A lot of entities want to pierce the corporate veil and none of them have your best interest in mind. Multiple government entities have new, and some old, options for piercing the corporate veil and your clients’ corporate veils. As their broker, you can help protect them, but protect yourself too.
A lot of entities want to pierce the corporate veil and none of them have your best interest in mind. Multiple government entities have new, and some old, options for piercing the corporate veil and your clients’ corporate veils. As their broker, you can help protect them, but protect yourself too.
A new tool is the Corporate Transparency Act (CTA). Many exemptions apply here including a “special” exemption for insurance producers!
But that only applies to your insurance business. If you have other LLCs, you may not get an automatic exemption. This might especially apply to rental properties. This law was passed specifically to pierce the corporate veil to identify people committing money laundering, tax fraud, and other illicit activities. You must register if you meet their criteria (go to the Beneficial Owner Information reporting system at www.fincen.gov/boi to learn more).
Under the Trump administration, ERISA liability was significantly increased because of the expansion of who the fiduciary is and their responsibility relative to health insurance plans. These cases are also being heard in civil court and involve whether the fees charged are reasonable. This is in addition to the regular ERISA regulations. Keep in mind, the corporate shield does not exist with ERISA – you are personally liable.
Civil litigation has found ways to pierce the corporate veil too. The following applies to you at the agency but also to your clients. Insurance agents are particularly well placed to help their clients run their businesses and engineer their insurance to offer better corporate shield protection. The over-arching key is to align and operate the business completely separately from your personal life and this includes not intermingling different companies you own.
Intermingling funds. Do not do it. For agencies this means:
Keep a separate trust account. This is always smart for many reasons, but it also helps show that you deserve the corporate protection.
Do not intermingle your personal expenses. If you intermingle your personal expenses, then why should the plaintiff not be able to claim the company’s assets should not be attachable? If you claim the business is the business, then how can that be if you spend corporate money for personal uses?
Intermingling assets.
Company vehicles. All kinds of games are played with autos. First, title the auto correctly and then align the insurance appropriately. If you are insuring a client and fail to do this, your client’s only insurance might be your E&O policy. Simply from an E&O perspective, the title should always align with how the insurance is written. If the auto is owned by ABC, Inc., then the insurance policy should be for ABC, Inc. An insurable interest must exist for coverage to exist and if the vehicle is titled under John Doe, then ABC, Inc. does not have an insurable interest.
This is a key point with corporate shields. John Doe is a separate entity from ABC, Inc. even if John owns 100% of ABC, Inc. Corporate law holds that the business is a separate legal entity. Therefore, assets must be titled appropriately for insurance coverage to apply and arguably, for the corporate shield to apply.
Relative to buildings, protect yourself and your clients by encouraging legitimate leases are written if they own their own buildings.
If you own a building, or your client owns a building(s) with different LLCs, these are all different legal entities. The insurance must be written correctly respecting these are different legal entities. Failure to do this risks lack of coverage and also adds ammunition to a plaintiff looking to pierce the corporate veil. When the different legal entities are not respected as separate, then the logic of the corporate veil fails. This protection does not exist just because you have different LLCs. You must show that these entities are separately run and each is respected as a separate legal entity.
Shareholder Loans.
I see many agencies with shareholder loans and those loans have no terms, no collateral, and nothing even in writing. This scenario can easily be construed as not respecting the separation of the corporate entity from the individual. Don’t make these suits so easy for the plaintiff!
Corporate Documents.
The IRS will look to see if you are holding regular corporate meetings and so forth. Failure to do so may be a big problem. Plaintiff attorneys will do the same. Hold your meetings, take your votes, and document your meetings!
Affiliated Entities and Enterprise Liability.
When someone or multiple people own multiple entities, it makes sense to create barriers preventing plaintiffs from bringing those other entities into the suit. This is a different version of piercing the corporate veil.
A common weak point is where one entity does the payroll for all the entities. Or maybe one benefit package is applicable to all the entities.
One of the most common insurance clients who have this problem are contractors, especially those contractors who say, “So what? Sue me. I’ll declare bankruptcy!” You and they should review the Seven Springs Mountain Resort vs. Hess case: https://casetext.com/case/seven-springs-mountain-resort-inc-v-hess
Insurance agents are perfectly placed to review their clients’ titles and the way they run their businesses to write their insurance correctly while also helping them strengthen their corporate shield. This point requires the agent to be a true advisor instead of a peddler. One is far more important and valuable than the other. Which are you?
NOTE: The information provided herein is intended for educational and informational purposes only and it represents only the views of the authors. It is not a recommendation that a particular course of action be followed. Burand & Associates, LLC and Chris Burand assume, and will have, no responsibility for liability or damage which may result from the use of any of this information.
None of the materials in this article should be construed as offering legal advice, and the specific advice of legal counsel is recommended before acting on any matter discussed in this article. Regulated individuals/entities should also ensure that they comply with all applicable laws, rules, and regulations.