IT COSTS A LOT TO GET SUED
(EVEN IF YOU'RE IN THE RIGHT)
A Small Business Guide to Errors and Omissions

Chapter 3: Potential Outcomes in Errors and Omissions Lawsuits
Part 2: How Small Businesses Can Avoid Going to Court

When a client files a claim against your business, you may think all you can do is hire a lawyer and prepare for trial. But that's not always true.

You can suggest mediation, a concept that your client may have never even heard of. E&O claims are particularly good candidates for mediation because they often stem from hurt feelings and misunderstandings — not the professional errors they allege. Mediation gives both parties a chance to air their grievances and resolve a problem, all outside the formalities of the courtroom.

What Is Mediation?

Mediation is a way for disputing parties (e.g., you and a client who is unhappy with your work) to reach a resolution. It's an alternative to full-blown litigation that can save everyone a considerable amount of time and money.

It's also less formal than litigation. While there are specific steps to follow, lawyers are generally unnecessary. Instead, a mediator is present. A mediator is an impartial third party who helps you and your client reach an agreement. Mediators do not determine who is right or wrong in a dispute. They are simply there to assist.

During a mediation, you usually don't need lawyers. Instead, an impartial third party called a mediator helps you resolve the dispute.

Mediation can be suggested before or after an Errors and Omissions lawsuit is filed. A judge may even order you and your client to try mediation before the case can go to trial. Because you can't always count on a judge to do that, you should at least try to put this option on the table.

To help steer your client toward mediation, emphasize the benefits, outlined below.

How Small-Business Owners & Their Clients Benefit from Mediation

Mediation tends to benefit both small-business owners and the unhappy party by…

  • Saving time. Generally speaking, mediation can resolve most issues in a day or less. If the dispute is complex, mediation might take several days. Additionally, mediation can usually begin within a few weeks of requesting the meeting. Lawsuits can take months — even years — to go to trial.
  • Cutting costs. You and your client will split the cost of hiring a professional mediator. There are some nonprofit organizations that offer mediation services for a very low fee. Other professional mediators may charge by the hour. For example, a typical mediator might charge $250 an hour plus a $250 administrative fee. If your mediation took four hours, both you and the other party would pay only $625 — much less than weeks upon weeks of legal counsel. Remember, even dropped or settled claims can cost thousands of dollars in attorney fees. A full-fledged trial can easily set you back $100,000 or more.
  • Salvaging the relationship. Unlike a trial, there is no "winner" or "loser" in mediation. Mediation is simply a way for two parties to decide how to resolve an issue. There is no threat that a jury is going to "punish" one party with a huge judgment. Both parties get the chance to voice their concerns, which can provide valuable insight and prompt practical solutions. That's why mediation is a good way to settle disagreements with people you still want in your life.
  • Maintaining privacy. What happens in the mediation room must legally stay in the mediation room. Anything said during mediation can't be used in court. Compare that to a trial, where details about the case are eventually disclosed to the public. Depending on the situation, local media could even report on your lawsuit. But mediation is a relatively quiet affair. And because the process is designed to be as diplomatic and mutually beneficial as possible, there is less of a chance that this dispute will hurt your public image.
Mediation can resolve conflicts quickly, usually in a day or less.

The best part? Mediation expenses can usually be covered by your Errors and Omissions Insurance policy. But because mediation is relatively inexpensive, some small-business owners won't need to file a claim with their insurance and risk raising their premiums.

What Is the Difference between Mediation and Arbitration?

Arbitration is another way to resolve disputes outside of a courtroom, but it is distinct from mediation in several ways. For one thing, it's more formal than mediation (though less formal than a lawsuit). An arbitrator  (who is a neutral third party) listens to arguments from both sides, reviews the evidence, and then comes to a decision about the dispute. A mediator simply facilitates the discussion between feuding parties.

Unlike a mediator, an arbitrator hears both sides of the story and decides which party is in the right.

Businesses frequently write arbitration clauses into their contracts. For an example, a contractor may include a clause in their client contracts that says any disputes must be arbitrated. If a client signs the contract, they forfeit their right to sue or appeal the arbitrator's decision. Arbitration tends to cost more than mediation but less than a lawsuit. Your E&O policy will likely cover the cost of arbitration, too.

To read more about how mediation can benefit you, read "Mediation for Small Businesses New browser window icon." on Nolo.com.

Next: Part 3: Why Winning an E&O Lawsuit Still Costs Money