Starting and running a business comes with many risks and rewards. While you set out to profitably provide products or services to customers, your commercial activities also open you up to legal liability if something goes wrong. Getting sued can be financially and emotionally devastating for a business of any size. However, there are proactive steps you can take to minimize risks and protect your company.
Introduction
Lawsuits are an unfortunate but common occurrence for businesses today. An operating company has so many potential interactions and transactions, that eventually some counterparty might feel aggrieved enough to file a complaint. Defending yourself in court is stressful and expensive. It hurts productivity, drains resources, and damages morale. However, by understanding legal risks and taking preventative action, you can avoid many lawsuits that sink other businesses.
The Importance of Protecting Your Business
- Lawsuits can lead to financial judgments that bankrupt companies
- Much time is wasted responding to discovery and court proceedings
- It hurts morale, reputation, and credit, and deters future investments
- Plaintiffs often seek publicity to pressure companies
Failing to avoid lawsuits can put you out of business if substantial judgments are awarded. Even if you eventually win, thousands of hours and dollars will be wasted defending the company in legal proceedings. Publicity around lawsuits also hurts morale and makes it harder to get loans/credit.
Overview of the Legal Risks Faced by Businesses
Many ways are operating a business can lead to getting sued:
- Breach of contract – failing to deliver goods/services as promised
- Consumer protection laws – misrepresentation, fraud, product defects
- Labor laws – discrimination, wage violations, harassment issues
- Premises liability – customers getting injured on your property
- Intellectual property – trademarks, patents, copyright infringement
Note that both customers/clients and employees have wide legal rights to bring civil suits against companies under various laws and regulations. Even frivolous complaints need to be addressed.
Preview of the 4 Steps to Avoid Getting Sued
There are four key strategies businesses can employ to minimize risks:
- Secure proper business insurance
- Implement strong contracts and agreements
- Maintain compliance with laws and regulations
- Seek legal counsel and risk management
If you understand the legal risks and take preventative action, you can thrive while avoiding lawsuits that destroy less careful companies.
Understanding Legal Risks
Before diving into the four steps to avoid lawsuits, it’s helpful to deepen our understanding of the legal risks faced by companies. Appreciating the breadth of litigation possibilities and typical costs makes it easier to motivate protecting your business proactively.
Common Types of Lawsuits Against Businesses
Some of the most frequent litigation filed against companies includes:
- Breach of contract – failure to deliver goods or services as contractually agreed. This includes missed deadlines, product defects, or interrupted availability of a technology platform or service.
- Violations of consumer protection laws – these include misrepresenting products through false advertising, failing to honor return policies, and selling defective or harmful products. Consumer advocacy groups are often behind these suits.
- Labor law violations – failing to pay workers properly, maintain a safe workplace, harassment complaints, and various forms of employment discrimination.
- Premises liability – customers getting injured while visiting your property/location due to unsafe conditions. This includes slip and fall accidents, falling merchandise, inadequate security against third-party assaults, etc.
- Intellectual property infringement – the unauthorized usage of trademarks, patented inventions and designs, copyrighted works like books/films, and trade secrets. Lawsuits seek financial judgements and injunctions forcing companies to cease infringement.
Note these categories often overlap. For example, a customer injury could indicate premises liability and also violation of safety regulations. Multiple suits can be filed for one incident.
Impact of Lawsuits on Small and Large Businesses
- Large jury awards and settlements becoming more common
- Average US professional liability insurance claim now over $60k
- Over 4,000 US ADA website accessibility lawsuits in 2021 alone
- Trademark lawsuits nearly tripled from 2014-2019
Lawsuits pose financial risks even for large corporations, but they can be business ending for small companies. One bad judgment can exceed the capitalization of entire startups. Due to treble civil damages, intellectual property suits often demand over $150k per violation. With defense costs you could easily face a $300-500k bill for a single IP incident. Sixty thousand dollars devoted to litigation can be impossible for companies doing less than $1-2M in revenue.
