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Did you know that business lawsuits cost small businesses more than $100 billion each year? As our society grows increasingly litigious, it’s more important than ever to protect your business and personal assets from lawsuits. Being a business owner makes you a target for a slew of lawsuits that may be filed by an employee, client, vendor, or even another business. It’s not a matter of if it will happen to your business, but when. Although some of these lawsuits will be frivolous, they pose a threat to your business’s assets should a judge rule in favor of the complainant.
Sometimes a person will file or threaten to file a lawsuit in the hopes that you’ll agree to settle out of court to avoid a long and costly legal battle. Planning ahead and protecting yourself can also help avoid these out of court settlements.
In this article, we’ll discuss the most common grievances, the best ways to protect your business from them, and what to do if your business is sued.
As a self-employed professional or business owner, you could face any of the following grievances:
Depending on your state’s limit, cases ranging from $3,000 to $10,000 in damages will be tried in small claims court. Complaints involving higher damages will likely be tried in a state court. If the lawsuit includes violation of the U.S. Constitution or federal law, one of the federal courts will typically hear the case.
Some of the lawsuits brought against you will likely be frivolous and unwarranted. Unfortunately, other claims will have merit. There are steps that you can take to protect your business from lawsuits with and without merit.
Operating your business at the highest standard is one of the best ways to avoid customer-related lawsuits. This includes providing exemplary customer service and a high-quality product or service. A lot of claims filed against businesses are by disgruntled customers who were unhappy with the customer service or product/service they received. When a customer comes to you with a complaint and is seeking an acceptable resolution, don’t just pay lip service to the matter. If you, as the business owner, go out of your way to make the customer happy, you could avoid a lawsuit.
To avoid injury-related claims, you need to make sure your premises are well-maintained and safe. To avoid discrimination-related claims, your employment policy needs to include statements about treating all customers fairly and respectfully regardless of age, race, sex, sexual orientation, religion, or disability. This may require diversity or cultural sensitivity training.
Take proactive steps to create a work environment that’s anti-harassment and anti-discrimination. Consult with an employment defense attorney before reprimanding or firing an employee to ensure that you’re doing so in a way that won’t come back to haunt you. The money that you’ll spend on the attorney’s consultation fee will pale in comparison to what you’d pay if an employee sued you and won the case. Retaining the employment defense attorney to deliver anti-harassment and anti-discrimination training to all employees and to draft/update employee handbooks is another way to protect your business’s assets.
A detailed complaint procedure should be issued to all employees with proof of receipt required. This will protect you in the event that an employee files a lawsuit but failed to properly report the infraction. Taking all complaints of improper conduct seriously and showing employees that you do can go a long way towards avoiding a lawsuit.
To avoid wage/pay related lawsuits, make sure employee wages are compliant with legal standards and that employees are fairly compensated for all hours worked, including overtime.
As a business owner, it’s important that you separate your personal assets from those of your business. If you don’t legally establish a separate business entity, you leave yourself open to claims against your personal assets. If a claimant is awarded damages in an amount greater than what you have in cash, you could lose your home.
Here are the available business structures and the liability protection each provides:
The right kind and amount of insurance will guard your business against the types of lawsuits you’re most likely to encounter. If you’re not sure which type of insurance your business needs, take a look at these different types of business insurance and what the policies typically cover. Don’t assume that a general liability policy is enough to protect your business – it doesn’t cover sexual harassment or auto-related injuries. Those incidents would require specialized insurance such as employment practices insurance or commercial auto insurance.
A general liability insurance policy will protect your business from some of the most common risks that business owners face. It’s the minimum amount of insurance that your business should carry. General liability will protect your business from non-employee claims of bodily harm, property damage, and damage to reputation (i.e. defamation). If a non-employee brings a lawsuit against your business claiming that your business is responsible for their damages, your general liability policy will cover the claimant’s medical bills, repairs to property, and your legal fees.
