Business Liability Insurance Memphis TN

The civil litigation system itself represents a significant risk factor and exposure to liability . Therefore, it is important that small business owners employ the various strategies that allow them to control the risk factors in litigation .

To that end, insurance can be considered a protection of last resort in that it will cover a loss in the event that other measures have failed. Clearly, if liability insurance fully covers a claim, the business owner will suffer no loss (except, of course, with respect to higher future premiums).

Whether the policy will cover the loss will depend on the policy's limits, as well as the scope of its coverage and exclusions (strategies involving coverage and exclusions are covered in detail in our discussion of insurance ).

Other strategies involving insurance, outside of coverage and exclusions issues, can provide significant benefits to small business owners. For example, a liability policy should have a duty to defend clause. When a claim is made against the insured, this clause requires the insurance company to defend the insured against the claim. In particular, the insurance company must hire an attorney for the insured, and pay the attorney's fees and related costs of litigation. The clause is especially important because the costs of defending against a claim, which can be significant, generally will not be reimbursed, even in the event the defendant prevails in the case, due to the lack of loser pays system in the United States .

In addition, the small business owner may be able to rely on other people's insurance . Here, a contract would require another party to secure and pay for a liability policy that also insures the small business owner. The arrangement might be used, for example, where a small business owner with superior bargaining power enters into a joint venture with another party. In this instance, the small business owners enjoy all of the benefits of the policy, but at no cost.

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A small business owner may need to purchase specialized liability insurance to cover gaps in a comprehensive general liability policy .

Corporations frequently purchase directors and officers, or D&O, liability insurance. These policies have very specific provisions relating to coverage. A careful advance reading of a D&O liability policy is always in order.

In addition, the small business owner should be aware that a limited liability company (LLC) will require a specialized policy that applies to "managers" of the LLC, rather than to directors who manage a conventional corporation.

Similarly, a statutory close corporation , which is usually managed by the shareholders rather than by a board of directors, will require a specialized policy that covers the shareholders while acting in their capacity as managers of the entity.

Both the LLC and statutory close corporation also may have officers who are selected from among the managers. It is important that coverage is extended to these officers while they are carrying out their specialized roles.

A D&O liability policy usually is a claims-made policy, covering only those claims made during a policy period. A policy that covers any occurrence during the policy period usually is the best type of coverage, but it may only be offered at a higher premium, or not at all. Where an occurrence-based policy is available and it is not cost-prohibitive, the occurrence-based policy usually will be the better choice (see the discussion of claims-made vs. occurrence-based policies in the context of errors & omissions (E&O) insurance ).

A D&O liability policy normally will be limited to the individuals who are named in the policy. Thus, caution must be exercised to ensure that each director, officer or manager is properly listed, and that new parties are added or deleted when there is a change in the management of the business.

The entity itself, its managers, subsidiary entities, and managers of subsidiaries usually can be listed as covered parties under the same policy. Of course, a separate entity may alternatively decide to take out a separate D&O liability policy. This usually makes sense only when management of the entities is not overlapping or the insurance company requires separate policies. If a single policy is used, it is always wise to review the policy in advance to ensure that each entity and its managers are covered.

Indemnification of Officers, Directors and Managers. An operating agreement for an LLC or statutory close corporation (or bylaws for a conventional corporation) generally should include an indemnification clause that requires the entity to reimburse the managers for any liability they personally incur while carrying out their management duties. Generally, state laws allow indemnification, except to the extent that the manager's conduct was a willful violation of the law. Business-friendly states, such as Delaware, allow for extremely br...

Selecting the types and levels of insurance is vitally important to a small business owner seeking to avoid day-to-day liability risks . So an owner should follow some general insurance guidelines if he or she wants to take full advantage of the protections purchased.

But what some small business owners may not realize is that insurance can offer protection beyond the scope of its apparent coverage by helping to avoid challenges to transfers of assets .

The Uniform Fraudulent Transfers Act (UFTA) outlaws transfers consummated thorough constructive fraud or actual fraud .

Constructive fraud exists when a transfer is made that makes the transferor insolvent, and the transferor receives less that full value in return. " Insolvent " means either that the transferor's liabilities exceed his assets (the balance sheet test) or that the transferor is unable to pay his debts as they come due (the cash flow test). If the two conditions apply, the transfer is automatically deemed fraudulent.

With actual fraud, the transfer's intent is the key issue. It must be proved that the transferor intended to defraud creditors through the transfer. However, even here insolvency is important, as it is one factor bearing on intent.

Moreover, distributions from a limited liability company (LLC) or a corporation to an owner on account of his ownership interest (i.e., distributions of earnings or dividends, or ownership redemptions ) are also subject to a constructive fraud test. Generally, these distributions are deemed fraudulent if they are made at a time that the business entity is insolvent.

So how do insurance liability limits relate to insolvency? The limits of a liability insurance policy can be deemed to be an "asset" under the balance sheet test and a future receipt of capital in the cash flow test. The result then can be that the transferor has a positive balance sheet (assets exceed liabilities) and a positive cash flow (cash receipts exceed cash payments) position, and thus is not insolvent. Accordingly, the transfer would not be deemed fraudulent.

One important catch, though: The insurance liability limits will be factored in only if the creditor challenging the transfer as fraudulent is someone who could benefit from the policy.

Let's say a physician, a sole proprietor , is successfully sued for malpractice and a judgment of $100,000 is rendered. The physician, upon receiving notice of the lawsuit, transfers $800,000 to hi...