How to protect your business from lawsuits

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By addressing your business risks with the right mitigation strategies and preparing for any disputes, you can reduce your chance of a lawsuit and the impact it can have on your reputation and your bottom line.
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Let’s consider the types of threats that could result in a business lawsuit, how you can decrease the chance of a legal action against your business, and what to do when disagreements arise.

Table of contents

Understand your potential risks

Small business owners face many risks, such as misunderstandings with customers and employees, conflicts over property rights, and numerous liabilities. These are some of the most common reasons for small business lawsuits:

Breach of contract

Disagreements can happen with your vendors, customers, landlord, and business partners. A breach of contract may involve:

  • One side failing to fulfill a contract on time.
  • Failure to pay upon completion of a contract.
  • Failing to provide goods or services that meet the standards listed in a contract.
  • Partial completion of a job that’s under contract.

There are basically two kinds of contract breaches. An anticipatory breach is when one party declares that they won’t fulfill their end of a contract or agreement. An actual breach happens when one side actually does fail to hold up their end of a deal. Either one could result in a legal action against your business.

Employment discrimination, harassment, and retaliation

Complaints of workplace harassment, discrimination, and retaliation can result in expensive lawsuits from employees, plus state and federal governments.

Federal laws prohibit employment discrimination based on:

  • Unfair treatment because of race, color, religion, pregnancy, gender identity, sexual orientation, disability, age, etc.
  • Harassment by managers, coworkers, and others in the workplace.
  • Denial of a reasonable workplace change because of religious beliefs or disability.
  • Improper questions about, or the disclosure of, genetic or medical information.
  • Retaliation over a workplace discrimination complaint, such as an employer retaliating against an employee for participating in a legal investigation or lawsuit, or wrongful termination.

Of course, a discrimination lawsuit could also arise from refusing to serve a customer because of their race, skin color, religion, gender, and other federally protected classes. State laws may also offer protections against discrimination and harassment in your employment practices and the customers you serve.

Accidents and personal injuries

You could face a lawsuit if there’s an accident involving the bodily injury of an employee or customer at your business, such as a customer tripping over a frayed rug or an extension cord.

If something you make or sell causes a personal injury, you could face an expensive product liability lawsuit. If you provide advice or services, a dissatisfied customer might sue you for negligence and claim you caused them physical or financial harm.

An employee lawsuit could involve:

  • Failing to provide protective equipment to employees.
  • Failing to eliminate a workplace hazard or repair faulty equipment.
  • Premises liability, such as wet floors or hazardous entryways.

Intellectual property rights

Intellectual property infringement is the misuse of someone else’s patents, copyrights, trademarks, trade secrets, or the right of publicity (the unauthorized use of someone’s name or likeness). If you want to use someone else’s image or work, you’ll have to get their permission.

Patents protect an invention and its creator against the unauthorized use, reproduction, or sale by another party.

Copyright infringement involves using someone’s creative work without permission, such as a picture, written work, song, etc.

A trademark is a word or symbol that identifies the work of an individual or company. Trademark infringement happens when a business creates confusion over which business is providing a particular service or product.

Trade secrets refer to confidential information and intellectual property that a company refuses to disclose, because of its economic value. This could include computer source codes and algorithms, or something like Coca-Cola’s secret recipe.

Using someone else’s likeness in a promotion without their approval could be considered a violation of their right of publicity, whether it’s posting their image on your website or using it in an advertisement.

Wages and scheduling issues

Failing to comply with state and federal labor laws, or just failing to keep accurate records, could give employees a reason to sue your business. If there’s a dispute over the number of hours someone worked or accusations of unequal pay, you could wind up in court.

Theft or loss of confidential information

You most likely have personally identifiable information (PII) of your employees and customers, such as their Social Security numbers, credit card numbers, and bank accounts. This is the kind of thing that hackers love to get their hands on, and it can mean a load of financial trouble and litigation if they do so.

In addition to the potential for lawsuits, every state has data breach notification laws, requiring you to notify customers if their personal information is stolen. You might also have to pay a fine for each record lost and cover the cost of credit monitoring for each person affected.

Protect your business with the right insurance

Implement risk management strategies

You can reduce your risk of legal claims against your business by following all applicable laws and regulations, keeping accurate records, and establishing the right procedures within your business.

Get the right licensing

While following the law might sound obvious, there are many small business owners who are simply unaware of what’s required. A business attorney could help discern whatever licenses and permits you need and explain the legal issues involved.