If your business generates a fair amount of foot traffic, you are at greater risk of physical injury lawsuits so you must purchase a general liability policy and keep it from lapsing.
Professional liability insurance, more commonly known as Errors & Omissions (E&O), is a type of liability insurance that protects professionals whose business involves providing advice or a service. If a professional is negligent in providing services and the client suffered a financial or other loss as a result, the incident is typically covered under this policy. General liability insurance addresses more direct forms of harm so wouldn’t be adequate for this type of claim. In the event of a negligence lawsuit, E&O insurance would help professionals with the cost of legal fees and awarded damages.
Depending on the profession, E&O insurance is known by other names such as malpractice insurance (medical) and lawyers professional liability insurance (legal). In some states, E&O insurance is required by law for certain professions.
Commercial auto insurance is highly recommended if you frequently drive your personal vehicle for business purposes or if you have employees who drive company vehicles. A commercial auto insurance policy will cover the cost of repairs, medical bills, and legal fees in the event that you or your employees are involved in an accident. This type of insurance will also pay for repairs if your personal vehicle or company vehicles incur non-accident damages such as theft, vandalism, severe weather events, and collision with an object.
You may also want coverage for medical expenses regardless of who is at fault. General liability insurance will protect your business from general claims of bodily harm but you still need commercial auto insurance to protect your business from lawsuits concerning car accidents.
If your employees drive their personal vehicles to conduct business on your behalf, your business can be held liable for accidents that occur. For example, if you regularly have employees make bank deposits in their own vehicles, your business would be responsible for any damages should an accident occur during one of these runs.
Standard commercial auto insurance wouldn’t apply in this case because it doesn’t cover employees who drive their own vehicles for business. Hired and Non-Owned Auto Insurance (HNOA) offers liability protection if your employees frequently use their personal vehicles to conduct company business.
If your business regularly rents vehicles (to haul goods or transport passengers), HNOA insurance will cover the cost of any damages that result from an accident. HNOA insurance doesn’t cover accidents that occur during commutes, accidents that happen while employees run personal errands during work, or physical damages to the rented vehicle. For this reason, it’s recommended that it be purchased as a rider to a standard commercial auto insurance policy instead of as a standalone policy.
Employment Practices Liability Insurance (EPLI) will cover your legal fees and any awarded damages should a former, current, or prospective employee file a lawsuit against your business claiming that his/her civil rights were violated. Because EPLI is a type of Errors & Omissions (E&O) insurance, it’s often added to an E&O policy. According to a study by Hiscox, EPLI lawsuits are among the most expensive claims that businesses encounter. The average claim costs $160,000 for legal fees and settlement, so investing in coverage is essential.
Any business with employees can be exposed to employment-related lawsuits and there are numerous acts that can trigger a lawsuit. The wrongful acts may occur during the interview and evaluation process or after candidates have been hired. Some of the acts covered by EPLI include:
Despite your best efforts to avoid a lawsuit, you may find yourself facing litigation. Here are recommended steps to take if your business is being sued:
Disclaimer: This article isn’t a substitute for professional legal counsel. If your business is being sued, consult an attorney before taking any action.
When you receive the summons, the first thing you should do is contact an experienced business attorney. The attorney should specialize in the type of lawsuit filed against you since, for example, a faulty product case is substantially different from a sexual harassment case. Ideally, he/she is familiar with the court in which the lawsuit was filed. Don’t try to hide anything from your attorney; be completely honest and share all facts so that he/she is best prepared to defend you.
If, upon your review or your attorney’s, the caption and service information on the summons doesn’t contain the correct name of your business, or is incorrect in any way, you can move to have the lawsuit dismissed. If the information is correct, you should continue reviewing the document and the allegations against you. You should then put a litigation hold in place. A litigation hold (also known as “preservation orders” or “hold orders”) is a stipulation requiring a company to preserve all data that may relate to a legal action involving the company. This requirement ensures that the data in question will be available for the discovery process prior to litigation.
