Settle That Case!

Lawsuits Are a Cost of Doing Business

When you start a business, you must understand there is a risk you will get sued as a result of the business’s operations. Whether it’s a vendor suing because you haven’t paid an invoice, an employee suing for wrongful discharge, a customer suing because your product or service injured them (economically or physically), or a patron slipped and fell on your premises, the risks are all around you.

While there are ways to minimize this risk, eliminating it is impossible. So, account for it when you do your business planning.

Rule #1: Buy insurance!

Partner with an experienced insurance broker who intimately understands your business. This will ensure that your insurance policy covers all the high risk areas of your business.

Rule #2: Understand the business decisions that arise when you are being sued.

Example: I represented a client who was being sued by a patron of his business. In my opinion, the patron had an extremely weak case against my client. The patron sought a settlement offer and I recommended my client take it. Why? Because the settlement amount on the table was less than the overall cost of proving in court that the patron had no case against my client. My client was emotionally reluctant to ‘give in’ to the patron and his frivolous lawsuit, but the business decision was fairly simple: pay more in legal fees to defend his case, or pay less to the patron to go away. Distasteful? Yes, but there are costs to doing business, this is just one of them. Note: if my client had followed Rule #1 Buy Insurance!, he wouldn’t have needed to go through this experience.

Rule #3: This is America, you can be sued by anyone for almost anything… and defending a lawsuit is expensive!

Understand the difference between, “Can I be sued for X?” and “Am I liable for X?” While it is fairly easy for a person to sue you or your business, whether or not that person suing you will be awarded a judgment in a court of law is an entirely different question. But you must understand the business implications of these concepts. In my example above, my client was sued on very weak legal grounds, but I will reemphasize, this is America, you can be sued by anyone for almost anything. My client had a strong legal case, but litigation is expensive and asserting that legal case was much more costly compared to settling with the other party.

Rule #4: Buy insurance!

Before your business does get sued, make sure your insurance company will cover the bill.

Protect Your Piggy Bank!

When you think about protecting your business and reducing unnecessary risk, you should think in terms of layers.  No single layer can eliminate all risk, but by using multiple layers, you can eliminate as much unnecessary risk as possible.

A business owner can reduce risk by intelligently drafting his or her contractual agreements with co-owners, vendors/suppliers, customers, and strategic partners.  A business owner can reduce his or her personal risk by creating a distinct legal entity for the business (forming a corporation, LLC, etc.).  A business owner can reduce risk by designing and implementing a formal hiring process, complete with background and reference checks.  The list of ways to reduce risk is unlimited, and a great business attorney can help you implement all of them.  One of the more critical layers on your list is insurance. I call it the ‘safety net’ or layer of last resort.

Insurance is a broad topic in that if you are willing to pay the premiums, you can insure just about anything.  For the typical business owner, however, I will break down the most common types of business insurance.  A more detailed guide for small businesses is available here from the California Department of Insurance.

Property (or first person) Insurance:

This protects your assets, for example, your building and all the stuff inside, from theft, damage, or destruction.

Casualty (or third person) Insurance:

This protects you against claims from third parties, like a customer who slips and falls while at your business, or if an employee is involved in an auto accident on the way to deposit the business’s earnings at the bank.  Worker’s Compensation insurance falls into this category.

You will want to make sure you have both types of coverage.

Make sure you find a great insurance broker/agent.  Get references from trusted advisors or other established businesses and interview several broker/agents.  MAKE SURE YOUR BROKER/AGENT IS LICENSED!  You can check on license status at the California Department of Insurance.

This last point is important and it’s easy to do.  I have encountered several businesses which paid premiums to a broker who did not forward those payments on to the insurance company.  That means the insurance policy was not in effect.  The businesses were subsequently sued for non-related reasons and there was no insurance coverage.  The businesses were on their own when it came to defending themselves in the lawsuits and paying the respective settlement amounts.  Paying lawyers to defend you and paying a plaintiff to waive his or her claims is a very expensive thing to have to do without an insurance company backing you up.