Insurance: The Protection of Last Resort

Ideally, the small business owner will structure the business to limit liability and then execute strategies to avoid day-to-day liability risks. As a result, it is hoped that claims will not be made or, if claims occur, the claimants will be unable to satisfy their claims from the business owner's personal or business assets. The asset protection strategies advocated throughout this small business guide are based on these principles.

Occasionally, however, claims will be made. And some of these claims may penetrate the multiple layers of protection set up by the business owner. If this occurs, the business owner should have one final layer of protection—insurance.

There are two basic types of insurance:

• Liability Insurance covers damages that the insured causes to other persons, both personal injuries and property damage. Thus, a liability insurance policy will have separate provisions, including separate limits, for personal injury and property damage caused to other persons.
• Property Insurance covers damages to the insured's own property. Property coverage will be addressed separately in an insurance policy. Thus, property coverage should not be confused with liability coverage for property damage that the insured causes to another person's property.

Each basic type of insurance is subdivided into specific types of liability and property insurance policies. The small business owner should have a comprehensive liability and property insurance policy, and specialized forms of liability and property coverage, which will cover the risks inherent in the specific business. This section addresses both comprehensive and specialized forms of insurance.

The business owner is likely to have multiple insurance policies. Accordingly, if a claim apparently is not covered (or not fully covered) under one policy, don't overlook the possibility that the claim may be covered by other policies. In a business setting, overlapping insurance coverage is very common. In fact, overlapping coverage and, in particular, the extent of each insurance company's duty to contribute toward the loss is one of the most frequently litigated issues in business insurance claims. In this litigation, insurance companies are pitted against each other, with the insured as an adversary of each company. As is true with respect to any insurance claim, don't expect any insurance company to voluntarily admit that it has a duty to contribute or that, in general, the claim is covered under its policy.

In some instances (e.g., auto insurance or in some states, professional liability insurance for certain professions), liability coverage is mandatory. Where insurance is mandatory, coverage at the minimum policy limits required by state law may be insufficient (as with automobile liability insurance).

In most cases, insurance is optional. This raises the issue as to whether or not to obtain insurance coverage. In certain cases, the small business owner may wish to forego insurance and instead rely on other asset protection strategies because premiums are cost-prohibitive (see, e.g., malpractice insurance). This can be a risky strategy in many cases. In a close case, choosing insurance will be the better decision.

Finally, a small business owner may want to consider purchasing an umbrella policy, which provides coverage after primary insurance is exhausted.

But in order to make sound decisions regarding the types and levels of liability and property insurance needed for your particular business situation, you'll need an understanding of the basics of insurance coverage and terminology.