How to keep people from suing my start-up business
September 23, 2005 11:08 AM   Subscribe

BusinessLiabilityFilter -- Do we need product liability insurance for our start-up mail order business that sells repackaged craft supplies to kids?

My husband and I are looking at starting a business that offers craft kits for kids by subscription. We'd take basic supplies -- a few pipecleaners, string, paper, stickers, sandpaper, whatever -- and provide instructions for making a craft. These supplies can be purchased at any craft or dollar store or even Wal-Mart. We wonder if we create a liability for ourselves, such as if a kid stabs herself with a pipecleaner. We were planning to include a note that says parents are best able to determine age appropriateness of crafts -- and we're gearing our kits to four- to eight-year-olds. If we are potentially liable, we want to know the best way to protect ourselves -- incorporation, insurance or something else. We're in Canada, but would sell 90%+ to US customers, if that helps. Thanks.
posted by acoutu to Law & Government (12 answers total)
acoutu, you might want to contact your local CAA for business liability insurance. they deal in this sort of insurance - funny, because CAA stands for canadian auto association - but they do provide home and business insurance as well, and the rates are reasonable.

I was looking for commercial liability insurance and E&O for a government contract (it was one of the pre-reqs) and talked with them about rates.

The nature of my consulting business caused me to look elsewhere for insurance, but the folks at the BCAA were helpful and would likely write you a policy.

In addition, you should consult a lawyer for the disclaimer that is being sent with the products that you sell. As you know, we Canadians are less litiginous than our American cousins, but if most of your business is to sell to the States, then you may find that you need either a well-worded agreement (products sold AS IS, buyer takes responsibility) or an iron-clad liability insurance product.

Send me an email if you want to discuss further - it's in my profile.
posted by seawallrunner at 11:25 AM on September 23, 2005

You need the insurance. You might also want to consult with an attorney about setting up a structure, such as incorporating, whereby you lump all of your liabilities and assets associated with the business together and separate from your personal assets.
posted by caddis at 12:04 PM on September 23, 2005

You definitely need to talk to a lawyer AND get the insurance. Even if you're only re-selling products, you expose yourself to the strict liability laws of the US by selling in the US. Strict liability means that if someone gets injured, you're liable even if you didn't do anything wrong, and this can include crafts made with your kits.

Also, what caddis said...shielding yourself from liability is never a bad idea.
posted by elquien at 1:41 PM on September 23, 2005

Strict liability means that if someone gets injured, you're liable even if you didn't do anything wrong, and this can include crafts made with your kits.

I am not sure it is quite that scary. Here is some info on strict liability.
posted by caddis at 2:01 PM on September 23, 2005

Sorry...I was trying to simplify a complicated subject area and make it clear that even if acoutu behaves carefully, he can still be sued. Obviously no one should proceed based solely on legal information given over Metafilter.
posted by elquien at 2:16 PM on September 23, 2005

posted by rmhsinc at 4:44 PM on September 23, 2005

One of the major purposes of incorporation, such as a limited liability corporation is to limit liability. Except for things like fraud or other criminal acts, or gross negligence, the liability of the owners of the corporation is limited to the money they have invested. So, for example, if the business fails, and declares bankrupty, the owners aren't at risk to lose (say) their homes, personal bank accounts, etc.

Incorporation costs money (legal fees, paperwork), but I'd guess it would be less expensive than liability insurance.

Also, I'd guess that you're not required by law to have product liability insurance.
posted by WestCoaster at 4:47 PM on September 23, 2005

For a couple of businesses that I've started, I decided that, up front, I'd pick between incorporating or buying professional liability coverage. Either one would shield my personal assets. In both cases, I elected to incorporate. When one of those businesses did well, I took the plunge and got an E&O (errors and omissions) policy, which would protect that corporation from losses.

I don't think there's anything wrong with taking this route. In your case, you'd need products liability coverage, which is inherently more expensive. Talk to an independent insurance agent about the costs, but I suspect you'd find that it's cheaper to start off with a corporation. Once that corporation becomes sufficiently valuable that you wouldn't be willing to lose it in the face of a claim, that's when you'll need to invest in products liability coverage.

As of the 15th of this month, IANAIA (I Am Not An Insurance Agent), so this ain't professional advice anymore. :)
posted by waldo at 6:18 PM on September 23, 2005 [1 favorite]

Response by poster: Yikes. I just wanted to set up a little mail order business that would do a few thousand dollars a year in trade. I got a quote on commercial insurance -- $1000-$2500/yr. If I just incorporated, would I keep my personal assets out of harm's way? I can deal with my corporation being liable -- if I started doing any serious money, I'd get the insurance. But a lawyer and expensive liability insurance would choke my business before I really got it going.

(And, yes, I recognize that Metafilter is not a substitute for legal advice.)
posted by acoutu at 9:33 PM on September 23, 2005

You will probably find that incorporating your business is much cheaper than you thought, even given the legal fees. You might call some lawyers tell them your concerns and ask them how much it will cost for them to help you. You can frequently get some free legal advice, the very basics, during the interview to decide whether you will hire the lawyer. Cover the tax implications as well. Not all lawyers will grant you a free interview, and most are short, 15 minutes or so, but for very basic, run of the mill situations like these you would be surprised what you can cover in 15 minutes. You can also sometimes get good advice through the local chamber of commerce or similar small business organizations. Do such organizations exist in Canada? They might also be able to prep you about the issues so that your time with the lawyer is more fruitful and they will also likely be able to recommend some lawyers to you.

Your kits do not sound particularly hazardous, but perhaps some of the small parts would represent a choking hazard.
posted by caddis at 8:59 AM on September 24, 2005

Are you making the craft kits or just selling them? I'm thinking in the event of injury, the injured is going to go after the party with the deeper pockets. (Not you as a small startup) It is likely the original manufacturer of the items you are selling will carry product liability insurance, but It is not clear to me to what extent you are modifying the original items to make these kits.

Product liability insurance and business insurance carry very different price tags. I made the business decision to carry only a general liability policy for my business. You can insulate yourself somewhat by forming an LLC and putting ugly disclaimers on your packaging, but this only goes so far.

Owning your own business carries risk. IANAL, etc.
posted by freq at 9:50 AM on September 24, 2005

acoutu - i'd love to be a customer. do you have a blog that would announce when you might launch?
posted by phildog at 7:33 AM on September 27, 2005

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