When you provide services to clients and they sue you for malpractice (i.e., professional liability or errors and omissions), they are trying to recover the losses they allegedly suffered because of your work. The suit can progress in three ways:
- The case is dropped or dismissed
- The case is settled out of court
- A judge or jury makes a decision on the case
If the lawsuit is dropped, you will only be responsible for paying your attorney’s fees (which could be expensive even if the suit doesn’t go anywhere). The other two options are significantly more costly. When a case is settled out of court, you pay a settlement to the client. When a judge or jury makes a decision on the case, you may have to pay a judgment.
What is a malpractice settlement?
Before an errors and omissions claim goes to court, you and the plaintiff (the client suing your business) can decide to resolve the issue. This option is called a settlement, which means you will pay a certain amount of money to the injured party if the client agrees to end the case.
Typically, settlements are less expensive than letting the case go to trial. However, even if the suit goes to court, you and the plaintiff can decide to settle at any point during the trial.
If you don’t have malpractice / errors and omissions insurance and you have to account for settlement costs yourself, you may be able to work out a structured settlement. This happens when the plaintiff settles the case for a large sum of money and your attorney strikes a deal that allows you to pay the amount in installments over time.
You and the other party can choose the payment schedule. For example, you and the plaintiff may decide on annual installments, which means you’ll pay a lump sum each year until the settlement is paid off.
What is a malpractice judgment?
If a malpractice lawsuit doesn’t settle, it will be tried in court (assuming it has sound legal merit). Because these lawsuits are civil torts (as opposed to criminal cases), your punishment – if any – will be monetary. The court will decide whether or not your small business is liable for your client's financial losses.
If your business is liable, the court’s next decision will be how much money you owe the other party to make them “whole.”
This decision is called a judgment or verdict. Usually, you’ll hear the word in a sentence such as “A judgment for the plaintiff in the amount of $20,000.” (For an example of a real-world professional liability judgment, check out “Errors & omissions lawsuit tips for real estate professionals.”)
If you fail to voluntarily pay the judgment, the plaintiff can file a judgment lien against your business to ensure you pay what is owed. A judgment lien attaches to your property and your assets until the debt is satisfied.
Ways to remove a malpractice judgment lien
To have a judgment lien removed from your property, you can:
Pay off the debt
If you pay off the judgment that you owe, the creditor (your client who won the case) will file for the release of the lien. Once the lien is removed, you can do whatever you want with your property, such as sell, trade, or transfer it.
Claim the property with the lien as exempt
Depending on your state laws, you may be able to claim certain property as exempt from collection. The court will decide whether the property qualifies for this classification.
File for bankruptcy
This option should only be exercised as an absolute last resort. Declaring bankruptcy will destroy your credit (and possibly shut down your business for good), but it will also fast track your request to remove the lien.
E&O insurance helps you avoid paying out of pocket
Errors and omissions insurance, also known as malpractice or professional liability insurance, can help your business survive a devastating and unexpected lawsuit. Instead of worrying about how you will afford lawyer’s fees and any settlements or judgments levied against your business, you can breathe easy knowing that you have a financial safety net in place.
An E&O policy means your insurance provider will:
- Find and hire a defense attorney on your behalf
- Pay settlements or judgments up to the stated limits of your policy
For more ideas about how to raft your business through a malpractice claim, read “Lawsuit funding tips for small business owners.