If you own a business, you want to limit your liability exposure. Today’s liability limitation efforts  require a multi-layered approach. This article explores three fundamental strategies that, when properly implemented, create a robust liability protection framework: the corporate veil, contractual limitations, and insurance coverage.

The Corporate Veil: Structure Matters

The limited liability company (LLC) has become the preferred business structure in North Dakota and Minnesota, and for good reason. The corporate veil provided by an LLC creates a legal separation between business and personal assets, protecting business owners from personal liability for business debts and obligations.

North Dakota and Minnesota courts have consistently upheld the corporate veil doctrine, recognizing its essential role in promoting entrepreneurship and economic growth. This public policy stems from the understanding that limiting personal liability encourages business formation and risk-taking, which drives economic development. However, this protection isn’t absolute – courts may “pierce the corporate veil” if business owners fail to maintain proper corporate formalities or use the entity for fraudulent purposes.

Key considerations for maintaining corporate veil protection:

• Maintain separate business and personal accounts
• Document major business decisions
• Follow corporate formalities
• Maintain adequate capitalization
• Avoid commingling personal and business assets

Contractual Limitation: Freedom To Contract

North Dakota’s and Minnesota’s public policy favoring freedom of contract provides businesses with significant latitude in negotiating liability limitations. This principle allows parties to allocate risks and responsibilities through carefully crafted contractual provisions.

Effective contractual limitations might include:

• Damage caps
• Warranty disclaimers
• Indemnification provisions
• Alternative dispute resolution requirements
• Choice of law and venue provisions

However, certain limitations exist. Courts may invalidate contractual provisions that are:

• Unconscionable
• Against public policy
• Product of fraud or duress
• Attempting to limit liability for intentional wrongdoing or gross negligence

Insurance Coverage: The Risk Transfer Mechanism

While corporate structures and contracts provide important protections, insurance remains an important mechanism for transferring risk. A comprehensive insurance strategy is essential for addressing risks that cannot be completely eliminated through other means.

Critical insurance considerations include:

• General Liability
• Professional Liability
• Employment Practices Liability
• Cyber Liability
• Property and Casualty
• Business Interruption

Integration: The Synergistic Approach

The true power of liability limitation comes from the strategic integration of all three fundamentals. No single approach provides complete protection. The strongest liability limitation strategy leverages all three fundamentals in a coordinated, comprehensive approach to risk management. Each element strengthens the others:

1. The corporate veil provides foundational protection.
2. Contractual provisions define and limit specific risks.
3. Insurance fills gaps and provides resources for defense.

If you need help protecting your business, please call or email SW&L’s Business Law team.

This article is for information purposes only and is subject to our disclaimer.