Importance of Proactive Risk Management
- An Ounce of Prevention is Worth a Pound of Cure
- Lower Risks = Better insurance rates = Saves money
- Build Contracts and Compliance Up Front = Less fires to put out later
- Documentation protects you when disagreements occur
- Don’t lose productive time constantly fighting lawsuits
- Keeping your house clean reduces vermin infestations
Being proactive reduces headaches and costs in both the short and long run. Prevention is almost always cheaper than the cure. Good records also help you win disputes quickly with less legal fees.
Step 1: Secure Proper Business Insurance
Transferring financial risks posed by lawsuits to insurance companies is extremely prudent. The right insurance policies defray the costs of litigation defense and any judgments or settlements. This allows companies to focus energy on productive work rather than legal battles.
Types of Business Insurance
Common insurance policies that help shield against lawsuits include:
- General liability insurance – covers injury lawsuits from 3rd parties
- Professional liability insurance – protects against errors and omissions
- Cyber insurance – data breaches, hacking, online harm
- Directors and officers insurance – protects executives and decisions
- Employment practices liability insurance – employee lawsuits
- Intellectual property infringement protection – copyright/trademark/patent lawsuits
You need to secure an optimal mix of insurance tailored to your business activities. An insurance broker can help assess needs and craft a prudent strategy.
Choosing the Right Coverage for Your Business
Choosing appropriate policies involves analyzing:
- Your risk areas and legal vulnerabilities
- The typical judgments and settlements in your activities
- The litigation history of your geography and specialty
- Budget limitations
Enough coverage so that any plausible claim falls completely within policy limits is recommended. This avoids personally covering gaps between insurance payouts and actual liabilities. Read policies closely to avoid denial of coverage for preventable issues.
Understanding the Legal Implications of Being Underinsured
- Personally liable for damages beyond policy limits
- Insurance denial more likely with insufficient policies
- Hurts odds of favorable settlements
- May indicate business negligence to juries
- Undercapitalization shrinks capital to fight lawsuits
- Can enable lawsuit to sink your company
Skimping on insurance might save a little up front but often backfires badly if sued. It only takes one underinsured incident to crater your company. Ensure you activate all the insurance shields possible to stop a lawsuit missile.
Step 2: Implementing Strong Contracts and Agreements
Clear written contracts minimize confusion between parties which reduces bad feelings that prompt lawsuits. They also provide vital evidence if a dispute reaches litigation.
Importance of Clear and Enforceable Contracts
Well-written agreements:
- Document expectations between parties
- Outline exact deliverables, rights, deadlines, and budgets
- Contain guarantees, scopes of work and liability clauses
- Prove what was promised if disputed later
Contracts act as preemptive dispute resolution. Even if disagreements later occur, clear terms enable faster resolutions.
Key Elements of a Strong Business Contract
Effective contracts clearly document:
- Parties – legal names and details about both sides
- Definitions – terminology used spelled out
- Deliverables – exact goods/services contracted
- Timelines – all deadlines and schedules
- Pricing – clear payment terms and adjustments
- IP rights – who owns what intellectual property
- Warranties – guarantees about deliverables
- Liability limits – who is responsible for what risks
- Dispute resolution – how conflicts get resolved
- Signatures – handwritten approvals or e-signatures
The above elements act as a checklist for contract writers to ensure clarity and enforceability.
Best Practices for Contract Management
Strategic contract management should:
- Use template agreements you control terms for
- Don’t let urgent needs lead to sloppy contracting
- Run contracts by qualified legal professionals
- Ensure both parties properly sign agreements
- Carefully fulfill all commitments you make
- Document everything to prove your performance
- Develop contractual risk management mindset in leadership
By making sound contracts central to your operations, you benefit from clarity while positioning the company legally in the best light should litigation ever occur.
Step 3: Maintaining Compliance with Laws and Regulations
Violating legal obligations is an easily preventable reason companies get sued. Staying current and compliant with new rules relevant to your business keeps exposure low.
Overview of Key Business Regulations
Major federal regulatory areas include:
- Consumer protection – advertising, data, safety testing
- Labor – wages, discrimination, leave, safety
- Health and safety – OSHA workplace rules
- Antitrust – anti-competitive cross-company collusion
- Environment/sustainability – emissions, impact reporting
- Finance – accounting, lending, public reporting
Additionally, diverse state/local laws and industry regulations like HIPAA shape requirements. Appointing someone to monitor emerging compliance issues is vital.
