How to Protect Your Financial Health From Lawsuits

Updated on January 17th, 2022
Protect Financial Health

When it comes to your financial health, there are numerous vulnerabilities you should be aware of. Your net worth can be damaged by such commonplace items as unexpected medical bills, car repairs, or home damage, but one area that often gets overlooked is how lawsuits can affect your financial health.

By taking responsible steps ahead of time, you can better protect your assets from lawsuits in either the private or business sector.

Carry Adequate Insurance

If you are a business owner, there are certain types of insurance you are required to carry. Depending on the state you reside in and the size of your company, you are likely responsible for taking out workers’ compensation coverage and possibly other general or professional liability insurances.

Even if you have insurance policies, it’s important to review them on a regular basis to make sure your coverage limits will cover potential lawsuits. This is especially important in certain fields such as medicine.

If you are in the medical profession and are carrying the same payout limits for ten years, you might get an unwelcome surprise if you are ever sued and find out your settlement amount is far higher than what your insurance will cover. In fact, the average malpractice claim payout figure increased from $287,000 to $353,000 in the five-year periods between 1992-1996 and 2009-2004.

Automatically selecting the bare minimum required coverage limits might save you some money on monthly or annual premiums, but it could cause your financial wellbeing to take a serious hit should you ever be unfortunate enough to be involved in a lawsuit.

Know What Your Insurance Covers

Let’s say you rent a duplex with your family. One day, your six-year-old child accidentally hits a baseball right through the window of the house across the street. Since you are responsible for the financial ramifications of your child’s actions, every dime of the money required to repair that window is coming out of your pocket, correct? Not necessarily.

If you are renting a duplex, you probably have a renters insurance policy. Unbeknownst to many people, renters insurance policies often provide personal liability coverage that can extend to damage or incident outside the home. So instead of the homeowner whose window was damaged feeling compelled to sue for damages, it’s very possible the renters’ insurance policy could facilitate an easy payout instead.

The same reasoning applies to homeowner’s insurance and injuries to guests. So the next time you hear a middle-aged dad refuses to buy his kids a trampoline because he’s concerned the neighbors will sue when their children get injured on the device, you might see if he knows the details of his homeowner’s insurance policy.

Many homeowner’s policies provide coverage for injuries to guests on your property, making threats of lawsuits much less dangerous to your overall financial health. The most important thing is to look into your existing coverage and see what is and is not covered. Making decisions based upon your available options can go a long way toward protecting your finances.

Create an LLC for Your Business

You can do your best to avoid ever being on the receiving end of a lawsuit, but you also need to get things in place to protect yourself if your best efforts are unsuccessful. If you are a small business owner, one of the first things you should do is to organize your company as an LLC (limited liability company). As the name implies, this greatly limits your liability, specifically separating business liability from your personal finances.

For example, if you are an arborist who has established an LLC drops a limb on a client’s house, the resulting lawsuit might be enough to cause the company to fold if adequate insurance isn’t in place. This might seem like the worst possible result, but it’s nothing compared to the fallout of being sued without the separation provided by an LLC.

With an LLC in place, your personal assets are safe, including your home, vehicles, and IRA accounts. Depending on the state, some or all of those assets can be seized by creditors if a lawsuit is successfully brought against you as an individual rather than a company.

Taking Preemptive Measures

Nobody wants to be on the receiving end of a lawsuit. Even if you win the suit, legal fees can easily rack up and cut into your nest egg. By taking steps ahead of time to protect yourself and your finances against claims, you can rest easier knowing that lawsuits can either be avoided or at the bare minimum limited in their damage to your overall financial health.

Peter Daisyme

Peter Daisyme

Peter Daisyme is the co-founder of Palo Alto, California-based Hostt, specializing in helping businesses with hosting their website for free, for life. Previously he was the co-founder of Pixloo, a company that helped people sell their homes online, that was acquired in 2012.

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