Hi, JJ Childers here with another Monday Morning Mentor. When it comes to protecting one’s assets from lawsuits, one of the biggest mistakes anyone can make is to do nothing. Probably the next biggest mistake is to take a “short cut” by putting all of your faith into insurance, such as an Errors and Omissions or Directors and Officers insurance policy for one’s business, instead of putting that business into an entity such as a corporation, LLC, or LP.
Without question, insurance is always a good thing for every business to have, but it should never be your sole strategy for asset protection for two reasons. First, every insurance policy has a limit. Suppose your business is sued and a judgment against it in the amount of $1,000.000 is awarded. If your insurance policy has a limit of $500,000, then the difference is going to be the responsibility of your business. If your business is a sole proprietorship or general partnership, then you personally would be responsible.
Secondly, every insurance policy contains loopholes which relieve the insurance company of the responsibility to pay claims in certain situations. A good example of this is the recovery effort following Hurricane Katrina. Many people who lost their homes were horrified to learn that their insurance companies would not pay their homeowners insurance claim because flooding is not covered by the homeowners policies.
