By Donald S. Malecki, CPCU

With the recent enactment of statutes governing limited liability companies, producers must be careful not to confuse these companies with limited partnerships even though part of the liability coverage requirements are the same..

.Briefly, a limited partnership is an entity comprised of at least one general partner and one or more limited partners. The general partner manages the entity and therefore has the same rights and unlimited liability of an ordinary partnership..

.The limited partners, on the other hand, have no voice in the operation of the business. Their primary obligation is to make capital contributions as required by the general partner. From the standpoint of accountability, the liability of limited partners is limited to the amount of their investment..

.Unlike a partnership, which can be formed simply by agreement among the partners, a limited partnership is a creature of statute. This means that the limited partnership is not officially recognized until the general partner applies for approval to the state of domicile and complies with all statutory requirements..

.There have been some cases where a limited partnership was not filed with the state properly and not discovered to be noncompliant until after a suit arose. In such cases as this, limited partners' liability reverts to that of the ordinary partnership., i.e., from limited to unlimited liability. This same type of result can also come about if the limited partners become too active (contrary to statute) in the business activities..

.Nature of the limited
.liability company.

.The concept of the limited liability company is an innovation created by an IRS ruling in 1988. Also a creature of statute, the limited liability company is intended as an alternative to corporations so as to provide its members with limited liability, comparable to the members of the limited partnership, but with active voice in the company's management, a characteristic normally associated with a corporation..

.Members of the limited liability company, therefore, have the best of both worlds, because they (1) enjoy limited liability, (2) maintain an active voice in the company's management, and (3) obtain certain tax advantages. Specifically, the members are taxed as though they are sole a proprietor or partnership and unlike the double taxation of a corporation. Because state statutes govern these entities, however, there are likely to be some differences among them..

.Planning insurance protection.

.The nature of the liability insurance that may be required by these kinds of entities, apart from the usual primary and excess liability policies, will vary. For example, if the entity is comprised of professionals, a professional liability policy will likely be required for the members. The laws must also be checked to determine applicability of workers compensation insurance..

.From a commercial general liability standpoint, both the limited partnership and limited liability company must be specifically designated as such in the policy declarations..

.The appropriate CGL policy provision that singles out the need for the designation of a limited partnership is the last paragraph of the Who Is An Insured provision, which reads:.

.No person or organization is an insured with respect to the conduct of current or past partnership or joint venture that is not shown as a Named Insured in the Declarations..

.Producers need to be keenly aware that the CGL policy must include both current and past limited partnerships on the policy or there can be problems. In fact, cases involving the failure to designate such partnership or joint venture on pre-1988 CGL forms are legion..

.The manner in which a limited liability company is handled under CGL forms can be somewhat puzzling to some producers because the designation "limited liability company" more closely resembles a corporation than a partnership or joint venture..

.Nonetheless, the Insurance Services Office has decided that the limited liability company should be treated the same as a limited partnership insofar as general liability is concerned. Until supplies of CGL forms are reprinted by insurers, an endorsement has been made available that amends the Who Is An Insured provision with the following:.

.1. If you are designated in the Declarations as:.

.c. A limited liability company, you are insured. Your members are insured, but only with respect to the conduct of your business. Your managers are insureds, but only with respect to their duties as your managers..

.Limited partnership liability policy.

.In addition to general liability insurance, there is insurance available through a limited number of insurers referred to as "limited partnership liability coverage." Specimen copies of these policies resemble the directors and officers liability policy as available for corporate officers and directors, except that the provisions are changed to correspond to the nomenclature of the limited partnership..

.Based on this writer's experience, general partners generally turn down the opportunity to purchase this kind of policy. Part of the reason may be that they do not understand the policy's purpose until the general partner gets sued by the limited partners for some kind of alleged action that results in monetary loss..

.There have been some cases where general partners have looked to the CGL policy protection only to learn that the kind of legal actions filed against them by the limited partners do not constitute "property damage," as defined by the CGL forms..

.On the other hand, some general partners feel they have such an iron-clad hold harmless agreement from their limited partners that a legal action is not going to go far in terms of time and legal expense. However, what they sometimes fail to realize is that they can be sued by third parties alleging economic damages not based on bodily injury, personal injury, advertising injury, or property damage..

.Sometimes these kinds of policies also are rejected by prospective limited partners because of price. It is uncertain the extent to which underwriters take into consideration the hold harmless agreements imposed by general partners. But these contracts also should be considered, since the price of these policies, for the most part, are on the high side..

.Limited liability company policy.

.It is uncertain what the market availability is with respect to the limited liability company policy. It would take as much effort to manuscript this policy as it would the policy for the limited partnership. The procedure would simply be to take a D&O liability policy and substitute the terms with nomenclature that corresponds to a limited liability company..

.Even if no stockholder suit exposures exist or the chances of legal actions between members of the limited liability company seem minute, a need still exists for this kind of policy. The need arises for the same reason it does with a limited partnership, i.e., any time a claim or suit is made against the entity by a third party alleging economic loss, or damages not based on bodily injury, personal injury, advertising injury, or property damage..

.Conclusion.

.Even though the legal characteristics of a limited partnership and limited liability company are different, they both are handled similarly from the standpoint of general liability. The fact that the CGL forms require past such entities to be named, underscores a very special caveat for producers: to maintain a list on the policy as long as possible..

.In light of legal actions that seek damages against legal entities for economic loss based on reasons other than injury or damage, as commonly defined in commercial general liability and umbrella policies, it is also necessary to recommend special insurance comparable to the D&O liability policies available to for-profit corporations..

.Producers need to be careful that if a D&O liability policy is issued for a limited partnership or limited liability company that the verbiage of the policy correspond to the respective nomenclature of the entity in question..

.Even though most such special policies, at least for limited partnerships, are rejected based on price or other reasons, it is still worth the producer's effort to offer the coverage whenever possible.