The Richest Partner is in the Most Danger


Mike, Olivia, Fred and Carl started Wishful Contracting as partners. They found out that they should never, ever do business as a partnership for a whole bunch of really good reasons. They decided that they would form an LLC and at the start of next year, they would start doing business as Wishful Contracting LLC.

Next year. Not now. For the rest of this year, they would operate as a partnership and they would fix it at the end of the year. After all, this was their busy season!

Fred’s Fire

Fred made a mistake on one of the job sites. While working a job at Important Computer Company, he set up a condensate drain pipe improperly. Rather than drain by gravity to the outside, he had mishandled an elbow fitting that let water pool in the pipe and leak at the joint. As if that wasn’t bad enough, the elbow joint was directly above an electrical outlet.

August started with a heat wave, so the air conditioning system at Important Computer Company was running all day long. The condensate pipe was full all the time, and a steady drip at the badly connected and poorly set up elbow joint worked its way down to the electrical outlet.

Important Computer Company ended business for the day, backed up their data, and shut down for the night. They turned off the air conditioning system as the last employee left for the day, but no one had any way to know that the condensate pipe was filled with water still dripping down the wall. By morning, water had seeped into the outlet and dripped on the power strip.

The manager showed up first and opened up for the day. When he turned on the switch in the main workroom, something sparked. There was a snapping sound and a flash, and then the lights went out. Thinking a breaker had been thrown, he headed to the breaker box in the storage closet to check the switches.

While he fumbled around trying to find the flashlight, he though he smelled smoke. Heading out to the main workroom, he saw flames licking their way up the wall behind a long table of half-a-dozen computers! He knew there was a fire extinguisher in the room, but with the lights out he wasn’t sure exactly where it was.

As the flames quickly grew larger, he saw the extinguisher and snatched it off the wall. He tried to read the instructions in the firelight, but it was too hard. He made his best guess, broke the seal, pulled the pin, and sprayed the fire. His efforts were able to put out most of the fire. He dialed 911 and the fire department came by to make sure the rest of the fire was out.

Tens of thousands of dollars of damage was done to equipment, and more tens of thousands of dollars in damage was lost in business while their quickly replaced their computer systems. To their credit, Important Computer Company worked quickly to get up and running to minimize their losses. Even so, total losses were more than $200,000.

They expected Wishful Contracting to pay for everything.

What’s Covered in Your Insurance?

It didn’t take long for the investigators to figure out what had happened. The fire hadn’t gotten anywhere near the ceiling, so the mistake Fred made was clear.

Olivia submitted the claim to Wishful Contracting’s insurance company, Really Cheap Insurance. The Really Cheap Insurance adjuster looked over the claim and determined that the problem occurred because Fred did not complete work to reasonably professional standards. Therefore, Really Cheap Insurance said, the claim was not covered under Wishful Contracting’s Really Cheap Insurance policy.

First, we need to make sure we have insurance.

Second, we need to know what’s covered in our policy.

Often, when people are hunting for insurance, they try to find the least expensive policy they can find. Landlords require policies to cover the premises and liability that might potential affect the landlord. Such a policy might offer zero protection for a business for work done off-site.

When you’re getting a policy, make certain you have the conversations and review the paperwork to make sure you’re covered for what you want covered.

Suppose Carl gets in an accident on his way to a jobsite, but he’s driving his personal vehicle. Is that covered under his insurance or under the company’s insurance? In at least one case I handled, two insurance companies argued over whose responsibility it was to cover an incident. Each claimed it was the other. The insurance companies could not agree, so the other party had to sue the driver in small claims court to get a judgment before either company would step in.

Who Pays When a Partnership Fails?

With a $200,000 claim looming over the partnership and no insurance to cover it, Wishful Contracting had a big problem. Liability was clear. They could fight it, but all that would do was delay things and possibly put them on the hook for enormous attorney fees. In short, they owed $200,000.

But the partnership didn’t have $200,000. The only partner who owned a significant asset was Mike. If the partnership had to pay, Mike was the only one with the ability to pay.

They talked to a lawyer who let them know that if judgment was entered against the partnership, that they would have what’s called “joint and several liability.” That would mean that if the partnership owed $200,000, any one of them could have their assets attached and have to pay that. Since Mike was the only one with any assets to attach, basically Mike would have a judgment lien on his property, potentially at 10% interest.

Understanding that, Mike decided to go ahead and take an equity line of credit out on his home and just pay it. The interest rate would be lower, the problem would be over, and Wishful Contracting might at least make enough money to pay him back.