A common misconception is that liability insurance is better than an LLC. This is categorically untrue.
Liability insurance has its place in protecting your business and personal assets, just like having an LLC. They fulfill different roles and should be used together, not separate. If you would like to discuss your particular situation please feel free to contact me.
Liability Insurance Cons
Liability insurance will offer some protection if you (or your company) are found liable. However, there are three main problems with liability insurance.
First, the insurance company may decline to cover the claim. This will leave you liable for the total amount of the claim. If you do not have an LLC, you will be personally responsible for the amount of the judgment.
Second, the amount of the claim may exceed your policy limits. For instance, if you are sued for $1 million dollars and only have liability insurance covering $300,000 then you will be liable for the balance of $700,000. Of course, you can have exceptionally high coverage limits or choose an umbrella policy that may cover the balance. However, the umbrella policy will be an added cost. Also, insurance only covers liability claims that are made against you or your business, not creditor claims.
Third, if you go out of business (i.e. dissolve the business or file bankruptcy or both) liability insurance or even an umbrella policy will not cover claims made against your business or against you personally made by creditors (as opposed to judgment creditors in a court case). Your personal assets will be at risk.
Liability Insurance Pros
Despite liability insurance not being a perfect solution for protecting your business or personal assets, it does have some significant benefits.
First, liability insurance allows you to pay a predictable amount of money each month, every six months, or annually that will cover you if you are found liable. Depending on your industry, your premiums will likely be substantially less than the claim amount against you. Thus, saving you money.
Second, the insurance company will most likely settle with the claimant and save you the burden of litigating. This is perhaps the best reason to have liability insurance. Litigating is never fun (unless you are an attorney and love it). Having the insurance company fight your battle is worth a lot.
Third, if the matter does end up going to trial, the insurance company has its attorneys. They will fight the claim on your behalf to avoid having to pay. This will save you the high cost of paying an attorney to litigate on your behalf. Although you should retain your counsel to make sure your interests are protected as well.
Liability Insurance and LLC Magic
Why not have the best of both worlds?
Liability insurance and a business entity such as an LLC provides you with layers of business and personal asset protection. The liability insurance will cover you as mentioned before, but if your liability insurance does not cover you or the claim exceeds your policy limits then the LLC will be liable and your personal assets will stay safe. This is provided you have maintained separate entities. The added benefit of having an LLC is that if you were to go out of business (dissolution) or file for bankruptcy (not the same thing), then the creditors will not have access to your personal assets.
Final Thoughts on Liability Insurance
The idea that one is better than the other is absurd. They both offer protection but in different ways. If you use them together, they will give you better coverage than using them separately (or not at all). If you are worried about your liability insurance not completely covering a claim, then utilizing an umbrella policy may give you the extra coverage that you need. There is no reason to sacrifice your hard-earned business (or personal assets) because of a claim and using the two (or three) together will provide you the greatest opportunity for success. Just remember that to enjoy the benefits of limited liability, you have to keep the two entities separate.
If you would like to meet with me to find out other ways to protect your assets please schedule a free no obligation consultation.
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