Limited liability insurance explained

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As a small business owner, you might be considering forming a limited liability corporation (LLC). Does that mean that you need limited liability insurance?

The answer to this question is maybe—despite its name, limited liability insurance is not a kind of insurance policy specifically for LLCs. Rather, it’s a type of business insurance that protects partners in a business. If you share your small business with one or more partners, you want to protect your stake in the event that someone files a claim against your business as a whole.

As a business owner, limited liability is just one way to protect yourself against insurance claims, and what it covers may overlap with the general liability insurance and professional liability insurance  coverage that you already have.

If you’re unsure whether or not you need this kind of insurance, this guide is designed to explain limited liability insurance: what it is, when you might need it, and what steps you can take to protect your business against liability claims.

Limited liability insurance defined

Limited liability insurance protects a partner’s stake in a company. If you and two co-founders form a creative consultancy together and split your stakes equally, a professional liability policy would protect only your stake in the business. Each partner is responsible for taking out their own policy.

That means that if a client sues your company as a whole for an ad campaign gone wrong, your 33% stake in the company would still be protected. 

Partners in the following kinds of businesses may want to consider limited liability insurance :

  • Multi-member LLCs
  • Partnerships
  • S-Corporations

LLCs and limited liability

But wait! You might ask: We have an LLC. Aren’t we already protected from liability?

Not necessarily.

While LLCs do provide some protection, it’s very misunderstood. When someone sues your LLC, they should not be able to go after your personal assets, only your business. However, depending on your bookkeeping practices and the way you run your business, it may be difficult to figure out where your business ends and your personal assets begin.

What’s more, even if you have an LLC, you want your financial stake in your business protected, right? After all, a single successful claim could put you out of business. That’s why business insurance is make or break, no matter what you do.

Doesn’t my insurance already cover that?

If you already have business insurance, you may be wondering whether you need limited liability insurance, too. In many circumstances, limited liability insurance may overlap with the general liability insurance and professional liability insurance that you and your partners have already taken out. To understand when you’re covered and when you’re not, let’s further define those two types of coverage.

Imagine you and your best friend have opened a photography studio. You want to be protected if a customer trips over a tripod or stains their silk scarf while visiting your darkroom (you know how litigious people can be these days). The possibilities are endless; imagine you take an actor’s new headshots, and then he blames you for not landing the big role.

  • General liability insurance covers your business when it comes to claims of bodily injury, medical bills, and property damage from your clients or third parties.
  • Professional liability coverage can protect yourself from claims of negligence or errors related to your services. Importantly, this insurance does not protect you in the case of intentional wrongdoing.

Imagine, now, that the unthinkable happens: even though you have each type of insurance policy, you’re caught in a situation where your professional liability insurance coverage does not apply. 

For example, your partner has been taken to civil court by a client who claims he showed up to shoot photos for her forthcoming article, but when he realized he’d shown up without a film reel, he pretended to shoot all day and charged her the full amount. Her story won’t go to print, and she won’t get paid.

In this case, your professional liability coverage would likely not cover your partner’s wrongdoing. If the claim ultimately empties the business’ coffers, a limited liability policy could prevent you from losing your investment in the company. Your business assets might be protected by your personal insurance policy (depending, of course, on its terms).

Adding Additional Insureds

If you want to be protected against liability incurred by your partner, employees, or subcontractors, limited liability insurance isn’t the only way.

When you take out a General Liability Insurance Policy or Professional Liability Insurance policy with Thimble, you can add as many Additional Insureds as you need.

What is an Additional Insured

Whether you have a full staff of employees or occasionally hire an independent contractor to help you with your workflow, anyone you pay to help complete your business may incur risk. 

To protect yourself and your business, add anyone you’re working with as an Additional Insured on your policy so that your coverage extends to them, too.

With fast, flexible insurance, you can add Additional Insureds to your Thimble General Liability Insurance coverage or Professional Liability Insurance policy. Whether you’re online or using the Thimble app, it takes only a click of a button to add and modify as many Additional Insureds (and as often) as you need.

Thimble: protecting your business and your bank account

If you’re looking for an affordable way to manage your business’ liability, Thimble has your back. You can get a quote for general liability insurance and professional liability insurance in under 60 seconds. All you need to do is enter your ZIP code, a few details about your business and services, and your desired coverage length, and you’ll receive an instant quote.

Thimble is business insurance by the hour, day, or month; it only works when you do. When you can add as many Additional Insureds as you need on-demand, you can get to work knowing you’re prepared in the face of liability claims.

Our editorial content is intended for informational purposes only and is not written by a licensed insurance agent. Terms and conditions for rate and coverage may vary by class of business and state.

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