Protecting Yourself

by Nicholas Walsh, PA

Suppose you’ve been working hard for ten or twenty years and you’ve managed to salt away a few bucks. You own a house, a boat, maybe a rental property or two. How do you protect yourself against the possibility of a ruinous lawsuit?

As regular readers of this column know, the first line of defense against claims is insurance of the right kind and in the right amount. If you have a business, you’ll need a Comprehensive General Liability (CGL) policy – don’t expect your homeowner’s coverage to protect you for a claim related to a business. Same goes for boat insurance. Homeowner’s will often provide coverage for incidents involving small boats (typically under twenty-five feet), but excludes coverage of larger boats.

It’s a really good idea to give your insurance agent a written description of all the business and recreational activities you are involved in, so the agent can see that you are covered.

The amount of coverage is a separate issue. All insurance policies state a limit of liability, the most the carrier will pay in any event. (Some policies deduct legal defense costs from the total, other policies do not). If you are accruing assets, and beginning to wonder if your policy limits are sufficient, ask your agent about an umbrella policy.

An umbrella policy attaches to an existing policy to pay a claim exceeding the liability limits of the underlying policy. For example: A client recently bought a boat and obtained P and I (protection and indemnity) coverage to protect against injury and other claims. His boat insurer limited liability to $500,000, however. His homeowner’s and auto policies had limits of $1 million, about right for this guy. A call to his homeowner’s carrier got him a $1 million umbrella policy, attaching not only to the $500,000 boat policy but to the homeowner’s and auto policies as well. If, heaven forbid, he should be found liable for a boat injury with a judgment of say $1,250,000, his boat policy would pay the policy limits of $500,000, and the umbrella would pay the rest of the claim.

The thing about umbrella policies is that they are generally not expensive. In insurance, it’s the first dollars of coverage that are pricey. That’s why insurer’s have deductibles (the “first dollars” of a claim, which the consumer, not the insurer, has to pay) - and why a larger deductible can save you a bundle in premium payments. Large claims are rare, so if you have underlying insurance in a reasonable amount, the “excess coverage” provided by the umbrella isn’t particularly costly. Look into it.

If you have an umbrella don’t let an underlying policy lapse – it voids the umbrella coverage.

How much coverage should you have, what “limits of liability”? That’s a subject for you and a good insurance agent. However, once you own a house and some assets and are moving up in the world, a total limit of liability, underlying policy plus umbrella if any, of $1 million might be correct.

So now you’ve got insurance coverage. Beyond that, as you acquire for example, businesses, rental properties and the like, you should seriously consider putting ownership of each in a separate corporation or limited liability company (LLC). Broadly speaking, the liability of a business entity is not the liability of the entity’s owner. If, for example, you own a multiunit and a renter takes a tumble down the back stairs, the LLC that owns and operates the building gets sued, not you, the LLC owner. Careful fleet owners will keep each fishing boat in its own entity, for the same reason.

It is also possible to divest yourself of assets, by putting them into a trust – perhaps an offshore trust, such as Cayman Islands, as the rich and famous may do. That’s way beyond the scope of this article and something I don’t know all that much about, specialized stuff. But there’s a similar mechanism available to any married person.

I’ve been lawyering for thirty years and it’s no secret that lawyers get sued. (I’ve been lucky so far.) But the missus and I get along pretty good most days, so early on I put the house and most other stuff in her name. Were we to get divorced the divorce court would ignore title ownership in its property division. But were I to be sued, and were my professional liability coverage to fail or not be enough, the house could not be reached.

If you are going to go this route, and you may want to give it serious consideration, don’t wait until the deputy is knocking on your door with a civil lawsuit. If you transfer assets then it won’t work. On the other hand, six years after you transfer assets to your wife, no one can challenge the move.

Bottom line: If you are doing well and want to hold onto your money, talk to a good lawyer and a good insurance agent, and make sure those two talk to each other and work in tandem.

I’ve covered many of these topics before, in more detail. You can find those articles on my website, nicholaswalsh.com. Click on “Articles”. You may want to look at “Beyond the Veil”, “LLC, Corporation of Partnership”, and “Incorporation?”, among others.

Stay well, and stay out of trouble.

Nicholas Walsh is an admiralty lawyer practicing in Portland. He may be reached at 772-2191, or nwalsh@gwi.net.