One benefit of sharing property is that you also share the risk of loss and liability. This makes co-ownership, in itself, a form of insurance. At the same time, in certain arrangements, you will need to purchase actual insurance in order to protect against loss of a magnitude that your group of co-owners cannot collectively swallow. And regardless of whether you buy insurance, you will want to deal with risk and liability issues in the co-ownership agreement that you create upon entering into this sharing arrangement.
Whether you are considering sharing a house, car, or lawn mower, start by brainstorming about the risks involved in your activity:
Avoiding or reducing risk usually means putting emergency plans in place, taking preventative measures (such as agreeing with co-owners that you will abide by certain rules, as well as buying fire extinguishers and keeping shared property in good repair), or avoiding certain activities altogether.
Certain risks that arise from a sharing group's activities will already be covered by existing insurance. For example, occasional group activities that occur at members' homes will likely be covered by homeowner's insurance. A casual carpool arrangement is covered by the driver's car insurance. In these situations, the individual home or car owner may be fine with carrying the risk. This is why we have insurance, after all.
But in some situations, the person bearing more risk might want other sharers to help pay insurance premiums or to pay for increased premiums resulting from higher liability limits or other coverage enhancements.
If a loss won't be covered by insurance, there are a variety of ways your group might distribute the risk. Typically, who pays for a loss will depend on who was responsible for it. For example, if a shared washing machine breaks unexpectedly, probably the whole group should pay for repairs. If the machine breaks because a member of your group misused it, probably that person should pay for repairs. And if the machine is a goner, you'll have to decide whether the group wants a fancy new model or a cheaper used replacement—and how this cost will be divided. These are all things you and your co-sharers could discuss in advance.
Some sharing arrangements place the burden or risk on one person—often, the owner of the shared property—and that could be a problem. For example, if three neighbors share a lawn mower owned by David, it doesn't seem fair to expect David to bear the full cost of repairing or replacing the mower if it dies after years of shared use. In addition, if one user of David's lawnmower has a bit too much to drink and takes it for a joy ride through another neighbor's prized rose garden, David shouldn't have to pay for that.
One way to deal with worries about where the risk falls is to agree to compensate the person who bears more risk. Lawyers call this "indemnification." For example, the group sharing a lawnmower may write this in their co-ownership agreement:
"We agree that if one of us causes the lawnmower to break through negligent use, that person should be responsible for repairing or replacing the lawnmower. If the lawnmower breaks and it's no one's fault, we will each chip in some money to help David pay for repairs or a replacement. If one of us is subject to liability arising from his/her negligent act or misconduct, that user shall hold harmless and indemnify David."
There may also be situations where a group will not want to be held responsible for one group member's stupid or reckless acts. A group that owns property together might use language like this:
"In the event that a member is subject to liability arising from his/her negligent act or misconduct, that member shall hold harmless and indemnify the group and each of the other group members, to the extent that the amount of liability exceeds applicable insurance carried by the group."
If a risk is not entirely avoidable, a group cannot or does not want to bear the risk together, and no one's insurance currently covers the risk, the next step is to look for insurance that covers your activity or shared item. We cover particular types of insurance in Part II.
Some group structures, like LLCs or nonprofit corporations, limit the liability of individuals who are members of the group. If your sharing group is large and will face some risk of lawsuits by outsiders, it might justify investing in a group structure that provides liability protection.