Asset Protection and Insurance

Many bar and club owners feel that a lawsuit will not happen to them. And when it does, it is very difficult to execute an asset protection plan that does not violate the rules against fraudulent transfers.

Asset protection is a legal shield or “maze” that is designed to frustrate creditors. It is a process that is used to insulate your assets from future creditors and lawsuits, which can take place on the business level and the individual level.

The biggest threat to any bar or nightclub is a lawsuit. Whether they are frivolous or meritorious claims, the fact of the matter is that the establishment and its owner are a target. To many, a bar owner is perceived as a high net-worth individual, and the business an attractive asset (and target). From my experience, asset protection is best accomplished through a multi-disciplined comprehensive approach.

THE THREE MYTHS 
There are three common, mistaken assumptions that I see my clients make. The first is a belief in what I call the Insurance Myth. While having insurance may be one way to insulate a business from claims, I often find that many business owners have inadequate coverage. Insurance coverage comes in many shapes and sizes, and may include General Liability, Workers’ Compensation, Liquor Liability (Dram Shop), Assault and Battery, and Hired/Non-Owned Vehicle coverage.

However, even if a business has coverage, it can find itself defending a claim out of its own pocket, should the insurance company issue a disclaimer.

The next myth that many business owners fall victim to is the notion of the “corporate shield.” Many proprietors, at the very least, have done some homework and know that they should be setting up some type of legal entity, such as an S-Corp or LLC.

However, many businesses fail to maintain corporate formalities, such as corporate records. An owner may not treat the corporation separate from the shareholder, and instead keeps the assets separate. If the court finds that the proper corporate formalities were not maintained, the protection of the corporate veil can be pierced and a shareholder could be held personally responsible.

The third common mistake that I see is a lack of a formal operating agreement or any type of business continuation or succession plan on behalf of an owner. Succession planning creates contingency plans through buy-sell agreements if a partner dies, divorces, is incapacitated, or wants to sell.

If you’re like many successful and smart bar owners, the business is your most valuable asset. It has supported you for a lifetime, and now you would like it to continue to support your children and grandchildren. Without good succession planning, closely held businesses are vulnerable to creditors, lawsuits, and partnership and ownership disputes. The goal is to develop an asset protection plan that insulates your business from future disputes as much as possible.

Every day, the life of a bar or club owner means more complications and more responsibilities. You must deal with new rules, new bureaucracies, and new problems. Asset protection is about preparing you to face these matters.

LIMIT YOUR EXPOSURE 
Any business where alcohol is being served will want to invest in a good insurance plan, and strategies can vary from nightclub insurance to live music clubs and dance floor insurance. Intoxicated people are a liability waiting to happen, and the owner of the venue in which that person acts out can be held widely responsible. You must protect yourself and your business.

“Club owners need to understand all of their exposures,” says Sherri McCullers, President of Coast to Coast Commercial Insurance Inc., in Oldsmar, Florida, which specializes in coverage for bars, restaurants, taverns, and nightclubs. “Owners need to know their limits, and they have to know exactly what they need to insure and how to get that across to their agent.”

McCullers recommends starting with an appraisal of your property, and that owners must provide full disclosure of everything that goes on in their bar in order to get the right coverage. “Obviously, something like a wet T-shirt contest will cause a little more exposure for the bar and a little more concern on the part of the insurance company,” she says. “Owners need to explain to their agent exactly what it is they’re doing in their venue. No insurer wants to see promotions for 3-for-1 drinks, or free drinks, because it makes them nervous that the bar may be over-serving. And they factor all of that into their rates.”

A standard insurance plan for a nightclub might include general liability with limits up to $5 million; property coverage for buildings, tenant improvements, furnishings and loss of income; liquor liability; non-owned or hired vehicle; assault and battery; workers compensation; and accidental injury.

According to McCullers, the most common claim within the nightlife business is assault and battery, and on-premise occurrences increase in proportion to the amount of liquor sold.

“Whether you own a restaurant, neighborhood bar, nightclub, or upscale martini bar, there is always the unfortunate chance that you will encounter a claim,” says Carol Kristiansen, President of KEL Insurance Services, LLC, with offices in Solesbury, Pennsylvania and Solana Beach, California. “To protect yourself, we highly recommend that any nightclub or establishment purchase insurance coverages to include General Liability, Liquor Liability and Assault and Battery.”

“Loss history is another important factor,” says McCullers. “If the bar is attracting a crowd that tends to cause problems, that will be a red light for an insurer. If you’re hosting an event that requires 25 bouncers, the companies will get very nervous. Something like a mechanical bull, that is an exposure that needs to be separately insured, and not too many companies will cover something like that under one policy. It has to be shopped a little bit more carefully than the average tavern.”


Larry Stoddard III is an Associate with Avelino Nitkewicz LLP in New York City.