A handbook for LLC owners LLC Insurance Guide

A handbook in three parts

Insurance for LLC owners, and the gaps an LLC leaves open

An LLC keeps the company’s debts apart from your own. It does not insure anything. The structure protects your personal assets, it stops well short of protecting the business, and the space between the two is where business insurance comes in.

Open the contents The policies, one by one
  • Plain wordsEach term of art explained where it first appears.
  • No scoresWhere one policy suits a job better, the reason is given in words.
  • Not adviceHow cover generally works, never a recommendation for your business.

Contents

Three questions, in the order an owner meets them

I

What the LLC structure protects
  • A company of its own1.1
  • Held by the structure, and what is not1.2
II

What it leaves exposed
  • Your own conduct2.1
  • Personal guarantees2.2
  • A shield a court sets aside2.3
  • Everything the company owns2.4
  • Duties set by statute2.5
III

The policies an LLC owner should know
  • General liability3.1
  • Professional liability3.2
  • Commercial property3.3
  • Business owner’s policy3.4
  • Workers’ compensation3.5
  • Commercial auto3.6
  • Cyber liability3.7
  • Umbrella3.8

Part I

What the LLC structure protects

A limited liability company is a legal person in its own right. It signs the contracts, owns the equipment and owes the debts. A creditor or claimant with a case against the business therefore has a claim against the company and what it owns, and generally not against the house, savings and car of the people who own it.

That separation is the liability shield, and it is real. It is also narrower than the name suggests. It decides whose assets answer for a debt or a judgment. It does not stop a claim being made, pay a lawyer to defend one, or replace what the company itself loses.

Held by the structure

  • Your personal assets, against the company’s ordinary debts.
  • Your personal assets, against a judgment entered against the company alone.
  • Each owner, against liabilities that arise from what other owners and employees do, in most cases.

Not touched by it

  • The company’s own cash, equipment, receivables and premises.
  • The cost of defending a lawsuit, whether it is won or lost.
  • Income lost while the business cannot trade.
  • Claims against you personally for what you did yourself.

Part II

What the structure leaves exposed

Five places where an LLC owner, or the LLC itself, still carries the loss.

  1. Your own conduct

    The shield covers the company’s liabilities, not yours. An owner who personally injures someone, gives negligent professional advice or causes a crash on a business errand can be sued as an individual, whatever entity they work through.

  2. Personal guarantees

    Lenders, landlords and some suppliers ask the owners of small LLCs to sign personally. Once you have, the debt is yours as well as the company’s, and the LLC does nothing to stop that creditor collecting from you.

  3. A shield a court sets aside

    Courts can disregard the company and reach its owners, which is usually called piercing the corporate veil. The common grounds are mixing personal and business money, running the company with too little capital for its foreseeable obligations, and treating it as an extension of yourself rather than a separate business.

  4. Everything the company owns

    A judgment against the LLC can take whatever the LLC has: its cash, its equipment, its receivables. The structure protects the owners from the business’s losses. It does not protect the business from them, and that is the gap most commercial insurance is written to fill.

  5. Duties set by statute

    Some obligations attach to a business whatever its form. Most states require workers’ compensation once a company has employees, with thresholds and exemptions that differ by state, and payroll taxes withheld from wages but never paid over can be assessed against the people responsible for paying them.

Part III

The policies an LLC owner should know

Each line of cover answers a different kind of loss. Knowing which one a claim belongs to is most of the work of reading a policy.

General liability

Also called commercial general liability, or CGL

What it answers
Claims that the business caused bodily injury or property damage to someone else, along with certain advertising and reputational injury claims.
What it usually leaves out
Injuries to your own employees, mistakes in professional work, damage to your own property, and vehicles.

Professional liability

Also called errors and omissions, or E&O

What it answers
Claims that advice or a service you provided was wrong, late or negligent and cost a client money.
What it usually leaves out
Bodily injury and property damage, which belong to general liability. Often written on a claims-made basis, so the policy in force when the claim arrives is the one that responds.

Commercial property

Also called business property insurance

What it answers
Damage to buildings the company owns and to its equipment, stock and furnishings, from causes the policy covers.
What it usually leaves out
Flood and earthquake in most forms, which are usually separate policies or endorsements.

Business owner’s policy

Also called a BOP

What it answers
General liability and commercial property sold as one package to smaller businesses, usually with business interruption cover for lost income.
What it usually leaves out
Professional liability, workers’ compensation and commercial auto, which are bought separately.

Workers’ compensation

Usually written with employer’s liability

What it answers
Medical costs and lost wages for employees injured on the job, and employer’s liability for related lawsuits.
What it usually leaves out
Independent contractors who are genuinely independent. Whether LLC members themselves are covered, excluded or allowed to opt in depends on the state.

Commercial auto

Also called business auto

What it answers
Vehicles the company owns or uses for business, including liability for accidents and damage to the vehicles.
What it usually leaves out
Employees driving their own cars on company errands, unless hired and non-owned auto cover is added. Personal auto policies commonly exclude or limit business use.

Cyber liability

Also called cyber insurance, or data breach cover

What it answers
Costs after a data breach or network attack, such as notifying the people affected, restoring systems and responding to claims.
What it usually leaves out
Whatever its definitions leave out. Wording varies more here than in older lines of cover, so the definitions section decides a great deal.

Umbrella

Also called commercial umbrella, or excess liability

What it answers
Liability claims that run past the limits of an underlying policy such as general liability, commercial auto or employer’s liability.
What it usually leaves out
Losses outside the underlying policies, in most forms. Excess forms follow the underlying policy’s terms closely.

Questions owners ask

Where LLC owners usually start

  • Does forming an LLC mean the business does not need insurance?
  • Can I be sued personally even though my business is an LLC?
  • Which policy answers when a customer is hurt on the premises?
  • What covers a client who says my advice cost them money?
  • Is a business owner’s policy the same thing as general liability?
  • When does an LLC with one part-time employee need workers’ compensation?
  • Does my personal car insurance cover driving for the business?

Before you rely on any of it

Your own policy has the final word

Cover turns on definitions, exclusions and endorsements that differ between insurers and between states. The declarations page and the policy form say what your own policy does, and a licensed agent or broker can read them with you.

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