A lawsuit can be a rude awakening for your business, forcing you to think in terms of survival and bankruptcy. Do you have the financial stability to stay afloat? What will the suit do to your reputation in the marketplace?
For most small-business owners, the answers to these questions are grim unless they have adequate Professional Liability Insurance. This coverage can spare you business the debilitating costs that crop up when a disgruntled customer sues your business for their financial losses. You can even be named in a lawsuit if you aren't at fault. While there's no accounting for human behavior, it's worth your while to learn about the events that lead to these claims. That way, you can head off Professional Liability lawsuits before they become a legal fiasco.
Understanding Professional Liability Lawsuits
Professional Liability Insurance covers lawsuits related to your products or services. The legal "causes of action" can vary from negligence (i.e., that you performed carelessly or didn't meet industry standards) to breach of contract (i.e., that you didn't follow through on your promises).
Generally, a successful Professional Liability claim will have to establish that…
- Your work needed to uphold certain standards. Your delivered services will be compared to the terms explicitly outlined in a contract or defined by the "usual" practices in your industry. The court might also compare your work against what a "reasonable" consumer could have expected from you.
- You "breached" your duty by not meeting those standards. This will be a fact-based examination of whether you actually did what you were supposed to do.
- Your breach caused the client's financial loss. If your client would have lost money regardless of what you did or didn't do, you can't be held liable.
- Damages. Your client must have proof of their losses.
Your lawyer and their lawyer will fight over each of these points. All said, a seemingly straightforward lawsuit can cost you tens of thousands of dollars in legal fees and lost productivity.
What Situations Lead to Professional Liability Lawsuits?
You may be surprised to know that Professional Liability lawsuits are often caused by very simple situations, including…
- Misunderstandings. If your clients expect one thing but you deliver something else, the results can be disastrous. Perfect communication is impossible, but your business should strive to manage expectations as much as possible.
- Typos. A misplaced digit or mistyped address can cause you to miss a deadline or fail to deliver the products your clients purchased.
- Missed deadlines. Any interruption in your supply chain could make you liable if your client doesn't get what they need on time — even if it's out of your control.
Release of confidential client information. If your office network gets hacked by an identity thief and your client's sensitive information is compromised, you might be liable for the ensuing damages.
For real-life examples of lawsuits, check out "3 Professional Liability Lawsuit Examples."
How Can My Business Reduce Its Professional Liability Exposure?
To decrease the chance of expensive Professional Liability lawsuits down the road, implement the following risk-reduction measures:
- Use contracts. Contracts should clearly define obligations, project timelines, and compensation so you can manage client expectations from the start. Be sure to work with an attorney to ensure your contracts are legally sound.
- Get everything in writing. Be sure to document all communication with clients. If you chat with a client on the phone, send a follow-up email to confirm what was said. These recorded conversations can help clear up arguments in the future about what was said in the past.
- Keep clients in the loop. If clients are continually apprised of your progress and potential pitfalls, they are less likely to be surprised by the outcome. Plus, transparency builds trust, which also helps deter lawsuits.
How Does Professional Liability Insurance Protect My Small Business?
If, despite your best efforts, a dissatisfied client decides to sue you, Professional Liability Insurance can cover the plethora of costs you'll face, including…
- Lawyer fees.
- Administrative expenses.
- Court fees (e.g., filing fees, court reporter fees).
- Expert witnesses.
- Settlement costs (e.g., settlement payments, mediation expenses).
- Court judgments.
If your Professional Liability policy includes a "right and duty to defend" clause, you won't have to worry about managing your own defense. This provision shifts the burden of finding a lawyer and orchestrating the case from you to your insurance provider.
To start the process of protecting your business's future, apply for a Professional Liability Insurance quote today. You never know when one small incident can turn into a big problem.