Many people establish business entities to protect themselves from personal liability. In a ruling last week, however, the NC Court of Appeals held that despite such corporate formalities, contractors can be personally liable for their own negligence.
The case, White v. Collins Building, Inc., __ N.C. App. __ (January 4, 2011), involves a new home constructed by developer AEA and purchased by the Whites. AEA contracted with Collins building, Inc. to build the residence. Collins Building is a one-member company owned by Edwin Collins, president, sole-shareholder, and qualifier for the company. When the Whites began to experience alleged construction defects, they sued all involved, including both Collins Building Inc. and Edwin Collins, individually.
Edwin Collins moved to dismiss the lawsuit against him individually, and his motion was granted. On appeal, the Court held that the dismissal was in error, and that Edwin Collins could be found individually liable to the Whites because the alleged negligence was his own action. While noting that it was a case of first impression for the construction context, the Court pointed out that “It is well settled that an individual member of a limited liability company or an officer of a corporation may be individually liable for his or her own torts, including negligence.”
The Court stated that a properly formed and maintained business entity may provide a shield or “veil” of protection from personal liability, but that the protection was not absolute. The Court also contrasted this situation to one in which the parties had contracted with each other; there the claim is usually a contractual one only, so if the Whites had contracted directly with Collins Building, Inc. to build their residence, they likely would not have a cause of action against Edwin Collins individually.
This case shows that, whilecorporate formalities are important to protecting yourself from individual liability, they are not a guaranty.
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Photo copyright Defense.gov.
As the year draws rapidly to a close, take some time to make sure that your company is in compliance with “the man.” Whether your business is a Co., an Inc., an L.L.C., a P.A., or a P.L.L.C., you need to make sure that your business follows all applicable corporate formalities. These include holding annual meetings, updating corporate minutes, and filing annual reports. You need to ensure that your business is meeting all corporate formalities not just in the state where it is incorporated, but also any other state in which the company is doing business. Of course, it goes without saying that you need to also maintain proper professional licensing in each state in which you conduct business.
In addition to following governmental mandates, you should ensure that you are, in practice, keeping company money separate from personal finances and otherwise show that the corporation is more than “the mere instrumentality” of you as an individual. If you fail to do so, you may be sued individually based on a “piercing the corporate veil” theory. [There are many factors courts look at to make this determination, which include the domination/control of the corporate entity, inadequate capitalization, siphoning or commingling of funds with the dominant shareholder, and the absence of corporate records, among others].
As we discussed with the insurance check-up, you should also consider a yearly corporate check-up with your attorney to keep your corporation intact and your personal assets protected. If you would like to discuss having such a corporate check-up, give me a ring. And as always, your comments, thoughts, and questions are welcome in the comment section below.
Photo courtesy of U.S. Army.
Recently I was contacted by a blog reader– let’s call him Mark– who suggested that I write a post on reviewing insurance policies. “Mark” shared a personal story in which, even though he had incorporated his business, he was sued personally under a “piercing the corporate veil” theory. Essentially, the plaintiff was trying to get at his personal assets. After reporting the claim to his insurance agent, he discovered he may not have had sufficient insurance coverage. He did not have a D&O policy, which can provide protection for a corporation’s directors and officers.
Contrary to insurance being just another item to scratch off your list, take some time to review your insurance policies and see if you have the coverage you think you have, and if there are other coverages which you might need but have not yet obtained. In addition to D&O policies, there are E&O (errors & omissions) policies for design professionals, CGL (commercial general liability) policies, builders’ risk policies, workers’ compensation policies, and umbrella policies, to name a few. The language and endorsements in your particular policy are important, and it is worth taking time (perhaps annually) for an overall insurance-health checkup.
You should make sure that your insurance agent knows your business and the possible risks. An insurance agent that specializes in your type of business is your best bet to ensure that you obtain and maintain full coverage. In addition, it is a good idea to have your policies reviewed by your construction attorney, so you can learn exactly what is—and what is not—covered.
Next week (on Wednesday), we will have a guest post on how indemnity language in your contracts can limit (or eliminate) your insurance coverage. Stay tuned.
In the meantime, questions or comments about insurance for construction and design professionals? Join the conversation in the comment section, below. And if you haven’t already, please take my quick, 10 question Blog Survey.
Photo Courtesy of U.S. Army.