If I form an LLC, do I still need insurance? And if I have insurance, why do I need an LLC?

By: Tamara B. Pow, Esq.

Whether or not you form an LLC (limited liability company), insurance is always the first line of defense.  Although an LLC may protect your personal assets from liabilities of the business (subject to some exceptions – see my earlier blog on protecting your personal assets by forming an LLC), you still want to have funds to pay liabilities of the LLC so that you don’t lose the assets of the business.  For example, if you form an LLC in order to take title to an apartment building and someone gets hurt on the property by no fault of the member, the LLC may get sued and will need funds to satisfy any liability as a result of that lawsuit.  If the LLC does not have adequate cash, it could be required to sell the building in order to pay its debts.  To avoid this, you want to make sure the LLC carries adequate insurance policies to provide funds to cover any potential losses, as well as to pay for attorney’s fees and legal expenses to defend itself.  If you have a loan on the property, the lender will have requirements for the level of insurance and types of policies you must maintain.  If the property is subject to one or more commercial leases, the leases will have requirements for whether landlord or tenant is responsible for maintaining insurance on the property.  If your LLC is the landlord in such a lease, you will want to make sure the LLC is identified as an additional insured on any tenant policy of insurance.

Even though you have insurance to pay for business liabilities, you may still want to form an LLC for multiple reasons.  First, insurance is limited and your insured limits can be reached quickly through attorneys fees, leaving little funds left over for a settlement.  For example, if someone is badly hurt on your property and you have a $1 million insurance policy, you may be able to settle for $1 million in damages (or less, if the amount of your insurance policy has already been used for legal expenses).  However, if someone dies as a result of a problem on your property, $1 million may be insufficient to achieve a settlement.  In that case, you want to have your business assets (in this case, the property) in an LLC to keep them separate from your personal assets so that you aren’t at risk of losing both.  You may also want to keep separate properties in separate LLCs so that each one is not subject to risk of loss for a liability on another property.

In addition, some liabilities are not covered by insurance.  For example, certain insurance policies may not cover damages caused by mold without a special rider added on to the policy.  Again, in this case, an LLC is critical to protect your personal assets.  Finally, the LLC acting to separate your assets means a plaintiff may be more likely to settle for a smaller amount because the LLC alone does not look like as much of a ‘deep pocket’ as if its assets were combined with your other business and personal assets.

A good business insurance broker is critical to helping you determine your risks, available policies to protect against them, and the costs of such policies so that you can decide how much insurance you want to carry.

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