What to do if your small business gets sued

Business lawsuits are common, and even a suit that has no merit can be expensive to defend. What’s more, you can be sued for just about anything, even if you have an ironclad contract with clear disclaimers. Small business owners need to know what to do in the event of a lawsuit—or even the threat of a lawsuit—against their firms.

1. Call your insurance company. 

Sometimes, the immediate reaction is to call your business attorney, but there are good reasons to call your insurance company first. Your attorney may be great at helping you draft contracts, but they may not be a litigator, and that’s what you need if you’re being sued. Insurance companies have attorneys who specialize in legal advice for the type of claims and lawsuits you’re facing—whatever they may be. They can assign one to your case quickly.

Another reason for calling your insurance company first is that your defense costs may be included in your general liability insurance coverage. If you call your own business lawyer, you’ll be paying them out of pocket for any costs you incur before the insurance company gets involved. If you start with your insurer, those legal fees could be covered from day one.

2. Do not contact the person who is suing you directly. 

Believe it: Anything you say can be used against you later in court. Once a suit has been threatened or filed, the attorneys should do the talking. So direct all communication through the law firms.

3. Document anything and everything related to the incident that prompted the lawsuit. 

Even if you don’t think something is relevant to the legal action, it may become so. Document your recollection of any conversations you had with the plaintiff if electronic or physical records don’t exist. Forward any information you have to your insurance company.

4. Discuss your options with your attorney. 

The costs to defend a suit are not just about damages. You may need to take time away from work to be deposed or go to court. Your business reputation could suffer, particularly if the lawsuit is public in nature or featured online. In some cases, it may make sense to settle a lawsuit, even if you believe you are likely to prevail in court. Just don’t do it by yourself.

To decide whether to settle, you’ll need to determine a few things:

  • How much is the plaintiff looking for? What are they likely to settle for? (These two amounts are seldom the same.) Legal counsel can help you determine what the plaintiff may be willing to accept and how to get to that number.
  • Is there a way to settle the case that doesn’t involve money? For example, in the case of a suit alleging you infringed on a copyrighted logo, you may just need to redesign your logo. This is not free, of course, but it doesn’t result in you having to pay the plaintiff a lot of money.
  • Is there another party that may bear some of the responsibility—and legal liability—for the claim? If you’re being sued for not delivering a product on time, is there a vendor who may have played a part in the delay? If so, they may be responsible for some of the cost.
  • How much will your insurance cover? Understand the limits of your insurance policy and compare them to a potential settlement and the cost of a trial. Remember that, even if you prevail at trial, your costs could be higher than a settlement.

How to keep from being sued

If the prospect of a lawsuit seems daunting, that’s because it is. You can be sued for almost anything, and even a frivolous lawsuit will cost you money. So prevention is the best strategy. Here are some tips:

  • Be careful about what you do and say. Make sure you can deliver on any representation you make to a customer, prospective customer, or vendor.
  • Train your employees properly. Make sure they don’t promise anything your company can’t deliver, and stress the importance of being conscientious and professional in all of their business dealings.
  • Treat your employees properly. Ensure that your employment practices comply with the letter of the law, and make sure they are well documented in an employee handbook.
  • Document everything. Keep records of key conversations and every transaction to the degree you can.

How to minimize the damage if you are sued

People can sue for just about anything, and even a suit without merit can cost you. Here are some ways to limit the damage:

  • Make sure you have the right business structure. If yours is a sole proprietorship or partnership, you (and your partners if you have them) could have personal liability for judgments against the business. To protect your home, bank accounts, and other personal assets, register your business as a limited liability company (LLC) or other corporate entity. Consult your tax advisor about the best option for you.
  • Insure your business. Many businesses try to get away with not having liability insurance, thinking it will save them some money. But once they have to hire an attorney and begin paying legal fees, they realize the error of their ways. Here’s a quick breakdown of the types of business insurance you should consider: General liability insurance protects against third-party claims of property damage or bodily injury. It also covers personal injury, which includes libel and slander. Every business should have this.
  • business owner’s policy (BOP) includes general liability coverage plus coverage for your business’s property. If you have equipment you use to do your work, or if you own the premises where your business operates, BOP provides more comprehensive coverage than general liability.
  • Professional liability insurance, sometimes called errors and omissions coverage, protects businesses that offer advice, like consultants or medical professionals, against claims relating to their professional services.
  • Cyber liability insurance is a good idea if your business uses computers, takes credit cards, or maintains customer data.
  • Workers’ compensation insurance is required if you have employees. It pays for most medical costs and lost wages if an employee is injured or becomes ill on the job.

Hiscox provides online quotes for business insurance to protect you in the event of a claim or lawsuit. You can also call and speak with a licensed insurance agent who can help you determine what coverages you need.

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