Preventing "Piercing of The Veil" - Practical Tips For Food Companies - What to Do and What to Avoid (part III of III)
By guest blogger Jerry Chiang
The following list will help you preserve your liability shield and protect yourself from the liabilities of your corporation or limited liability company (“LLC”). This is not intended to be an exhaustive list but rather an illustrative list of activities that will either preserve one’s liability shield or undermine it.
Do’s:
• Properly capitalize the corporation/LLC, or in the alternative, obtain sufficient insurance to cover potential liabilities.
• Keep personal and business entity funds separate by creating a bank account for business entity funds and transactions.
• Hold oneself out as an officer or employee of the corporation/LLC.
• In transacting with third parties, make it clear that they are transacting with a corporation or LLC and not an individual.
• As a corporation, observe all formalities listed in your state’s corporation statute and the corporation’s bylaws. To learn more about Washington corporate formalities, visit the Washington Business Corporation Act.
• As an LLC, observe all formalities listed in your state’s LLC statute and the LLC’s operating agreement. To learn more about Washington LLC formalities, visit the Washington Limited Liability Company Act.
Don’ts:
• Avoid paying excessive dividends or distributions.
• Avoid below-market sale of assets to a shareholder, member or a third party.
• Avoid using business entity assets for personal purposes and vice versa.
More on Reducing the Risk of Failure - Focus on Shifting Liability For Consumer Claims
Food Safety Magazine ran an interesting piece by Aaron Krauss titled “Reducing the Risk of Failure.” The article was part of the magazine’s focus on limiting liability for food companies. Mr. Krauss includes a good discussion of the pros and cons of indemnities and disclaimers of warranty and liability as ways to shift or reduce liability for claims within the supply chain. Yet, the article does not discuss how to shift liability for claims from outside the supply chain, i.e., consumer claims.
For example, Mr. Krauss advocates that if members of the supply chain limited liability between themselves to the purchase price of the product, this might reduce or eliminate litigation. Mr. Krauss points out that “if everyone in the ‘peanut butter food chain’ had limited their liability, a store might not bother suing, since it could only recover its purchase price.”
Limitation of liability clauses, while effective to reduce exposure between members of the supply chain, will have no limiting effect on consumer claims. Unless a food seller can invoke a “passive retailer” defense, each member of the supply chain will be strictly liable for injuries to consumers caused by the food product.
The only ways for a food seller to shift consumer liability is through either supplier indemnity or insurance. Mr. Krauss is correct that indemnities by suppliers may be hard to secure and harder to enforce. And, claims defended by the seller’s own carrier will invariably result in higher premiums.
Because insureds will generally be penalized through premiums for invoking their own insurance, the best insurance is somebody else’s insurance. Even a food seller that might not have the leverage with its supplier to receive indemnification may be able to secure “additional insurance.” Naming a vendor as an additional insured frequently costs the supplier nothing in added premiums. If seller specifies that this insurance is to be “primary and noncontributory,” the supplier’s insurance may be the first line of defense for claims involving the supplier’s products.
If a supplier will provide additional insurance, follow-through is essential. The seller needs to (1) verify that the supplier has, in fact, named the seller as an additional insured and (2) review the operative language of the additional insured endorsement and/or policy language to ensure that it does not include unacceptable conditions or exclusions.
