How to Protect Your Financial Health From Lawsuits

This story originally appeared on Due

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

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By taking responsible steps early on, you can better protect your assets from lawsuits whether in the private or business sectors.

Carry the appropriate insurance

If you are a business owner, there are certain types of insurance that you must bear. Depending on the state in which you reside and the size of your company, you will likely be responsible for obtaining workers’ compensation coverage and possibly other general or professional liability insurances.

Even if you have insurance policies, it is important to review them regularly to ensure that your coverage limits will cover potential lawsuits. This is especially important in certain fields such as medicine.

If you work in the medical profession and carry the same ten-year payment limits, you may get an unwelcome surprise if you are sued and find that your settlement amount is much higher than what your insurance will cover. In fact, the average malpractice claims compensation figure increased from $287,000 to $353,000 in the five-year periods between 1992-1996 and 2009-2004.

Setting the minimum required coverage limits automatically may save you some money in monthly or annual installments, but it could take your financial well-being a serious blow if you’re unfortunate enough to get involved in a lawsuit.

Find out what your insurance covers

Suppose you rent a duplex apartment with your family. One day, your six-year-old accidentally hits a baseball through the window of the house across the street. Since you are responsible for the financial ramifications of your child’s actions, every cent of the money required to fix that window goes out of your pocket, right? not nessacary.

If you are renting a duplex apartment, you will likely have a tenants insurance policy. Unbeknownst to many people, renters insurance policies often provide personal liability coverage that can extend to damages or accidents outside the home. So rather than a homeowner whose window was damaged feel compelled to sue for damages, it is very likely that the tenants’ insurance policy will make it easier to pay instead.

The same reasoning applies to home and guest casualty insurance. So the next time you hear a middle-aged father who refuses to buy a trampoline for his kids because he’s afraid he’ll sue neighbors when their kids get hit on the machine, you might see if he knows the details of his homeowner’s insurance policy.

Many homeowner policies provide coverage for guest injuries on your property, making the threats of lawsuits less dangerous to your overall financial health. The most important thing is to look at your current coverage and see what is and isn’t covered. Making decisions based on the options you have can go a long way toward protecting your money.

Create an LLC for your business

You can do your best to avoid being on the receiving end of a lawsuit, but you also need to put things in place to protect yourself if your best efforts don’t work. 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 suggests, this significantly limits your liability, specifically separating business responsibility from your personal finances.

For example, if you are a tree expert and set up an LLC that drops a party into a client’s home, the resulting lawsuit may be enough to void the business if proper insurance is not in place. This may seem like the worst possible outcome, but it doesn’t compare to the ramifications of litigation without the separation that an LLC provides.

With an LLC, your personal assets are safe, including your home, vehicles, and IRA accounts. Depending on the state, creditors can forfeit some or all of these assets if you are successfully sued as an individual rather than a corporation.

Take precautionary measures

Nobody wants to be the receiving party of a lawsuit. Even if you win the lawsuit, legal fees can easily add up and break the nest egg. By taking steps early to protect yourself and your money from claims, you can rest easy knowing that lawsuits can be avoided or minimal damage to your overall financial health.

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