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I have seen a fair amount of information about operating an LLC and steps to take to avoid potentially piercing the corporate veil. I am wondering if liability insurance carried by an LLC plays any role in protecting the corporate veil or not?

In other words, does insurance make it more difficult to pierce the veil, or is the insurance neither here nor there, leaving a "veil" decision based entirely on pertinent actions (e.g. co-mingling of personal and business finances)?

Obviously, hopefully this is never an issue - just trying to wrap my mind around it.

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I am wondering if liability insurance carried by an LLC plays any role in protecting the corporate veil or not?

Liability insurance provides legal defense and payment of claims when an insured is sued in tort and did not engage in intentional misconduct. Typical tort liabilities include car accident liability, slip and fall liability, and other kinds of harm caused to others through negligence, or for which the insured has strict liability (e.g. product liability related injuries).

While the insurance wouldn't cover the claims, one of the factors considered when a court is asked to pierce the corporate veil, is whether the public interest is served by doing so, and whether the LLC has made prudent provision for foreseeable risks plays into that analysis.

The existence of liability insurance for the LLC, if it is adequate relative to foreseeable tort liabilities it could incur, makes it less likely for the veil to be pierced, even though the insurance itself doesn't cover the veil piercing risk. The insurance coverage also makes it much less likely that a tort victim of the LLC will have a judgment that can't be satisfied from a combination of the insurance proceeds and the assets of the LLC itself, which is the predominant circumstance in which veil piercing analysis is necessary.

This analysis applies with even greater strength to efforts to reach assets transferred by an LLC to its members as a "fraudulent transfer" on the grounds that the the LLC was left undercapitalized in the face of foreseeable liability exposure by the transfers made to the members (even if the transfer did not actually render it currently insolvent), which is closely related to piercing the corporate veil.

Keep in mind, however, that one doesn't have to do a piercing the corporate veil analysis if the owner of the LLC personally engaged in the activity that caused the tort liability. In those cases, the LLC owner is personally subject to liability in tort, even if the LLC owner was acting in an authorized official capacity as an officer of the LLC when the actions giving rise to tort liability was committed.

For example, suppose that an owner of the LLC who is also a manger of the LLC is driving a truck delivering goods sold by the LLC to a customer as part of LLC business and gets in an accident in which the driver of the truck is at fault. Both the driver and the LLC are liable to the person hurt in the accident for the full amount of the harm suffered by the victim for which the driver was legally at fault.

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An insurance policy can't protect against laws, but it can mitigate the effects of it, like paying off judgements. The policy cannot stop a legal action from penetrating the veil in the first place though.

So no, it doesn't protect the veil.

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