As a small business owner, you’re likely more concerned with cash flow, sales, and managing employees than getting sued. However, the reality is that small business owners will face the threat of a lawsuit at least once over the life of their business, and the financial impact can be devastating. A U.S. Chamber Institute of Legal Reform study revealed that 43% of small businesses were threatened with, or engaged in, litigation.
The financial hits of litigation can be far more damaging to a small business than to a large one, which often will staff in-house legal counsel and devote a portion of their budget to legal defense. It’s important that small business owners understand business liability insurance and what kinds of coverages you need.
Business owners who’ve had to pay legal damages say the costs nearly put them out of business. But the effects of litigation can go far beyond crushing financial losses. A lawsuit can harm your business’s reputation, especially if it paints your business in a negative light and if the case is publicized by local or national media. It also can put stress on you and your employees.
Why Small Businesses Get Sued
Small businesses are sued for a wide variety of reasons, from breach of contract and product defects, to employee relations and noncompliance with federal regulations (such as the Americans with Disabilities Act).
The two most common sources of small business lawsuits are employees and customers:
Many small business owners treat their employees like family, forging a tight bond over a common goal of growing the business in a way that’s mutually beneficial. However, the occasional unhappy employee—who feels as if their boss has mistreated them—will sue. According to a Hiscox study, nearly one in five small businesses will face employee litigation, which can cost upwards of $125,000 to defend. Of the cases that go to trial, 25% result in a judgment of upwards of a half million dollars.
Employees who feel they are unfairly disciplined or terminated may be tempted to sue for retribution or to recoup any financial loss they suffered due to their employer’s action. Or they may sue because they feel their managers did not adequately address a complaint they reported. Here are six common types of employee lawsuits:
- Wage and salary violations
- Workplace harassment or hostile work environments
- Violation of EEOC federal workplace discrimination laws, including bias against age, disability, religion, gender, retaliation, sexual orientation, pregnancy, etc.; for example, in 2018, the SLS Hotel settled a discrimination lawsuit for $2.5 million
- Employee injury as a result of employer negligence
- Wrongful termination
- Discrimination in violation of the Immigration and Nationality Act (INA)
Likewise, customers may sue for a wide range of reasons—from feeling they did not receive the product or service they were promised, to getting injured on the company’s premises. Even businesses with seemingly transparent and customer-friendly policies get sued. Here are a few reasons people might bring charges against a small business:
- Discrimination; for example, two Omaha residents sued 87 local businesses for violations under the Americans with Disabilities Act
- Having a hidden camera in the bathroom; a woman filed a $100 million lawsuit against Hilton Worldwide, claiming that she was filmed while showering in her hotel room and subsequently blackmailed by an employee of the hotel
- Personal injury on premises
- Refusal of service claims
Of course, sometimes lawsuits are warranted, but other times they may seem frivolous or even unjustified to the business owner. Unfortunately, the validity of the lawsuit may have little effect on how much time and money a business will have to spend defending itself, unless perhaps the judge throws out the case.
Reducing the Threat of a Lawsuit
Business owners can do several things to reduce the threat of lawsuits:
Minimize the financial perils.
Take the right steps to reduce the financial repercussions on both your personal and business finances, should litigation become necessary. Incorporate your business in a way that shields your personal finances from any legal claim, and obtain the right business insurance coverage to protect your company’s finances.
General liability insurance, for example, protects you for a range of potential claims against your business, such as someone slipping on your property or accusing your business of false advertising. Specialized liability policies can be designed around the unique needs of your business, when necessary.
Be careful what you say and do (to both customers and employees).
It may seem obvious, but you can get yourself in trouble by over-promising or making grandiose claims about your business and capabilities. In general, steer clear of saying anything, whether publicly or privately, that could come back to haunt you. For example, refrain from making overly specific claims about your products or services that could be disputed.
Volkswagen faced a Federal Trade Commission lawsuit after the car manufacturer claimed that some of its cars burned clean diesel fuel, while cheating on its fuel emissions tests for years. Recently, the founder of the scandalized Fyre Festival faced a slew of federal and class action lawsuits, as well as prison time, for deceiving investors and festival attendees.
On the employee side, make sure to have clearly stated policies—which are then clearly defined in an employee handbook—that promote fairness and that explain the rules and how specific difficult situations will be handled.
Line up competent legal help.
Before you find yourself in legal hot water, have a reputable and informed lawyer on call to counsel you on how to prevent matters that could lead to legal trouble for your business (whether that means employee practices or product or general liability). This person should be the one you reach out to if potential legal troubles arise, with the goal being to avoid a full-blown lawsuit.
What to Do If You’re Sued
If someone does sue your business or threatens to sue, take the following steps to improve the outcome for your business:
Call your lawyer right away.
Contact your attorney immediately—ideally before a suit has been filed or any formal action has been taken. Your lawyer should guide you through the best course of action for either deflating the situation or ensuring you handle it properly. For example, your lawyer may give you insights on how to address the person threatening to sue, or may advise you not to have direct contact with that person at all.
Be sure to keep complete records about the person or entity threatening to sue and the situation at hand. You may be asked to present this information in court or arbitration proceedings.
Contact your insurer.
Contact your insurer. They will guide you through the process of filing a claim.
Don’t panic. While facing litigation is nerve-racking, if you’re on the right side of the law, it’s in your best interest to stay optimistic and to focus on continuing to run your business as best you can.
By taking the right steps to protect your company from the business and financial risks of a lawsuit, not only will you have better peace of mind, but also you just may save your business in the long run.
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By setting up your company as an LLC or corporation, you can protect your personal assets as a business owner. Although operating your company as a sole owner may be the simplest and most affordable choice, you will be held accountable in the event of a lawsuit. You should go over your alternatives with a legal counsel to decide the best strategy to separate your personal and business finances. If you ever find yourself in such a situation, it is important to get legal counsel from trademarking lawyers.
I run a small consulting business for Condominiums in addition to my regular job. I’m thinking of expanding the business and I’m interested in obtaining insurance coverage.