Owners of residential and commercial buildings face potential liability for accidents which occur on the property’s premises. Two premises liability cases found their way into the top ten civil damage awards in Arizona during 2010. In LeClair v. Lumberman’s Building Center, the jury awarded $3,900,000 to a truck driver who slipped and fell on black ice. The accident occurred at the Lumberman’s Building Center and caused the truck driver to lose his leg. In Kerege v. Viscount Hotel Suite, an elderly woman fell down carpeted stairs in a hotel atrium, ultimately, caused her death. The jury awarded the plaintiff $3,000,000.
These two cases illustrate the need to form an Arizona Limited Liability Company (LLC) to protect the personal assets of the owner. Imagine you just purchased a small strip mall in Phoenix. You depend on this strip mall as one of the assets to help fund your retirement. However, when you purchased the strip mall, you did not have title to the strip mall held in an LLC. Rather, you personally held title to the mall believing an insurance policy covering the strip mall sufficiently fully protected you against any lawsuits and judgments arising from the real estate.
The insurance policy on the strip mall covered the first $2,000,000 of damages occurring to any person on the property. During a rainy monsoon day, a prospective plaintiff slips on the sidewalk of the strip mall and injures themselves badly. The upset plaintiff sues the owner of the real estate, i.e., YOU, and the jury awards the plaintiff $3,000,000 in damages. Your insurance company pays the policy limits of $2,000,000, but you now have a $1,000,000 problem, which is the unpaid amount of the judgment. Guess where the plaintiff will collect the additional $1,000,000. If you said from your life savings you are correct. Unfortunately, the plaintiff will be able to collect the unpaid amount of the judgment from your personal assets. The strip mall you depended on to help fund your retirement has caused you to expend other personal assets you depended on for retirement to satisfy a judgment on a lawsuit.
This disaster could have been avoided if the property owner had formed an Arizona LLC to hold title to the real estate. The general rule regarding property held or a business operated through an Arizona LLC is that the owner(s) of the LLC are not liable for the debts or obligations of the company. People form LLCs to protect their assets from things that go wrong with investment real estate and businesses. Thus, in the above example the property owner could have protected the owner’s life savings by forming an Arizona LLC and transferring title to the strip mall to the LLC.
Important Lesson for Business Owners & Investment Real Estate Owners: Insurance is always your first line of defense, but your second line of defense is the LLC.