can seem logical, especially in our conservative region where we do not like to waste a single penny of our hard-earned money. However, advising insurance instead of an LLC is clearly improper once someone truly understands what LLCs are designed to do and not do.
Insurance and LLCs are not mutually exclusive. Almost all businesses, including farms, should have both good liability insurance and a complementary business structure that also limits liability.
An LLC will not eliminate all liability for accidents related to a business or farm. However, an LLC will effectively limit liability to the assets owned by the LLC, if the LLC is properly set up and properly managed after it is set up. Similarly, insurance does not eliminate all of a business’s or person’s liability for an accident, because those who make claims are still responsible for co-pays and deductibles.
An LLC is best thought of as being insurance beyond traditional insurance. An LLC is protection in the case of the worst catastrophes, instances when traditional liability insurance covers only a part of the damage or none of the damage.
Regardless of how inclusive an insurance agent says a policy is, each insurance policy contemplates situations where the insurance will not pay. I call the uncovered instances “gaps” in coverage.
I recently represented a farmer in a lawsuit where a farm insurance company refused to pay for damages from an accident involving a pickup truck that was only used in the farming operation. My farmer client thought the farm truck was covered in the farm insurance policy. However, the farm insurance company claimed that its farm insurance policy did not cover vehicles for which “regular motor vehicle” insurance policy could have been secured. Because my client thought the farm policy covered that pickup truck, my client did not have traditional vehicle coverage on the pickup truck. Although we ultimately won the lawsuit, had there truly been a gap in coverage, my client would have lost his farm.
Similarly, insurance has limits to its coverage. A small business owner may have a multi-million-dollar liability insurance coverage limit. A million dollars seems like a very large amount of insurance. However, if an accident results in people’s deaths, those people’s families may claim damages of several million dollars. After the insurance company pays its responsibility of one or more million dollars, the rest of the money owed is the responsibility of the business. If the business is not properly organized and managed as an LLC or other formal entity, that responsibility to pay the difference becomes the personal responsibility of each of the owners of the business. This means that savings, properties and other assets completely unrelated to the business can be recovered to pay for the damage the business caused.
Having an LLC does not mean that insurance is not needed, and vice versa. Most businesses are best served using both.
Lee R. Schroeder is an Ohio licensed attorney at Schroeder Law LLC in Putnam County. He limits his practice to business, real estate, estate planning and agriculture issues in northwest Ohio. He can be reached at Lee@LeeSchroeder.com or at 419-523-5523. This article is not intended to serve as legal advice, and specific advice should be sought from the licensed attorney of your choice based upon the specific facts and circumstances that you face.