Do I Really Need Insurance For My LLC?

As a business attorney, I frequently have the pleasure of assisting clients with setting up a new business entity. This may take the form of an LLC or corporation and may be intended for a start-up business, a real estate investment, a new business line, or some other exciting new venture. Regardless of the specifics, during the process I am often asked some version of the following question: Do I really need LLC insurance for this new entity?

It’s a valid question. After all, the client is paying us to set up an entity for the express purpose of protecting their personal assets from claims against the business. Why should they also pay a lot in insurance premiums, especially since cash flow may be tight until business gets going?

I am not an insurance broker, and I do not counsel clients on amounts and lines of insurance coverage. But my answer is always the same – yes, you need to properly insure this business.

The reason is simple; if a claim is ever filed against the company, you want every available weapon at your disposal. As corporate lawyers say, you want a “belt and suspenders.” If the company becomes embroiled in litigation, legal fees in the six figures or above would not be unusual. Those funds need to come from somewhere.

Further, without proper coverage, the courts may not enforce the liability protection the company was established to provide. In certain cases, the court can “pierce the corporate veil” and attach the owner’s assets. One factor the courts will look at is whether the entity is adequately capitalized, meaning whether it maintains sufficient assets and insurance coverage to cover the risks inherent in doing business. If the business owner is pulling all of the money out of the company and failing to maintain appropriate coverage, the court may be inclined to pierce the corporate veil. (Kevin Birkhead, December 2016)