Liability Protection: The Keystone of a Successful Business

I. Introduction

For an entrepreneur, starting a new business can be a fulfilling
venture. However, if the company and its assets are not properly
protected, the risks that come along with such an endeavor can prove to
be costly. This article will first discuss the agency issues that arise
in a litigious society. It will then explain the process for retaining
liability insurance. Finally, it will conclude by suggesting some
simple ways a new business owner can ensure he or she will receive
maximum liability protection.

II. Agency Issues

Agency law issues often arise when an employee takes action on
behalf of the company without the employer's consent or the proper
authority. [1] The Restatement of the Law (Third) Agency defines agency
as, "[t]he fiduciary relationship that arises when one person manifests
assents to another person that the agent shall act on the principal's
behalf and subject to the principal's control, and the agent manifests
assent or otherwise consents to so act." [2] However, even without the
explicit assent of the owner, the company can still be held liable for
actions taken with a third party if the party reasonably believes the
employee had authority to enter into the transaction. [3]

In 2001, the Minnesota Appellate Court held that the President of a
company has the apparent authority to enter into most contracts on
behalf of the company. [4] Decisions like this have been prevalent
across the country. [5] Assigning proper titles to various employees is
a key way to limit liability when the employee may take action without
the proper authority. [5] "Do not give your employees the appearance of
authority that they do not really have. If you call your best salesman
"Vice President" or your bookkeeper "Chief Financial Officer" just
because the title sounds good, you will have a very hard time defending
against actions taken by them which would have [been] appropriate if
they were really officers of the company." [6] Another way to protect a
company is to obtain liability insurance. [7]

III. Liability Insurance

Retaining the right liability insurance is key to running a
successful business. [8] "When it comes to liability insurance, small
to mid-size companies are especially susceptible to the unforeseen
changes in the insurance market conditions and contractual and legal
obligations placed upon them." [9] Because businesses in this group are
especially vulnerable, it is important to take steps to protect the
assets of the business by obtaining the proper insurance. [10]

First, the business owner should hire a reputable insurance agent or
broker. [11] This task in itself may be intimidating, as there are many
types of insurance brokers to choose from. "When looking in the yellow
pages, look for specialization in commercial insurance, and membership
in one of the professional agents or brokers associations." [12] During
the first meeting with the agent or broker, it is important that the
individual do his or her own analysis of the necessary type of
insurance coverage to cover any gaps that may exist in the business
owner's personal estimate. [13]

Once the proper broker or agent has been retained, one should assess
the type of insurance needed. [14] There are six main types of
liability insurance for small businesses: property, time element,
crime, automobile, liability, and workers' compensation. [15] The
initial analysis mentioned above should bring to the business owner's
attention in which, if not all, of these areas insurance protection is
needed. Additionally, many state agencies require specific protection
for certain types of businesses. [16] "For example, the Contractors
State License Board requires bonds for contractors, and the Public
Utilities Commission requires Commercial Automobile Insurance. Most
other insurance is a business decision on your part." [17]

The high cost of liability insurance may cause concern for business
owners. [18] Each individual's business will have a unique cost that is
calculated based on premiums. [19] "General liability premiums are
typically based on sales, payroll, area or, in the case of an office,
by class." [20] However, a simple cost benefit analysis will almost
always advise the business owner to err on the side of caution. [21]

IV. Conclusion

Many issues that can arise when starting a new business are
unforeseeable and unexpected. The easiest way to protect oneself from
these unanticipated costs and liabilities is by retaining liability
insurance. Although the cost of this insurance may seem steep,
considering the alternative (paying for the liability once it occurs),
it is a small price to pay.

[1] David K. Staub, Small Business Liability Protection, AllExperts,

[2] Restatement of the Law (Third) Agency § 1.01 (2006).

[3] Id. at § 2.03.

[4] Powell v. MVE Holdings, Inc., 626 N.W.2d 451 (Ct. App. Minn. 2001).

[5] West Case Update, (last visited Mar. 19, 2008).

[6] Staub, supra note 1.

[7] Vicki Gerson, Liability Insurance for Small Businesses: Protecting Your Assets, NFIB, Sept. 30, 2004,

[8] Id.

[9] Id.

[10] Id.

[11] Gaebler Ventures, For Entrepreneurs, Small Business Insurance FAQ, (last visited Mar. 12, 2008).

[12] Id.

[13] Id.

[14] Id.

[15] Id.

[16] Id.

[17] Id.

[18] Gerson, supra note 7.

[19] Id.

[20] Id.

[21] Id.