Risk Management Lessons from a Zombie Attack
The most basic concept of risk management is the same as zombie management: create as many barriers as possible between you and the invading horde. Too often, I see clients whose risk management plan consists of only one “wall” — insurance. Friends, if that’s you, your business is in serious danger of having its brain eaten. After all, managing risk is not just about having money to pay a judgment. A business protecting itself with insurance alone would be like protecting oneself from a zombie attack with health insurance for a new brain.
Risk management should be about fending off an attack — i.e., staying out of court in the first place. Or if you can’t stay out, then getting out as quickly, quietly, and cheaply as possible.
How do you do this?
You need to understand all the protective walls available to you and integrate them into your risk management plan before a zombie/plaintiff attacks.
The walls in order from outer to inner:
Wall #1 - Immunity. For a few lucky souls, statutory immunity from liability is available. If you have it, you can get dismissed quickly from a lawsuit. Examples are gun manufacturer immunity for product liability claims and volunteer nonprofit director immunity for negligence claims. If a basis for immunity exists, you should find out before any claim is made and proactively make sure you fulfill all statutory requirements to keep it in place.
Wall #2 - Incorporation. Incorporation’s central purpose is to protect the personal assets of people who act on behalf of a business. Commonly referred to as the “corporate shield,” officers, directors, owners, and agents can assert this shield as a defense as a basis for dismissal if they are sued as individuals. It’s like a spaceships’ “force field” and, like a force field, is a no-brainer for any risk management plan. If you own a business that is not incorporated and somebody successfully sues your company, they can satisfy a judgment against you by taking your car, boat, house, bank account contents, and any other personal assets. But if your business is incorporated as a Limited Liability Company, S Corporation, or C Corporation, a successful plaintiff can only collect against the assets of the corporation. But you cannot just “build” the wall by incorporating; you must maintain it by performing all ongoing requirements or “corporate formalities,” like having board meetings and taking minutes. And keep in mind that a strategy of incorporating can be applied to subsidiaries as well so that the assets of distinct divisions of your business can be isolated and protected from liabilities created created by other divisions.
Wall #3 - Indemnity. Next, a business can protect its assets with contractual indemnity, which is when one party (the indemnitor) agrees to step in the shoes of the other party (the indemnitee) if a specific thing happens. An example: you contract with a caterer to feed your guests at a business event, who then accidentally serves tainted oysters that send dozens of guests to the hospital. The food-poisoned guests sue your company. If your catering contract had an indemnity clause that called for the caterer to indemnify you for third party claims, the caterer will have to pay you for any losses and expenses you incur from the lawsuit. If you didn’t, then you will have to pay your own losses and expenses. Keep in mind that there is a distinct type of indemnity that needs to be specifically included in an indemnity clause called “defend.” If an indemnitor agrees to “defend” an indemnitee, it is agreeing to pay the costs associated with defending the claim - such as attorneys’ fees.
Wall #4 - Insurance. Finally, your wall of last resort is insurance. But this does not only mean the insurance you buy. While that is crucial, the insurance wall also means that you obtain proof of insurance from parties with whom you contract — especially if they are providing you with indemnity. After all, if you invoked your indemnity rights with that negligent caterer and it turned out they didn’t have insurance to fund it, you’re going to be SOL; an indemnity payment from an insurance company is always better than trying to liquidate a bunch of catering equipment. For your insurance coverage, you need to identify all areas of potential risk to ensure that you are adequately covered. You don’t want to find out that you lacked coverage the hard way — i.e., when you try to make a claim. Insurance companies have no problem denying claims when they think there is no coverage.
So keep in mind these 4 four walls of defense when developing a risk management plan. T McKee Law’s attorneys have decades of experience developing these plans. We’d love to help build your walls as plentiful and strong enough as possible to keep any zombie/plaintiff out.