Most people think that a business lawsuit is something that happens to other people and other businesses. That is until it happens to you.
Even if you are the most responsible, savvy business owner you are not immune to the potential that an injured client or greedy plaintiff’s attorney will file suit against your company (and maybe even you, personally). According to Forbes, nearly half of all small businesses are involved in some type of litigation every year. But there are some ways you can help make the process easier on yourself and mitigate the financial and emotional stress. Read on below to find out what to do in case of a business lawsuit.
When can a business lawsuit happen?
To reduce your chances of being sued, the first step is to figure out where you could potentially be liable or otherwise legally and financially responsible. Since the goal of a civil lawsuit is to end a dispute between two parties (businesses and individuals), it’s important to be aware of the possible scenarios and situations that lead to these cases.
- Contract disputes. They happen when any party in a contract has a disagreement regarding any of the contract terms or definitions, or in other words, when a breach of the contract takes place. They are a very common source of liability for businesses: this article in RocketLawyer points out that this type of lawsuit makes up about 60 percent of the roughly 20 million civil cases filed every year.
- Torts. Other civil wrongs small businesses encounter are called “torts.” These could be property torts, liability torts, dignitary torts, infringement liability, and negligence. The typical scenario leading to property damage lawsuit happens when the landlord of a commercial business location sues the business for damages in the property. Slip and fall accidents are also considered torts, as well as any incident where a customer gets injured while in the business or while using items the business produces. As a common-sense measure, make sure your store or business location complies with the highest standards of safety and hygiene.
- Breaches in the hiring process. Under federal law, an employer cannot illegally discriminate in its hiring process based on a job applicant’s race, national origin, gender, pregnancy, age, disability, or religion. Have that in mind when you’re hiring new staff. If you’re hiring for the first time, these tips can help you be compliant.
- Violations in intellectual property. Be aware of copyrights, patents, and trademarks. When you use another firm or individual’s intellectual property for your own business and benefit, you could be liable for theft and money damages.
- Problems with employees and competitors. Having employees is another risk factor, as well as signing a large number of contracts, especially if they’re complex ones. Even your own success may expose you to lawsuits: competitors could file claims to slow your progress or disgruntled employees could make claims that aren’t valid. It may sound obvious but always do your best to keep your employees happy. By taking some simple measures you will exponentially reduce the possibilities of being sued by your employees.
Have in mind that not every business runs the same type and level of risk. Your chances of getting involved in a business lawsuit can depend heavily on your exposure. For example, if you have a business storefront, it’s possible that you could get sued by someone who slips and falls on a wet front step. In contrast, if your business only operates online, you don’t have this same exposure, but your chances of infringing property rights are bigger.
What can you do to prevent a business lawsuit?
As with most things in life, it’s a good rule of thumb to prepare for the worst but hope for the best.
Measure 1: Get the best possible insurance
For most businesses, it’s wise to have insurance against a possible business lawsuit. General liability insurance typically serves as the first line of defense. It will usually cover lawsuits related to false advertising, property damage, claims of an injury on your property, and similar occurrences that may prompt a lawsuit. Depending on the exact nature of your business, you may require more specialized insurance.
Learn here the best insurance for your small business
If you have insurance, your policy will usually cover attorney fees, the courtroom costs, and often the money (or “damages”) you may have to pay as part of a settlement. In short, insurance provides your small business with financial protection so you aren’t at risk of losing your business because of a lawsuit. Of course, if you feel like you need business insurance, you may want to consider examining the policy closely. Be sure to ask your insurer specific questions like, “What does your business insurance cover?” and “Does your business insurance cover lawsuits?”
Measure 2: Have a lawyer on your side
Another good way to be prepared for a business lawsuit is to have a lawyer you trust on retainer. If you’re looking to find a lawyer after you’ve already been hit with a lawsuit, it can be difficult to find a reputable one. Instead, you’ll want to do your due diligence in advance in order to find a lawyer who is qualified and experienced in small business lawsuit cases. This might require paying a monthly fee so that when you do call, your retained counsel will pick up the phone.
What to do if your business is sued
First, realize that just because you receive a letter from a lawyer does not necessarily mean you have a business lawsuit. In other words, the first step is figuring out if you are actually being sued. Lawyers typically issue you what is called a “Demand Letter” or “Cease and Desist Letter” before a lawsuit. This letter will usually provide some of the facts (from their side), their demands, and the consequences of not heeding their demands. They are generally seriously phrased and official looking. If this is what you received from a lawyer or law firm, you haven’t been sued quite yet. But it’s best to reach out to your retained lawyer if and when you do.
If you’re certain your small business has been hit with a business lawsuit, there are some steps you can follow to alleviate the situation. Remember to take action as soon as possible: a lawsuit poses a serious threat to a business and any lost time can only make things worst.
Step 1 – Contact your lawyer
Your immediate first call should usually be to your lawyer, hopefully, one who understands you and your company. As long as you trust your lawyer (and, if you don’t, it’s a definite sign you need a new one), allow him or her to guide you throughout the process and give careful consideration to any advice he or she provides. Remember there’s no point trying to cover anything up, as dishonesty will only hurt your defense. Be honest with your lawyer about the allegations and stick to the true facts. Your attorney is there to help you win the case, not to judge you.
Step 2 – Contact your insurance provider
Following your lawyer, your second call should usually go to your insurance company so they know the situation and are put on notice. Read your policy carefully regularly so you know the correct steps to take so you don’t waive coverage. Hopefully, they will confirm that your general liability insurance will help protect you both for attorneys’ fees and money damages.
Step 3 – Consider a settlement instead of going to trial
A settlement may be the best course of action for a small business owner. Winning a case could be more expensive than settling, so don’t let pride affect your decision-making. Alternate dispute resolution (ADR), such as mediation or arbitration, can be a viable way to resolve issues while avoiding the costs of trial provided both parties agree to it. Ahead of time, you can also write provisions into your contracts that require disagreements to be solved through binding arbitration (in other words, a common agreement)—almost eliminating the chance of going to trial. Bear in minds that once you step into a courtroom, the legal fees will start to increase significantly and there is more risk that a judge or jury will not decide in your favor. And even if you’re not at fault for anything, the cost of going to court can put a financial strain on your business both in terms of financing litigation and the opportunity cost of being away from running your business.
A piece of advice during the process
Common sense suggests that while the small business lawsuit is active, you’ll want to avoid all contact with the person who is suing your business: the plaintiff. Even if you have a personal relationship with the plaintiff, you’re usually better off maintaining all communication through your attorney.
Make sure you never lie to anyone about the events related to the lawsuit, including your lawyer. Frankly, it’s better not to speak to anyone except your attorney.
There are a lot of grey areas when it comes to business law. Always be cautious. If you’re in doubt, don’t take any step until you’ve consulted with your attorney.
And after the business lawsuit is over…
Once the business lawsuit is settled, consider taking a closer look at how to avoid this type of litigation in the future. You may want to review the reasons why this lawsuit happened so you can take steps on how to prevent future lawsuits. Think about your business in the long term. Even if you didn’t do anything wrong, making a few adjustments to minimize the risks is well worth it.
If you found these tips useful, subscribe to Camino Financial Newsletter to stay on top on other trends that could help your business. It’s free and every week you’ll receive updates, news, and tips specifically curated for your success.