Expert: Charles W. Field - 5/17/2010

Question
QUESTION: "On a radio talk show the other day a caller told the host, an attorney, that he is planning to start a small business and asked what steps he should take. Among other things the caller was told he should consult an attorney about the specific procedures, and
that he may want to consider forming a corporation of the type designed for small businesses. The reason is liability. The proper type of ownership would protect his assets from liability should his business cause losses to others.

This sounded prudent, of course, but then I began to wonder about the ethics involved. The objective, which is to reduce or even eliminate the chances for a "victim" to recover losses from the business owner's assets somehow doesn't seem fair when taken in the literal sense.

What I'm wondering now is whether there is a companion rule for businesses of this type to maintain sufficient insurance to provide protection for a "victim" outside of the personal assets of the owners. Is there such a requirement imposed when a small business incorporates? Or does it vary in the individual states?

ANSWER: There is no such rule in GA (the only state in which I practice) nor in any other states that I have ever heard of. Most businesses that deal with the public get insurance. While the main reason may be to protect their assets, a by-product is the protection of the unintended victims. Sometimes business do not buy enough insurance to satisfy, e.g., a multi-million dollar judgment. There is no rule as to the amount of coverage they must have.

---------- FOLLOW-UP ----------

QUESTION: Thank you, Mr. Field for your prompt reply. I believe your reply in all likelihood applies to many, if not all, states of the union. It does bother me that small business people are being urged to incorporate for the purpose of protecting their personal assets from business-related claims, without being mandated to protect their business clients via
insurance. As you said, many do carry such insurance voluntarily, but I wonder if such an important protection should be dependent on someone's conscience. I hope and trust that the attorneys who suggest incorporating also suggest, or better, urge their client to purchase insurance. I know they fear frivolous claims, but surely their are legitimate claims which should be given a fair opportunity to be heard. Thank you, again.

Answer
I always strongly encourage my clients, both business and personal, to carry enough liability insurance so as to protect their assets, as I said earlier. This has the intended or unintended consequence of protecting the "victims", as you put it.
What you are talking about in terms of mandated liability coverage is an issue that is within the sole wisdom and judgment of state legislatures. E.g., GA has mandatory minimum liability insurance coverage for automobiles of $25,000.00.
Lawyers have no more input into the process than the average citizen.