Better Safe Than Sorry
The Meaning of Liability: “Being Bound or Obliged in Law or Equity to Make Restitution”
Liability means responsibility, and that always translates into dollars—something a small business never has enough of. Liability can mean disaster.
Almost anyone can make a claim for anything and try to hold YOU responsible. Whether it’s a loss of personal property or an injury during class, students or their parents may blame you. A plumber may trip on a step. A parent may be offended by a photo in your promotional literature. But just because someone is disgruntled or even badly hurt, you aren’t necessarily responsible. The law requires that the claimant prove actual monetary damages (not hurt feelings) and that you were the “proximate,” that is, the direct cause.
Too often, an aggrieved party takes the position that “if you don’t ask, you don’t get” and makes a claim even if it’s not likely to be upheld on the merits. Settlement is always preferable to litigation, and insurance companies are not unwilling to make a payment instead of incurring the very substantial expense of defending a lawsuit. Be aware that for the defendant—YOU—the consequences of a settlement can be every bit as disastrous as a judgment. Insurance companies don’t like paying (even if they prefer it to litigating), so they might raise your premiums or your deductible—or drop you altogether.
For uninsured or small claims, you may be tempted to negotiate a settlement just to make the claim “go away.” Word gets around among the parents, and you could wind up paying for every lost iPod or cell phone.
Here’s what you need to include in your liability avoidance plan:
Give up your sole proprietorship. Create a limited liability entity, and conduct your business entirely through that entity. That way, a claim can be assessed only against the assets of the business, and not your house or your life savings. Accountants tend to favor LLC’s, many lawyers recommend Subchapter S corporations. Which type of entity is best for your business depends on whether you have partners or investors, what percentage of your business your partners hold, and whether you have enough time (and money) to comply with the filing requirements for an LLC. A not-for-profit corporation will also insulate you from liability, but may not serve your business purposes.
Separate out your business expenses from your personal expenses. Don’t commingle business income with personal income, and be careful not to treat your business checking account as a personal ATM, even if you are in fact the sole owner. Courts have the authority to look behind the corporate structure and make a determination that your corporation is merely a shell. But that’s no reason for not paying yourself an adequate, appropriate salary, having the business pay for your justifiable, business-related expenses, and taking the deductions to which your business and you as an individual are entitled.
Your insurance agent should be your new best friend. Get an honest and independent appraisal of the amount of coverage you might need…and buy more! Whether you own or rent, you need to protect the physical plant against total or partial loss or damage. Watch out for “acts of God” or force majeure exceptions. If you’re in a flood zone or subject to hurricanes or other unpredictable weather conditions, and you can’t qualify for sufficient insurance coverage, hire a contractor to weather-proof. Develop and put in place systems of notification and evacuation in case of emergencies. Since 9/11, insurance carriers, accrediting bodies, government agencies, school systems, even apartment buildings are requiring to have emergency plans.
Don’t forget to insure against personal liability as well, just in case. And if you have a board of directors, you won’t get anyone to serve without directors’ and officers’ coverage.
Carefully drafted waivers should be presented to everyone, no exceptions. Students (and/or their parents and guardians, depending on the student’s age) need to agree to “assume the risk” of injury during class, rehearsals, performances, on and off your premises. That includes related travel. Accompanists and musicians, teachers, office personnel—no one should be exempt from signing a waiver. And you should consider developing a form for a doctor’s acknowledgement of each student’s fitness, including identification and disclosure of any medical problems, such as scoliosis or diabetes.
Injuries are inevitable, even if the floor isn’t slick. Dancers get hurt. But they shouldn’t have the right to blame you. A signed waiver won’t stop someone from suing you, but it will shift the “burden” of proving that the injury or loss was caused by a higher degree of negligence on your part.
Be proactive. Create and maintain a safe environment, working from inside out. Pay attention to complaints and do everything you can, as fast as you can, to remediate potentially dangerous conditions. Don’t wait to have the plumbing checked until you hear about the flood in the bathroom that’s ruining the kids’ pointe shoes and designer bags. Install sprung floors, securely fasten all mirrors and barres, and don’t be timid about absolutely forbidding glass containers in the studios. And if the Yorkie that one of the teachers brings to class has fleas…well, you know what you have to do!
Have an engineer do a thorough inspection, as if you were buying the property. Asbestos may be present, but if it isn’t “friable” (that is, free) it isn’t a problem. Old pipes are, however, and the exterior may need “pointing” and “flashing” to prevent water infiltration and falling chunks of masonry. Shovel your walkways, de-ice sidewalks, secure loose barres and banisters. Provide safe storage for valuable items. Make it clear by posting simple, legible signs that you are not responsible for loss or damage to personal property. You don’t want to find yourself in the business of replacing cell phones or expensive sneakers.
“Liability” doesn’t just mean responsibility for injury, loss or damage. It may mean responsibility for employment-related taxes or benefits. Require formal written contracts of all employees and independent contractors. The criteria for establishing an independent contractor relationship are specific, and subject to audit by taxing authorities. It isn’t enough to have a verbal understanding creating a relationship. When a faculty member tries to collect unemployment insurance, you may find yourself in deep trouble because you “thought” she was an independent contractor.
Structuring adequate protection from successful claims of liability should be taken seriously, carefully, systematically, and always with the advice of counsel.