Because anything you say regarding the lawsuit can be used as ammunition by the plaintiff, legal experts advise against communicating directly with the plaintiff. All communication should be between your attorney and the plaintiff’s. Once the lawsuit has been filed, there’s no longer an opportunity to talk things over or reach an amicable resolution, so there’s no reason for direct communication.
If the plaintiff is a current employee or someone that you have an ongoing business relationship with (and must communicate with), do not discuss the lawsuit with them.
There are a number of business insurance policies available to cover various types of lawsuits. Accusations of copyright infringement and defamation of character are typically covered by general liability insurance. If a client alleges that your advice caused them to experience a financial loss, professional liability insurance (E&O) often covers this. If an employee files a suit against your business for sexual harassment or injuries sustained in the course of performing his/her job, employment practices liability insurance and workers’ compensation insurance, respectively, generally cover these incidents.
If the alleged incident falls under what your policy covers, it’s customary for the insurance company to pay attorneys’ fees, court costs, and any settlement or judgment amount if you’re found liable. If you feel that your policy covers the incident, contact your insurance company as soon as possible. You’ll most likely have to forward documents related to the lawsuit to them. If the incident is covered, the insurance company or their legal counsel will defend the lawsuit.
Even if the insurance company or their legal counsel is involved in the lawsuit, you should keep your attorney advised of any claims or actions against your business.
When you’re notified of a lawsuit, you’re given a deadline to respond to it, often within 30 days but this can vary from state to state. Your response should include:
Before you respond, make sure you fully understand the nature of the allegations against you and the potential liability and harm the lawsuit could do to your business. If the lawsuit is for a small amount of money, or if it can be resolved without the exchange of money, settling the case may be a better option for your business since legal fees and court costs can add up quickly.
Discuss with your attorney alternative resolutions to propose to the plaintiff and whether it makes sense. To help you decide on the best course of action, ask your attorney to detail the defense plan and give cost estimates at different stages of litigation.
Your insurance company’s level of participation may also affect how you choose to proceed with the lawsuit. If the alleged incident isn’t covered under your policy, you should find out approximately how much it will cost to pay legal fees and the judgment should the judge rule in the plaintiff’s favor.
Counterclaims could work in your favor so be sure to ask your attorney about the feasibility of a counterclaim against the plaintiff or a third party. If yes, this could take some or all of the liability off of you. If a customer files a lawsuit because they bought a faulty product from you, for example, the onus could be placed on the manufacturer of the product.
As a course of action, you may opt to file a motion for immediate dismissal of all or part of the complaint. However should you choose to proceed,
Being sued can be a disheartening experience and the litigation process can be lengthy and stressful. However, you can’t let it keep you from staying focused on your business. You still have a business to run and financial goals to reach.
Even if the allegations against you are false, put your pride aside and make a decision that’s in your business’s best interest. Some business owners are hesitant to settle because they feel that doing so is an admission of guilt. Will winning the case cost you more than settling it? If legal fees and the judgment will cost you $45,000 but you could settle the case for $25,000, settling is the best financial decision for your business.
Although the U.S. is growing increasingly litigious and the threat of facing lawsuits is real, there are steps that business owners can take to minimize their exposure. Providing exemplary customer service and a quality product or service will demonstrate your commitment to your customers and reduce the number of customer-related lawsuits you encounter.
If you take care of your employees by fostering a work environment that’s anti-harassment and anti-discrimination, and you adhere to legal standards concerning wages, you can reduce the number of employee-related lawsuits.
Even if you’re careful to conduct your business in an honest, ethical manner, you could still fall prey to lawsuits. Protecting your business by choosing a business structure that offers liability protection is essential. Add to that adequate business insurance coverage and you significantly minimize the risk of your business going under due to a catastrophic claim. If in doubt about the kind of insurance your business needs, consulting with a lawyer about potential exposure is always a good idea.
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