Hello Folks,
My home shop hobby has slowly evolved into a small profitable business. A while back I contacted my home owners insurance agent to see if additional coverage was needed…and he was quick to explain that since it is a business, my home owners policy simply does not cover the shop, equipment, or liabilities associated. I phoned around in the local yellow pages for info on small business insurance…..but it seems that my hobby business is too small for coverage.
Here’s is the reality, how do I protect myself should some file a claim against my work . For example, what if a child falls from a swing that I built, or off of a chair and unfortunately is injured. Then an ambulance chasing attorney convinces the parents that they are entitled to the value of my personal assets.
I’ve set up a LLC in an effort to separate my personal assets from the hobby business, but after talking with a lawyer friend, he stated that the nature of a hobby business is a sole proprietorship which is often vulnerable to piercing. He felt that is wasn’t an issue of trying to prevent a suit…but rather to be prepared in the case that it happens. His recommendation was to get insurance such that the insurance company will provide the defense in the worst case scenario.
…and finally, this is were the problem comes in….I can’t find an insurance agent who will write a policy due to the small size of my operation.
I’m sure that I’m not alone. I see craftsman from all trades selling their art and products at festivals, shops, web sites..etc. What do they all do?
Does anyone have any insite to this situation? ..or an insurance agent that understands a hobby/craftsman’s business with a willingness to write a policy.
Sincere thanks,
Rob
Replies
Sorry that I can't respond directly to the insurance issue, but I'll try to add something to the "piercing" issue your raised.
In a one-man shop the liability does not arise because a plaintiff can "pierce" your limited liability company. As long as the LLC (limited liabiilty company, for the uninitiated) is formed and operated properly, with the corporate formalitites adhered to, it will be as legally impregnable as General Motors.
The liability arises because LLCs, corporations, and other legal entities do not protect you from lawsuits arising from things you've done personally. For example, suppose you're the sole owner of the company and are delivering a finished piece to a customer. You spot an attractive female, turn your head for a moment, and veer onto the sidewalk, plowing through a stand of neurosurgeons. The law does not allow you to exit your car and shout "Ha ha ha! You can't sue me becaue I have an LLC!" You can always be sued personally for things you personally do wrong, legal entity or no legal entity.
In contrast, suppose you had an employee deliver the goods and plow through the doctors. The LLC would protect you personally - unless the employee were your six year old nephew to whom you had unwisely given the keys to the Expedition.
I will add paranthetically that the personal protection does not do you any good if all of your wealth is tied up in the assets of the LLC. A successful creditor can always get those assets. The "shield" of the legal entity protects only your personal, non-corporate assets.
But getting back to the story, if you are a one-man shop then by definition you are going to be responsible for just about anything the company does. Most lawyers still recommend forming an entity on the off-chance that the company will do something for which you are not responsible, or that you will hire an employee, but this is the reason that the LLC doesn't offer much protection.
Now, I hope someone else can answer your actual question.
As you just discovered, it's not possible to protect yourself from all the risks of the world. Most small business operate without insurance. Even if it is available, the cost is not affordable, which is why Ins. Co's don't even offer it to small biz.
There's a theory that says that if you have liability insurance, you're much more likely to be sued. Think about it. Starting a lawsuit is VERY expensive. No self-respecting, money grubbing lawyer is going take a contingency case against a tiny business like yours. And who's going to pay a lawyer $150/hr to file against someone with few assets? So you are really pretty well insulated against suits, frivolous or otherwise. In reality, this theory usually proves correct.
i've operated for 32 years without liability insurance because the premiums are nearly as much as my gross revenue. However, I do have a policy that covers defense costs only. This is a large professional group policy, custom underwritten, that is not available without the group. It's not the liability that you have to worry about, it's the defense costs. Lawyers will bankrupt you whether you win or loose.
Dave
As others have said, it is not possible to protect yourself from everything. I carry a 5 million personal liability "umbrella" policy that is part of my homeowners insurance. It covers me for the sailboat racing I do if someone is hurt or killed. It would also covers me for anyone hurt using anything I built.
But, you are right to be worried about it. An ameteur woodworker built a small step stool for his son to use. At some point, the stool was taken to the kid's school and ended up in the kindergarden classroom. A couple of years later, a teacher stood on it and it broke and so did the teacher. Both the teacher and school sued the builder even though the stool was never designed or built to carry the weight of an adult. The builder lost his shop and most of his assets.
