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How to protect your small business from a lawsuit

How to protect your small business from a lawsuit

By Wil Chan
Jun 21, 2022
6 min read

Owning and operating a small business can feel like a dream come true. But that dream can become a nightmare if you’re hit with a lawsuit. 

While nobody ever wants to get sued, statistics say between 36% and 56% of small businesses are involved in some type of litigation every year, and as many as 90% of small businesses go through a lawsuit at some point while doing business. 

Being sued is not something you should take lightly, and you should always consult your lawyer with any questions. In the meantime, here are some things that may be helpful to know about keeping your business prepared for a lawsuit. 

Claims vs. lawsuits

The first thing you should understand is the difference between a claim and a lawsuit. 

A claim is a demand made against another party for compensation for damages. While a claim can be made against any individual or business, they’re usually handled by lawyers or insurance companies.

If they can’t work out an agreement, or settlement, that all parties are satisfied with, it’s possible for a claim to lead to a lawsuit. 

A lawsuit is a formal legal dispute that gets decided in court.

Examples of common small business lawsuits

According to the U.S. Chamber of Commerce, businesses spend an average of $1.2 million annually fighting litigation. Common reasons for lawsuits include:

  • Employee or customer discrimination. If a business refuses to serve a customer or hire a job candidate based on protected classes, it can be sued.
  • Workplace harassment. This is defined as unwelcome conduct that is based on protected classes. 
  • Breach of contract. If you fail to meet obligations and promises to partners or vendors, you risk getting sued.
  • Accidents, injuries and property damage. This could include slip-and-fall accidents or damaging someone else’s belongings.
  • Payment disputes. If you’re not paying employees or vendors what you’ve promised them, they could take you to court.
  • Wrongful termination. An employee believes they were fired illegally.

Protect your small business from lawsuits by staying prepared

Even if you don’t expect to be sued, it’s never a bad idea to prepare your business ahead of time. Here are some tips to protect your business.

Separate your personal life from your business

If you are an entrepreneur whose business is set up as a sole proprietorship, you could consider incorporating as a limited liability company (LLC). That creates a legal separation between your business and your personal assets, which protects personal assets such as bank accounts or your home if you are sued.

Keep organized and accurate records

Good record keeping can be a business lifesaver. Having signed agreements, emails, notes from phone calls and meetings and more can help you resolve disputes and clarify details of business transactions in the first place before a claim is filed.

By keeping accurate records, you can provide a paper trail of how a conflict may have escalated and the steps you took to resolve the problem. If you’re sued, your lawyer will want to review these records.

It’s a good idea to find a lawyer who is qualified and experienced in small business lawsuits, and ideally someone who is familiar with your industry.

If you’re scrambling to find a lawyer after you’ve already been sued, it can be difficult to find one who best fits your needs. That’s why many small businesses keep a lawyer on retainer. 

Aside from helping you in the event of a lawsuit, a business or employment lawyer can give you legal advice on hiring employees, staying in compliance and reviewing documents.

Get insurance coverage

Another way to prepare is to get insurance coverage against a possible lawsuit. 

Having insurance is common in many professions as some of the risks are transferred to the insurance company. For instance, both attorneys and doctors are at risk of being accused of malpractice. Without liability insurance, they would be fully responsible for the costs associated with claims and lawsuits.

General liability insurance typically covers the cost of the lawsuits over a wide range of incidents like advertising harm, personal injury, property damage, and bodily injury. It will usually also cover attorney fees, the courtroom costs, and money you may have to pay as part of a settlement — up to the policy limits. 

Depending on the exact nature of your business, you may require more specialized insurance. This might include professional liability insurance (aka errors and omissions insurance), workers’ compensation insurance, commercial auto insurance or another kind of coverage. 

It’s a great idea to start a conversation with your small business insurance provider today to find out what kind of protection will best suit your needs. 

If your small business gets sued

If your small business is hit with legal action, your first call should usually be to your business lawyer. Allow them to guide you through the process and give careful consideration to any advice they provide. 

After your lawyer, you’ll want to contact your insurance company. That way you can let your insurer know what happened, and confirm that your insurance policy will protect you.

Not all legal disputes are created equal. But it is fairly common for legal disputes to end up in a settlement. 

Once you step into a courtroom, the legal fees will start to increase significantly. Even if you’re not at fault for anything, the cost of going to court can put a financial strain on your business. 

Getting sued is both stressful and time-consuming. But with the right kind of preparation, it doesn’t have to ruin your business. It’s never a bad time to talk to your lawyer or insurance provider about how you can best protect yourself.

NEXT helps protect your small business

NEXT offers customized insurance designed to protect you and your small business from unexpected challenges.

Running a small business can be a 24/7 job. That’s why NEXT gives you 24/7 DIY access to manage your coverage on your schedule.

You can get a free quote, browse your options and get covered in just 10 minutes online

Start your quote online today.

How to protect your small business from a lawsuit

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About the author
Wil Chan is a content writer at NEXT and has been a professional writer for more than ten years. His work has been featured in publications including Forbes and Greatist. He has run a freelance business since 2016 and feels passionate about helping self-employed people in all industries succeed.
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