Sole Proprietorship or LCC vs the E&O insurance 10

[HD10]

I am planning to start a part time business in structural design in Northern California. Most probably small work for residential or minor commercial structures. Have about 35 years of experience in commercial, office, school, residential buildings. I have been trying to decide on the company structure, and liability insurance, and would appreciate any tips and help.

The sole proprietorship is the easiest to form. And I can select a name other than my last name for a DBA. Less paperwork starting and during the year, easier tax filing, less expenses etc. But there is this thorny issue of liability. If something were to go wrong, anyone can sue and come after my personal assets.

On the other hand, an LCC would shield from anyone coming after my personal assets (will it?) if I understand correctly. But the startup paperwork, startup fees, yearly paperwork, yearly fees etc are much larger. Taxes might be just a little more complicated than the above option. Plus, I was told that professional license holders can not start an LCC in CA and it has to be a PLCC. Even a PLCC is not allowed for structural engineers in CA. Which leaves only an S corp as the option from perspective of keeping my personal assets separate form the company. Lot more time and fees to set up & operate, more fees and paperwork yearly, double taxation etc.

Are SEs generally operating under sole proprietorship? Do they tackle the issue of lawsuits and someone coming after personal assets by getting an E&O insurance? And does that strategy actually take care of that particular issue and gives you peace of mind?

If yes, how much E&O coverage is enough? 250k? I do not anticipate having billing of more than 15-20k yearly, at leas in the beginning. Which companies are best for premiums and for handling of claims? I hear the names of Hiscox and Travelers.

Sorry for the long narrative. Any tips would be appreciated.

 

[XR250]

How did you protect yourself from potential liability for 15 years? How did you get peace of mind?

I honestly did not worry about it.
I did talk to an Attorney early on. Right or wrong he stated that as long as all my assets were jointly owned with my wife, they could not be touched.

 

[HD10]

Thanks very much for everyone who chimed in. A lot of good information and tips. It looks like at my small level, Sole Proprietorship should be good enough. While it seems some people have been successful without carrying any insurance, I would sleep better at night carrying E&O, at least to the level of my potential projects.
Trying to limit the liability to the fees I receive, is an interesting concept. And I understand also, how to pitch that to clients.

 

[CARunderscore]

Aseur, if the 5-10k premium is based on 250k billing, that wont work for me since I am only anticipating 15-20k billing. Does ASCE provide a better option?

Was this issue ever addressed in the thread? I'm exploring the idea of a part-time practice myself, and I also would not anticipate more than $20,000 annual billing for the first few years. Looking at prior threads, it sounds like my plans would be dead in the water if I tried to carry E&O insurance without having like $100,000 in revenue, or at least a plan to get there quickly. I'm starting to suspect I'd be better served just using good contracts, doing good work, and avoiding risky projects/clients. And having a good lawyer.

I did talk to an Attorney early on. Right or wrong he stated that as long as all my assets were jointly owned with my wife, they could not be touched.

And stuff like this. I don't know all of the details, but there is a lot of protection to be had in asset classification.

On a separate note, I've been reading up on LLC formation, and the literature definitely stresses avoiding chinks in the corporate veil, but I have a nagging suspicion that the typical small business owner probably keeps horrible records, uses their business assets for personal use all the time, etc. and that a lot of the typical advice reflects that. Malpractice liability is the main thing I'm worried about.

 

[phamENG]

CARunderscore - I launched my practice part time and my E&O policy was $1900/year. Not cheap, but I considered it worthwhile. And it helped me build my business. Several solo competitors of mine don't carry it, and I remember the timid question from potential clients about it...and the relief in their voice when I told them I had it. I know it's won me more than a few projects.

 

[CARunderscore]

phanENG, I appreciate the input. Do you mind me asking for reference: What industry(ies), and what was your average annual billing for the first 3 years?

 

[phamENG]

I locked in that rate for 3 years with an expected billing rate of between $10k-20k. Mostly residential and commercial. $1M/$1M. I bought it through a broker - it's an AXA XL policy.

I've since gone full time and my billing is substantially more than that. I'm not looking forward to my rate adjustment next spring...

 

[HD10]

It's amazing to have such great discussion above. But not remember the basic question!
The question is, how long does the liability stays with an SE for the design he has done, the report she has written etc.? Statute of Limiyations, anybody?
And if you terminate the insurance along the way, retire or whatever, do the insurance companies still cover any lawsuits arising form the work done when that insurance was active?

 

[JLNJ]

I know a guy who went out on his own and carried no insurance. He figured not being insured would decrease the likelihood that he would be sued. No point in going after someone with shallow pockets.

 

[phamENG]

how long does the liability stays with an SE for the design he has done, the report she has written etc.?

As long as you pay for it.

Statute of Limiyations[sic], anybody?

Depends on where you are. Some states its 5, some 10, I think federal work is actually unlimited for design errors (which is kind of terrifying) but I could be mistaken - I haven't done any federal work since branching out on my own.

And if you terminate the insurance along the way, retire or whatever, do the insurance companies still cover any lawsuits arising form the work done when that insurance was active?

No. You either sell your business and its liabilities (good luck) or you purchase tail coverage. You're no longer expanding your liability exposure, so it costs less and if I remember correctly the cost declines over time (the longer your buildings stand, the less likely a future problem will be blamed on a design flaw). And if all of your work falls under a 5 year statute of limitations, you could drop it after 5 years - though you'd probably want to discuss that with a lawyer/insurance broker to make sure you're in a safe position.