Steve could probably help in this discussion -- he's got insurance for his new business. In the meantime, here're my 2 cents worth:
Rob, the solution to your problem may lie in making enogh phone calls. I've encountered (in a general sense) this problem twice. The first time was when I was in the horse business (boarding, training, teaching, transportation). I probably made 50 phone calls before I finally found an agent who knew of a company who would cover the business.
The second example is the business I'm in currently (not woodworking) which is a retail business that's fraught with theft and fraud problems. It took dozens of phone calls to find the company that would cover me.
Incidentally, now that I'm approaching WWing as a business, I talked with my insurance agent that got me this coverage. Included in my insurance, which is for a retail storefront (brick and mortar) type business, is product liability which covers any product I manufacture.
forestgirl -- you can take the girl out of the forest, but you can't take the forest out of the girl ;-)
Insurance..... Well, in California cabinet makers and molders come under the C-5 (rough carpentry) specialty classification for licensed contractors. To become a contractor you must prove at least 4 years of journeyman level work, in the specialty for which you are applying. You must acquire a 7,500.00 surety bond, pass both the trade and legal tests that are administered by the state and have at least 2,500.00 in assets.
That said, an unlicensed contractor needs none of that but if they are doing work that becomes permanently attached to a dwelling that houses people, it cannot exceed 500.00 in total labor and materials. You must also declare that you are an unlicensed contractor. If you are making cabinetry or furniture that is not permanently attached then to the best of my knowledge, there is currently no limit.
The point that is being attempted here is that with a contractors license, you become credible. Insurance companies will normally write policies for businesses that have a valid contractors license. They are far less likely to take a chance on someone who has not validated their skills even though that person may be entirely capable. Its all about risk in a very hard insurance market.Steve - in Northern California
As someone else pointed out, an umbrella policy will cover you for most personal liability. The usual exclusions are for intentional acts. (You wack that non-paying customer upside the head with a scrape piece of lumber). HOWEVER, read the fine print (insurance company lawyers are worse than any ambulance chaser I've ever known), almost all carriers will exclude coverage for any commercial business liabilities. So, what does this mean. You will spend more time arguing over coverage than liability.
The LLC is a good way to go. You do have some additional expense involved. Filing fees, possible additional taxes and the expense of keeping up with the corporate formalities. (keeping minutes, etc.) Now the catch, when piercing the corporate veil (always thought that was a neat phrase), one of the things courts look at is whether the corporation had liability insurance! A classic "gotcha!"
If you own your home, or other substantial assets, an LLC is still a good way to go. It is far easier to get business liability insurance as a corporation than as an individual. Another consideration is to transfer your substantial assets into a trust, with you being the trust beneficiary. trust assets are sometimes protected from personal liability. If you are married, and think you will stay married, transfer your substantial assets to your spouse. Your spouse's assets should not be exposed to cover your personal liability.
Of course, see an attorney about all of this.
Michael
Rob, a couple more suggestions, hopefully they're not duplicates: (1) go to a show and ask all those craftsmen about their insurance, especially the ones who sell furniture. You'll find somebody who can give you a recommendation; (2) with regard to "my hobby business is too small for coverage" -- there will be a bottom number for annual sales, but that doesn't mean you have to actually sell that much in order to get the coverage, it just means that you have to pay a premium based on that lowest amount. The bottom number for the retail business coverage I have is probably two-times what my actual sales are, but it's no biggie. My premium ($400/year) is the lowest premium based on that sales volume, I just pay it.
forestgirl -- you can take the girl out of the forest, but you can't take the forest out of the girl ;-)
When I started my shop, I contacted the agent that writes the policy on the building we own for my wife's business. He was happy to write the policy. Just hang onto your hat for the bill. Mine was $850 the first year. There goes the profits. Good Luck.
Len (Len's Custom Woodworking)
I just found out that in Washington State a 250,000.00 liability policy is required to register as a contractor. If there is no one here then you might try over at Fine Homebuilding.
Steve - in Northern California
Edited 7/19/2002 10:54:16 AM ET by Steve Schefer
rob did you find a situation to liability ins.
we only work a few days a week jist have something to do besides watching tv
[email protected]
thank you
Best of luck y'all. That's why I only make end tables & curio tables on request. My buyers haven't had a problem signing a disclaimer saying simply, "Buyer assumes all responsibility for use of this product."
Luckily, in 40 years I never had a piece fail. Most folks don't stand on tables. But, by all means, go with insurance.
Mikaol
This forum post is now archived. Commenting has been disabled