Advice on what to do if LLC can't get insurance for products

[ericwoo]

Jurisdiction

Ohio

I started an single person LLC last year with private label products for sale online. The sales were fairly good with over a half million in 2020. Frankly, the products were a bit risky with some having issues, but nothing has caused an injury and I do not believe they would hurt people. However, I did not do my due diligence in getting liability insurance. I have asked several insurance companies for quotes but they didn't want to take me on because the private label products would be registered as manufacturer.

I am a bit concerned and wondering what others would do in this instance.

I am debating about completely dissolving the business because of this, even though it is good income for me. However, if I get sued without insurance, can't I just sell all the LLC assets and pay with what is left in my business bank account, then bankrupt/discontinue the business?

 

[Tax Counsel]

However, if I get sued without insurance, can't I just sell all the LLC assets and pay with what is left in my business bank account, then bankrupt/discontinue the business?

The problem is that you may end up being sued personally for the damages the buyer suffers. You should be aware that a LLC does not shield you from liability for your own negligence even if that negligence occurs as part of doing work for the LLC. And there is the possibility that the injured person would attempt to pierce the corporate veil to get past the LLC liability shield, too, Even if you you successfully defend the lawsuit, the cost to defend it can cost you a lot money, into the tens of thousands of dollars or more.

 

[ericwoo]

Is there a way to set it up so that I can't be held negligence by partnering with someone or setting it up as a regular corporation?

So far, the answer seems to be that I should just stop business if I can't get insurance.

 

[army judge]

Is there a way to set it up so that I can't be held negligence by partnering with someone or setting it up as a regular corporation?

You might want to meet with a couple local attorneys and discuss a better path forward.

There is no way you can prevent another person from initiating a civil lawsuit against you.

That said, there are protections you can put in place IF you do get sued.

You can purchase insurance, assuming an insurer wishes to undertake the risks.

You can form a company or a corporation, which theoretically protects your personal assets if your corporation gets sued.

You might also wish to discuss with those attorneys how you can use your current business framework/structure as the basis from which a new corporation or company could be formed.

You might be a bit behind the curve here, but good on you for thinking about changing things to form a more perfect business entity.

 

[adjusterjack]

So far, the answer seems to be that I should just stop business if I can't get insurance.

I agree. I spent 35 years in the insurance industry. If you cannot get products liability insurance for your product then your product is way too risky for you to keep selling it. Bankruptcy can often be a cure worse than the disease.

However, you haven't said where you have tried to get insurance or whether it's been offered and you don't want to pay the price.

I suggest you find a large, well established independent commercial insurance agency who has access to the excess and surplus lines markets. You may be able to get insurance that way, albeit it at a high price for a few years until you establish some claim free experience.

Inquire about a "claims made" policy that may be able to cover you for 2020 for anything that might come at you that you don't know about.

 

[Tax Counsel]

Is there a way to set it up so that I can't be held negligence by partnering with someone or setting it up as a regular corporation?

If it is determined that you were negligent (e.g. you failed to properly check out the safety of the products you offered for sale, etc) then you can avoid personal liability by partnering with someone else or forming a corporation for this. Indeed, a corporation generally offers you the same limited liability as a LLC, which means that swapping to a corporation wouldn't really change much with regard to the liability issue.

So far, the answer seems to be that I should just stop business if I can't get insurance.

I don't know what kind of product you are selling, but if no commercial insurer will insure you that suggests a very risky product. You can get insurance to cover almost anything, but you have to find the right insurer willing to do it. If the product is risky, though, the premiums may be pretty high.

If the business is doing well and you'd really like to continue it, keep searching for that insurer and spend a little money on a good business attorney to find out what risk you really have and what steps you can take to at least reduce it as much as possible.

 

[zddoodah]

I am a bit concerned and wondering what others would do in this instance.

You wrote that you have "asked several insurance companies," but this sort of business insurance would typically be written through agents/brokers, and I suggest you seek out a local agent/broker, rather than try to go direct through an insurer.

if I get sued without insurance, can't I just sell all the LLC assets and pay with what is left in my business bank account, then bankrupt/discontinue the business?

Did you really mean "if I get sued"? What you really meant was "if the LLC gets sued," right? I emphasize this point because, while your LLC is a single-member LLC, the LLC is not you, and vice versa. The LLC is a completely separate legal entity.

If the LLC gets sued and can't afford to pay for its legal defense, then yeah, you could, in theory, bankrupt it or liquidate it outside of bankruptcy. If you get sued personally and neither you nor the LLC has proper insurance to pay defense costs, then you might be f***ed.

In addition to seeking out a local commercial insurance broker, I strongly suggest you confer with a local business attorney to make sure your LLC is set up such that the likelihood of you getting sued personally (google "alter ego" or "piercing the corporate veil" if you're not sure what I'm alluding to) is as low as possible.

I echo the points made in the last couple paragraphs in "Tax Counsel's" last response above.