Consequences of Non-Compliance
Ignoring regulations creates substantial litigation threats via:
- Government agencies suing to force statutory compliance
- Class action lawsuits around consumer/labor harms
- Existential threats – environmental cease and desists
- Voiding insurance coverage
- Stricter settlements and court judgments
- Personal executive liability for failing governance
Maintaining rigorous compliance helps avoid devastating lawsuits in these areas.
Strategies for Staying Updated and Compliant
Best practices for compliance include:
- Designate an internal compliance officer role
- Subscribe to legal update news services
- Have law firm review policies/procedures yearly
- Conduct periodic all-staff retraining on requirements
- Perform internal audits and risk assessments
- Document diligent compliance efforts
Compliance should become an integral part of company operations and culture.
Step 4: Seeking Legal Counsel and Risk Management
Competent legal help applying the law to your business is invaluable for lawsuits prevention. Ongoing advisory relationships with attorneys facilitates proactive awareness and response to situations likely to lead to litigation.
When to Consult with Legal Professionals
Seeking timely legal guidance protects against lawsuits and reduces risks around:
- Drafting bespoke company agreements
- Changes in service offerings, products, or major contracts
- Responding to warning letters or initial legal complaints
- Initiating termination of customers, vendors or employees
- Settling disputes before they reach litigation
- Any situation with material financial or legal implications
Err on the side of consulting counsel whenever unclear or uncomfortable. The incremental cost far outweighs liability from letting issues slide.
Proactive Risk Management Strategies
Proactive risk reduction activities lawyers can help with often include:
- Reviewing template agreements and policies
- Conducting legal audits of operations and contracts
- Facilitating management/employee legal training
- Assessing compliance gaps
- Improving document retention procedures
- Drafting crisis response plans
- Monitoring legal alerts and news sources
This ongoing collaboration embeds legally intelligent decision making into how you run the entire business.
Importance of Regular Legal Audits and Reviews
- Ensure you know all evolving legal obligations
- Verify operational activities match requirements
- Confirm proper documentation proving compliance
- Uncover situations likely to cause disputes
- Opportunity for preventative fixes to reduce legal risks
Annual legal checkups also build shareholder confidence and positive governance perceptions that help if ever sued.
Conclusion
Defending a lawsuit can overwhelm time, financial resources, productivity, and morale. However, by proactively securing proper insurance, implementing strong contracts, maintaining legal compliance, and seeking counsel, companies can avoid much unnecessary litigation Targeting these four areas builds a shield protecting even small businesses from legal threats that might otherwise sink them. The time and money invested prevents immeasurably greater costs if forced to reactively fight potentially company ending lawsuits. An ounce of prevention truly is worth a pound of cure when it comes to avoiding the risks of getting sued. Companies that resist temptation to cut corners on legal diligence position themselves for success via reduced risks, costs, and distractions.
Recap of the 4 Steps to Protect Your Business
- Purchase adequate business insurance policies
- Utilize strong contracts for all major deals
- Maintain rigor compliance with all laws and regulations
- Retain qualified legal counsel for tailored advice
Emphasizing the Importance of Proactive Risk Management
The risks of business lawsuits can never be fully eliminated but much needless exposure is preventable. Appreciating the scope of legal liabilities, securing key organizational shields, and nipping potential problems while small all pay enormous dividends. Integrating proactive legal diligence across company culture and procedures substantially influences the probability of avoiding otherwise likely lawsuits.
Encouragement for Businesses to Take Action to Avoid Getting Sued
Don’t let fear of liability lawsuits paralyze entrepreneurial drive but also resist minimization of preventable risks. Sailing safely between defensive stagnation and reckless growth requires intentionally nurturing operational excellence around compliance, contracts and documentation. Your future self will thank you for legal foundations built to enable innovation not bogged down fighting lawsuits. Here’s to profitably and responsibly avoiding the risks of getting sued through wise ongoing planning!