 

[phamENG]

JLNJ - that's fine...until you find out your client's sister a lawyer who doesn't mind filing the paperwork for him. It costs almost nothing to name somebody in a lawsuit (though litigating it can get expensive), and even if you aren't at fault it'll cost you a few thousand to get your name taken off or negotiate a settlement. I think it's BA on here who has a story of a $500 letter that said, effectively, its safe but may crack and it cost him about $10k (that's having the suit dismissed, not settling or an adverse ruling).

I had an issue come up recently - not a design issue, but a construction issue - and the contractor got sued. I immediately contacted my insurance company and warned them that something may be coming. They thanked me, put me in touch with one of their lawyers and we discussed the issue, and then she assigned me a local attorney to review everything and stand ready in case they filed suit against me. Cost me exactly $0 (if you ignore the premium I pay) and there's no claim against my insurance. It's like a pre-claim slush fund they use to defuse situations before they reach claim/lawsuit level.

 

[XR250]

I've only been threatened to be sued once - and it was by a customer who was a law professor. My current policy is to not have lawyers as customers, because, as Pham pointed out, it costs nothing for them to sue you.

I literally tell them that it is too easy for you to sue me so I'll pass.

 

[Settingsun]

BAretired was sued by a local authority iirc. But the premise of not having insurance is only partly that it discourages law suits. The other, necessary part is that you don't care about the outcome if you are sued. Otherwise you're just holding a weak bluff.

I have been curious in this discussion on engineer's contracts. We have our own terms, of course, but they're hardly relevant. Few of our clients are naive enough to use our terms. I'm wondering whether that's the nature of our work (larger private clients and government) vs what's being discussed here, or just how it is in North America?

(We also won't get far with just 1 million insurance.)

 

[HD10]

Have you actually said that to them? What if they sue you for discrimination then.......

 

[Lomarandil]

HD10, I haven't followed the "gay wedding cake" stories for a while, but I don't think lawyers could be considered a protected class under any existing anti-discrimination law.

----
just call me Lo.

 

[StrEng007]

Perhaps this should be a separate thread, but how does this apply to the licensed engineer who works for a company but is no way an owner or a partner of the company. If said company has it's insurances in place, how does the individual engineer working for the company protect themselves? Is there contract law that states no individual hired by the company can be financially responsible?

 

[phamENG]

StrEng007 - only if you have such a contract in place with your employer.

This was a sticking point I had with my last employer. I brought up this concern to which they said "you have nothing to worry about." I said "If I have nothing to worry about, then I'm sure you wouldn't mind having your attorney draft an indemnity commitment or, at the very least, right it into the Employee Handbook as a general protection for all employees." They wouldn't do it. So I refused to seal anything.

In general, the Engineer of Record assumes at least some personal liability for everything they design. If a problem rises to the level of criminal negligence, manslaughter, etc. then the Engineer of Record can be held criminally liable. The same liability extends to civil suits. It is true that many attorneys will view an individual with limited personal assets and no insurance to be a dead end and not worth the time/expense, but that's not a sure thing. If they are already suing the company, it will cost about 5 seconds of a paralegal's time to add your name to the filing. So an individual may very well get caught in the 'shotgun approach' if they are suing multiple parties already.

Some states have laws restricting this, though, so it does depend on where you are and what jurisdiction the contract(s) fall under.

Best bet is to sit down with your own attorney experienced in this kind of law and discuss the risks to which you are exposed. This will help inform your salary negotiations, indemnity from your employer, etc.

 

[HD10]

I have not looked in to the specifics of discrimination issues with professional consulting and am not sure whether "profession" is a protected class or not. When I was renting my property to a tenant, that definitely was a consideration. Lawyers are more inclined to sue the landlord.......and it does happen more in their case. But legally, I could not, not rent the property to them just because of their profession. At least I could not say that.

 

[bookowski]

I'd be interested in seeing a poll here on what others have actually seen. It seems to me that most of this talk is too risk averse, but maybe i'm too delusional. Each of us probably has a pretty limited data set of observed claims but combined we should be able to get some better idea.

I am curious how many times others have seen a) any claim that resulted in any level of disruption/loss, b) a claim that effectively ended up a company, and c) a claim that pierced the company and got to an individual. I'd leave out the few famous cases that we've all heard of.

My data points:
- Never had a claim since starting my own business
- Have a couple of peers that have been briefly named in incidents that did not actually involve structure which there were able to get out of fairly quickly, with the insurance footing the bill for the minor legal work involved.
- Previously worked for a big company that had many claims, including one that resulted in what was at the time the largest settlement for a bldg/construction incident (no longer the record holder). Interestingly that claim had essentially zero impact on day to day operations, never mind impacting any individuals involved. This was a large company (numerous office in/out of the US) and it seemed that some level of claims was a constant part of doing business, but I never saw it disrupt anything nor any fear that it would touch an individual.
- I'm familiar with some involved in the mega settlement from surfside, no one personally touched that I know of
- I occasionally do expert review work, in my limited exposure there I've never seen an individual touched. Very recently I worked on a 12M overall claim where the struct eng had a 2M policy. They are getting his policy minus his legal expenses on that one. I asked the attorney I was working for about personal exposure (since it got me thinking). He told me that in 25 years of doing only construction litigation he's never actually seen anyone go after an individual (but that it could happen). I also worked on one where the engineer had designed numerous mid level hotels for a major chain and was extremely negligent and they got his policy but no other repurcussions.

Based on my observations the risks seem very low to be personally touched in a meaningful way.

 

[XR250]

I have been in business since 1997 and have probably worked on over 10,000 projects (no joke).
I have been threatened to be sued once and paid out less than $1000 out of my own pocket on another occasion. That's it!