It’s a heart-racing, stomach-churning, sweaty-palm-inducing prospect: your business is being sued. To protect yourself, take stock of your personal liability well before you get a letter from a lawyer.
And, while it’s terrible to think that all your hard work on the business could come undone, it’s even worse to contemplate that legal action could ruin your family and strip you of your personal assets.
So if your business is being sued, how do you know if your personal assets are at risk?
It can depend on your business structure and insurance coverage, says Steadfast Broker Technical Manager Michael White. Your brokers can also play a role in protecting you, by advocating for you with your insurer.
“Whether your personal assets are at risk can also depend on your insurance. As a rule of thumb, all businesses should have public and products liability insurance”
Your structure determines your personal liability
The way you have structured your business has implications for your tax and licensing obligations, and can determine your potential personal liability.
If you’re a sole-trader or a small business your personal assets may be at greater risk than if you’re structured as a company.
“If they’re claiming against the company, then it’s usually the company’s assets that are at risk. The company can guard against that by going into liquidation,” White explains.
“But individuals can’t go into liquidation. So if a claim is against the individual, and you don’t have insurance or your insurance is inadequate, then they can claim the balance from the individual’s assets.”
White also suggests that for advice on structuring your business, you’re best to speak to your lawyer and accountant.
Your insurance coverage transfers risk
Whether your personal assets are at risk can also depend on your insurance. As a rule of thumb, all businesses should have public and products liability insurance.
“If you have liability insurance, the first step is to look at what that liability insurance applies to,” White says.
“And it depends on what you’re being sued for if – you’re being sued because of nonpayment of debt or breach of contract, that’s not really an insurance matter.”
Professional indemnity and management liability insurance are also commonly called upon to protect businesses and individuals being sued.
Your broker is your advocate
Contact your insurance broker as soon as you find out you’re being sued, or become aware that somebody might sue you.
“Your broker will tell the insurer and it’s then up to the broker to help make sure that the insurer extends indemnity,” he says. “Because in any liability claim there’s actually two claims – one is the claim by the third party against the insured, and two is the insured’s claim under the policy.”
Your broker can also help you complete your claim in a timely fashion, and can act as your advocate if there are any hitches.