How to Avoid the Lawsuit That Could End Your Business

Kathy SImpson

Businesses are increasingly the targets of lawsuits, even when innocent of any wrongdoing. If you provide professional services or expert advice, your business may face a unique liability risk. Make sure you’re protected.

Two and a half years ago, Ed Rozak attempted to collect $25,000 in unpaid fees from a former client of his small Internet solutions business based in Cleveland, Ohio. What ensued was a full-on battle.

“They came at us with a lawsuit, accusing us of negligence and failure to perform,” Ed said. “It started at around $300,000. Over time, they actually grew the amount of the claim, claiming over $100 million dollars.”

The cost of the lawsuit could have put Ed’s small business out of business.

The number and nature of lawsuits being filed these days are both surprising and alarming. And the sky is the limit when it comes to financial settlements. The troubling fact is that you don’t need to do anything wrong to be sued. Ed’s case is a classic example of that.
The grounds for Ed’s lawsuit fell under the category of professional liability—a type of claim that customers often resort to when disputing a fee.

The Many Faces of Liability

Business lawsuits may arise from any shape or form of alleged negligence or wrongdoing. We commonly think in terms of claims for physical things or events such as defective products, slip-and-fall accidents, property damage and the like. There’s also the liability that can arise from employee claims and auto accidents. Smart businesses take measures to minimize these risks and purchase liability insurance in the event that they’re faced with a claim.

Professional liability is a risk that is unique to businesses that provide professional services or expert advice. This is the liability for mistakes – or errors and omissions as well as products that fail to perform – and the financial loss a customer may claim as a result.

Lawyers, accountants, financial advisors and others in related lines of work know all too well the high price they can pay for errors and omissions, even if the claim filed against them is frivolous. What’s less commonly known is that other types of businesses such as Ed’s technology firm share the same risk – and it may go beyond the intangible. For instance, a hardware manufacturer could be held professionally liable for the monetary loss caused by a failure of their hardware product.

“Many professions may not even realize they have an exposure,” said Greg Leffard, vice president of The Hartford’s business liability products division. “If they’re providing services for others and their clients suffer a financial loss because of their services, they can be sued.”

“Professional liability risk is much more than the financial loss to wronged customers,” adds Joe Coray, vice president of The Hartford’s technology and life science practice. “It also includes damage to one’s reputation within the business community as well as relationships with other customers.”

Is Your Business At Risk?

Here’s just a sampling of lesser-known professions that can be sued for errors and omissions:

  • Advertising agencies
  • Appraisers
  • Architects
  • Electronics firms
  • Employment agencies
  • Home inspectors
  • Information technology companies
  • Management consultants
  • Market researchers
  • Printers
  • Telecommunication specialists
  • Travel agents

If you’re in one of these industries or another service-related one, you should have professional liability insurance protection. But do you?

Liability Risk Management through Insurance

Many small business owners believe that the general liability insurance they have through their Business Owner’s Policy (BOP) or a separate general liability policy provides blanket coverage for lawsuits that may come their way. It’s not so. General liability covers third-party claims due to bodily injury and property damage. But professional liability claims for financial injury are excluded from general liability coverage altogether.

Professional liability is typically covered through a specialized policy or coverage part, one that is tailored to the specific protection needs of your service-related industry. It’s the only way to protect your business from claims alleging financial harm due to your negligence, misrepresentation, inaccurate advice, breach of warranties/representations, or failure to perform.

For example, general liability insurance would cover a customer’s slip-and-fall accident on your premises but only professional liability insurance would cover a client’s monetary losses due to a flaw in your software product. Or suppose you offer data storage services and one of your servers crashes. Client data that is lost, damaged or corrupted would only be covered by a technology professional liability policy, not general liability.

“It’s important to have the right insurance coverage for a business’s unique risks,” Coray said. “It’s also important to have an insurance provider that will support and protect the insured’s professional reputation and business relationships when there is an allegation or claim.”

The Cost of Professional Liability Claims

Professional liability lawsuits can run the gamut in terms of costs – from thousands of dollars to defend a case that is dismissed to millions in awards. They can also cost in terms of time away from day-to-day business on cases that can sometimes take years to resolve.

Ed had the foresight to purchase a professional liability insurance policy for his business. Once he filed his claim, his insurance company quickly took over the lawsuit and assigned experienced legal counsel to provide for his best possible defense. A year and a half later, the case was settled in Ed’s favor. Without professional liability coverage, the future of his business might have been uncertain.
“It’s conceivable that I could have lost the business,” Ed said.

Seek the Assistance of Professionals

Liability suits can be time consuming and expensive, no matter what the size or profitability of your business. Meet with an attorney to ensure you understand your specific liability risks. Discuss your protection needs with an insurance agent who can help you evaluate your insurance needs.



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