Regardless of which type, all insurance boils down to liability. Simply put, liability is about determining who is responsible when something goes wrong.
For example: if a customer with a food allergy gets sick at a restaurant, who will be held liable? In most cases, we might assume that the restaurant would be held liable. However, this becomes cloudy if the allergen was clearly marked on the menu. Liability is not always a black and white issue. Most times, it exists in a gray area.
Many business owners will limit their liability using the following methods: separating their personal assets from the business, a waiver of subrogation, or by using a Hold Harmless Agreement.
When a business is found liable, an owner’s personal assets could be impacted. This is why limited liability is important. Limited liability allows for a business owner to keep their own assets separated from the business. This means if a business is sued and found liable for paying damages, only the business will be impacted. In this way, neither the owners or any other investor’s personal assets are at risk.
Anyone suing a company for damages of any type cannot seek more than the value of the assets held by the company.
Acquiring limited liability status for your business is not always necessary. However, if your business owns property or you feel a lawsuit may exceed the value of your insurance, acquiring this status is a good idea. That said if your business grows much larger and you intend to offer stock options and gain a wide range of public and private investments, setting your business up as a traditional corporation will work. Corporation status also provides limited liability status.
Limited liability status means having your business investments and personal assets legally separated. This status is often contingent upon keeping up with certain requirements, as determined by your state. Every state varies in what it requires, although most have similar rules for setting up and maintaining a business as a Limited Liability Company, or LLC. This also involves ensuring that the business is well funded along with keeping all documentation up-to-date.
In a legal sense, subrogation gives one party the right to “stand in” for another. This concept is commonly used by insurance companies and those they insure. If someone damages your property, the insurance company may pay you for the damages, and then seek a lawsuit against the responsible party to recoup the costs. This means that the insurance company is practicing subrogation by “filling in” for you and suing the at-fault party.
Subrogation can be beneficial for an insured person or company. It frees you up from having to worry about getting involved in the legal system. Instead, you may receive payment from your insurance company, who then deals with the lawsuit. However, there may be times when receiving compensation for a claim is contingent on a successful lawsuit. In this case, subrogation may not be beneficial for you at all.
Many agreements allow room for a “waiver of subrogation.” This means all parties involved in the agreement disallow anyone to step in on their behalf and sue for damages. This can help keep the peace between parties and is potentially beneficial for those forming a Limited Liability Company or a corporation who would prefer to avoid the risk of lawsuits. It can also be helpful for those entering into agreements with other contractors.
For those seeking limited liability for short-term purposes, a Hold Harmless Agreement may be necessary. This legal agreement is formed between two parties, typically a contractor and their client. In this agreement, either one or both parties agree to give up their rights to file a claim against the other. In this way, legal liability is established.
This type of agreement is relatively common for those hiring contractors to perform services on a property. More commonly, contractors may request a Hold Harmless Agreement that limits their own liability should they accidentally damage the property they are working on. Additionally, if you are renting out your space to someone else, a Hold Harmless Agreement will free you from liability should the other party do anything that would potentially come back to you.
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