People face unforeseen, unfortunate events all the time. Sometimes the unfortunate events are mistakes or accidents. Other times, Mother Nature or society creates situations where negative things happen for which people are financially responsible.
In the context of businesses in particular, financial responsibility for even one negative event can sometimes be significant enough to cause the business to cease operations. Obviously, the closing of a business not only affects the business owners—a business closure affects employees, customers, communities and society as a whole.
Therefore, people and businesses try to actively avoid and plan for the possibility of having financial responsibility for various unfortunate events.
Liability is the legal term for responsibility. Limiting liability (responsibility) is best addressed through two complementary tools.
First, insurance is the first line of defense for unanticipated financial liability.
Nobody likes to pay insurance premiums. However, during a catastrophe, when literal, clinical shock and depression can make a horrific event even more daunting, there is little (outside perhaps a hug from a loved one) that is more peace-promoting than confirmation that insurance is stepping to the plate to help.
In my opinion, one of the biggest values of insurance may be insurance’s almost universal coverage of legal fees. This is commonly called “cost of defense.”
A person or business may be accused of being financially liable for an adverse circumstance or event but may not actually be liable. In these contexts, insurance usually pays for attorneys and experts to try to avoid the liability altogether.
Thus, for example, a person may be 100% in the right, with no liability/responsibility for some negative event for which someone else is responsible. But if that innocent person is accused of having liability, that person may have to prove that he or she is not financially liable. Proving a lack of financial liability is incredibly expensive, and insurance’s coverage of “proving that the person is not liable” is sometimes more valuable than insurance coverage for the event itself.
Second, smart people and businesses use legal structures and entities to limit liability.
Legal structures and entities like corporations, LLCs and even trusts are tools that can and do effectively decrease financial liability. However, those legal structures and entities really only function properly after insurance has done all that the insurance can do.
Thus, sometimes insurance does not provide complete coverage for liability stemming from a certain negative event. Usually, insurance works except (a) when the financial liability is bigger than the insurance limit and/or (b) when there is a gap in coverage, and insurance does not provide coverage for the specific, negative event.
In those circumstances, legal structures and tools step in to provide backup liability protection.
At best, insurance and legal tools minimize liability. Insurance and legal tools do not eliminate liability. There are public policy reasons for this distinction. Without any co-pay or deductible whatsoever, a person with insurance or legal structures would not be motivated to share in society’s mission to decrease the frequency and magnitude of negative events.
Lee R. Schroeder is an Ohio licensed attorney at Schroeder Law LLC in Putnam County. He limits his practice to business, real estate, estate planning and agriculture issues in northwest Ohio. He can be reached at [email protected] or at 419-659-2058. This article is not intended to serve as legal advice, and specific advice should be sought from the licensed attorney of your choice based upon the specific facts and circumstances that you face.