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Small business lawsuits: would your company survive?


Would your business survive a lawsuit?

Being sued ranks high on the worry list for small business owners.

Which is not surprising, really.  With over 100 million cases being filed annually in US state courts, the threat of a lawsuit’s very real. 

And lawsuits don’t come cheap. If a case drags on, you’re looking at legal costs of five, maybe even six, figures.

That’s not such a problem for larger organizations. They’ll often have a chunk of budget set aside specifically to deal with lawsuits.  But it’s not the sort of cash an SMB owner has just lying around. Footing the legal bill alone can be enough to put a small firm out of business.

Of course, the impact litigation has on your company isn’t just financial.

A lawsuit takes up so much of your time. Time you could be spending actually running your business. If the press gets hold of the case, any bad publicity can seriously damage your reputation.

So what can you do to up your chances of surviving one?

1) Understand the risks

There are risks involved with starting up and running any business. Understanding what these are and taking steps to protect yourself from them, is key to your firm’s chances of success.

Part and parcel of this is knowing where a suit’s likely to come from. Breach of contract, a faulty product, or breaking rules – any of these could bring one to your door.

But the two most common sources of small business lawsuits are your staff and your customers.

Employee suits

It’d be nice to think you and your employees are like one, big, happy family. That no-one would discriminate, or file a charge. And in many cases, that’s true. 

Unfortunately, research by Hiscox shows that 1 in 5 small businesses face employee suits. The most common grounds being:

  • Salary
  • Workplace harassment
  • Discrimination (over age, nationality, disability, gender, religion or sexual orientation)
  • Injury in the workplace
  • Wrongful dismissal

Typically taking around 275 days, employee lawsuits cost an average of $125,00 to defend. And that’s before a case gets to court.  If it does go to trial and you lose, you’re looking at damages averaging $200,000. With 25% of judgments costing more like $500,000.

Customer suits

Customers might sue because they’re not happy with the product you sold them, or the service you gave. Or because they got injured on your premises.

They might have grounds. They might not. Don’t assume because you run your business in an ethical manner everybody else does. Sadly, more and more frivolous suits are being filed every day.

Thing is, even if the case is groundless, you’ll still have to find the time and money to defend yourself.

Yeah. It sucks. But there are steps you can take now to protect yourself and your business.

2) Limit your liability

Incorporate your business in a way that shields your personal assets.

Being a sole proprietor may be easy on the pocket and paperwork, but it does mean that the buck stops firmly with you.

An LLC (limited liability company) separates you from your business. If there’s a loss, incident, or claim made against your business, you’re not held personally liable.

3) Stick to the rules

Limit the risk you’ll be fined, or face a lawsuit, by keeping on top of your industry rules and regs.

And make sure you’ve got the right licenses and permits. Remember, it’s not just the federal ones you need, there’ll be state licenses you’re required to have, too.

4) Line up legal support

Get yourself a decent lawyer.

Different kinds of cases call for specialized attorneys. But before there’s even a hint of a problem you want access to a commercial lawyer who’s familiar with your industry. And who’s there for you to consult on a day-to-day basis.

They’ll be able to review contracts, advise you on things like intellectual property rights and HR issues. They’ll also be your first line of defense if your firm looks like it’s landed in legal hot water.

5) Get it in writing

As well as contracts with all investors, you want to make sure you’ve got contracts with every single employee and independent contractor. Don’t be tempted to use a template you pulled off the internet. Get your lawyer to draft them.

It’s also worth having a handbook giving clear guidelines for employees on company policies, rules and behaviour in the workplace, and regarding social media.

Make sure all employee complaints and disciplinary problems are in writing and document the steps you took to address these. That way you’ll have a proper record if there’s a problem later on.

6) Cover up

Make sure you’ve got the right insurance, so your firm’s finances are protected, too.

There’ll be some coverage investors and clients insist you have. And some you’re required to have by law. But it’s worth checking if you need other policies, too, like patent infringement or automobile liability insurance.

And if you run your business from home, your home insurance policy may not be adequate. You’ll most likely need business owner’s coverage to cover theft, third party injury and product liability.

Here’s a quick run-down of some of the products available:

General liability insurance is designed to protect your business from claims of physical damage to property or people. If you visit clients, or they come to you, this policy’s a must. It also protects you from personal injury claims, like someone accusing you of publicly bad-mouthing them. Your policy can cover medical expenses, legal fees and compensation, if you’re liable.

Professional liability insurance, or errors and omissions protects you from claims you’ve made a mistake or left something out. It’s coverage you want if you offer a professional service or advise clients. Because if you do, you can be sued for professional negligence. If that happens, your insurance can hire you an attorney, cover your legal defense costs and pay damages, too, if you’re liable.

Workers’ compensation insurance is required by most states even if you only have one employee. But as the cost of workplace injuries can be crippling to a small business, it’s well worth having anyway. It can cover medical expenses, legal costs, loss of earnings, and damages.

Directors’ and officers’ insurance protects your personal assets. Because as a company director, you can be sued personally if someone – a client, employee, investor, even a competitor – thinks you’ve done something wrong. Like mismanaged funds, or treated staff unfairly. And as spouses can be named in suits, the policy can protect their assets, too. By taking care of legal costs and compensation, if you’re found at fault.

Cyber liability insurance is the coverage you need to survive a cyber attack. It takes care of your recovery expenses, including: your legal costs and damages if you end up facing a class action suit for losing client data; regulatory fines and penalty payments; and repairing your damaged reputation, as well as your website.

How much is enough?

As for how much cover you need it’s always safer to over-estimate. Imagine the worst-case scenario and go for as much as you can afford. It’s worth it. Having the right insurance keeps you in business when things go wrong. And safeguards your assets.

If you’d like to know more check out InsuranceBee’s small business insurance.

Or if you need some help, call us at 978.344.4215. We’ll find a package to fit your firm’s exact needs.

Image used under license from Shutterstock.

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