Dangerous Asset

Dangerous Asset

Investopedia / Laura Porter

What Is a Dangerous Asset?

A dangerous asset is a piece of property or investment, which poses a risk of liability to its owner. Liability means that the owner of the dangerous asset could be sued or found legally liable for someone getting hurt. The term dangerous asset usually applies to a physical asset, such as a building, vehicle, or equipment.

Key Takeaways

  • A dangerous asset is an asset that poses a risk of liability to its owner and can include equipment or a vehicle.
  • Liability means that the owner of the dangerous asset could be sued or found legally liable for injuries or damage to property.
  • To reduce the financial impact from being held liable, businesses can buy liability insurance or establish an asset protection trust.

Understanding Dangerous Assets

A dangerous asset is an asset that poses a threat to the physical safety of another individual, thus creating a potential liability to the asset’s owner. Although accidents can occur with many types of assets, dangerous assets pose an added risk, particularly if the owner is aware of the danger. The result can be a financial payout by the company if they're sued by the individual injured by the asset.

For example, a bicycle rental company that owns a bicycle with a wobbly tire and rents it to a customer is exposing itself to the risk that the customer has an accident caused by that defective equipment. Assuming that this causation can be proved, the rental company will likely be held liable for the renter’s injuries and will owe damages to the injured party.

Although the wobbly tire in the above example can cause injury, the dangerous asset is the bicycle itself. The risk of liability and injury from a faulty asset can be minimized with improved equipment checks and investing in resources to improve maintenance and safety standards.

There is also an element of randomness to the risk an asset poses, which is sometimes referred to as an act of God. A dangerous asset can be inherently dangerous even when working as originally intended. A rented bicycle, a chair lift, or a heavy piece of equipment could all be considered dangerous assets since they could cause injury even when they function properly.

Reducing the Liability from Dangerous Assets

Although business owners have the risk of serious financial repercussions for the assets they own, there are methods in which the financial liability can be reduced.

Liability Insurance

Since dangerous assets pose a risk of injury to individuals and liability risk to the business, company owners can purchase liability insurance. Liability insurance protects a company or its owner from insurance claims filed against them as a result of injuries to people or damage to property.

Liability insurance pays for any financial costs that might arise from being sued in which the insured is found liable or legally responsible. Examples of liability insurance include workers' compensation, as well as commercial and personal liability insurance.

Asset Protection Trust

An asset protection trust (APT) is a trust agreement in which the assets placed within the trust provide protection from creditors, lawsuits, or judgments. Typically, trusts are used during the estate planning process, which helps to determine how a person's assets will be distributed upon death.

An APT can hold cash, securities, real estate, equipment, and intellectual property such as a patent. An APT can be held by a financial institution within the owner's country or within an international institution without offices in the insured company’s jurisdiction or residence. Since an asset protection trust (APT) is a complex financial vehicle, a financial planner is usually involved in establishing the trust.

Limited Liability Corporation (LLC)

Another common measure taken to protect owners of dangerous assets is the establishment of a separate entity such as a limited liability corporation (LLC) to own those dangerous items. Doing so protects the original purchasing entity from liability since the asset in question is technically owned by the LLC.