You may need a business license from your state or local government, and failure to obtain one can result in financial penalties. Your local city or county clerk may advise on any local license you may need, and on issues such as whether you can run a business out of your home. Your state’s secretary of state office can inform you of any state licenses you may need.

If your business involves agriculture, alcoholic beverages, transportation, or any other industry that involves federal regulation, you might also have to obtain a license from the federal government. The U.S. Small Business Administration (SBA) has more information on federal licenses for small business owners.

Any business involving people’s health, such as a restaurantcoffeehouse, or fitness center, may need a permit from your local health department. If your business is open to the public, you might need an occupancy permit from the local fire department.

Of course, you’ll also have to follow any licensing requirements involving your profession, as well as any bonding or insurance requirements.

Document everything

Whether you’re dealing with employees, customers, or suppliers it’s a good idea to maintain a formal written agreement so that both parties know where they stand—and you’ll have a record of this in case you wind up in court.

An attorney may advise you on when you need to sign a formal contract. Even in the case of a handshake deal, whether it’s in person or over the phone, it’s a good idea to follow up with the other party via email or snail mail where you outline what both sides are agreeing to.

You might include the services or products you or the other party will provide, what the deadlines are, and the amount either side will be paid. If your business relies on giving advice, make sure you document whatever guidance you provide to your customers. If they refuse to follow your advice, this will also be important to make note of.

In all your communications, you could also ask someone to confirm they received the information and agree to what’s been stipulated. Maintain a phone log of all your conversations that include the date, time, and topics discussed. Any changes to your business relationships should be documented as well.

Good record keeping will be important, especially as your business grows. A good paper trail can be a huge asset in case of a potential lawsuit, although it won’t be much good to you if you can’t find the particular documents you need.

Communicate and collaborate

Keeping your clients informed of your activities is a good way to keep them happy and avoid a lawsuit. If you’re unable to meet a deadline, make sure you notify your customers as soon as possible and explain why.

You should also respond to questions from your customers as soon as possible, at least within 24 hours. As with your other business records, you should keep track of these communications.

Protect your data

Data breaches can wind up costing your business large sums of money and a loss of reputation. The key to preventing a data breach at your business is to educate your employees, make sure they follow the best practices in cybersecurity, and keep your software updated.

Use complex passwords that are hard to guess, and change them frequently. Consider using a password manager that uses encryption software to store multiple passwords online.

Teach your employees to watch out for suspicious emails and phishing attempts. Make sure they don’t click on email links or attachments unless they’re absolutely sure it’s from someone they can trust. Hackers often use these methods to gain access to your computer systems.

Keep your computer systems updated, install antivirus software, and backup your files on a regular basis so even if a ransomware shuts down some of your systems, most of your data will still be protected.

Make sure you have a response plan in place, in case a data breach does occur. It should include contacting those affected and following the notification laws in your state.

Establish clear policies and procedures for employees

State and federal laws require employers to provide a safe workplace that’s free of physical or emotional harm. The Occupational Safety and Health Administration lists several employer responsibilities that include:

  • A workplace free of serious, recognized hazards.
  • Providing employees with the right safety tools and equipment.
  • Employee training that includes operating procedures, safety and health requirements.
  • Informing employees of their rights and responsibilities.

Legal and compliance training for all your employees on issues such as recognizing and avoiding harassment or discrimination are important. You should also have procedures for reporting any of these issues, and let your employees know you’ll take their concerns seriously.

An employee handbook might sound like a time-consuming task for a small business owner, although your legal counsel or a human resources consultant could help you draft such a document while making sure you’re following all applicable laws.

Conduct regular safety inspections and assessments

This involves your physical property, your employees, and any equipment they use. Keep an eye out for potential hazards from your entryway to your interior.

Loose asphalt or ice in your parking lot, frayed carpeting, and physical obstructions (such as extension cords) could all add up to a bodily injury and an expensive lawsuit. Your smoke alarms should all be in working order, and your exits clearly marked and unobstructed.

Make sure your employees are using their equipment properly, and keep your equipment well-maintained. Regular safety drills and employee education can help remind your employees of the right procedures and keep them safe.

You should also document and keep track of all your safety efforts, as this could help with your legal defense if you wind up in court.

Follow best practices for contracts and agreements

Having an attorney draft you a simple contract that you can use in multiple situations could be a sound investment for your business.

If you draft contracts and agreements on your own, between yourself and a customer, consider having an attorney or law firm on retainer so they can look over these documents before you sign them.

You might also add a hold harmless agreement to your contracts. It can protect your business from customer lawsuits, under certain conditions.

Any contract or business agreement should have these key elements:

  • The date that yourself and the customer agreed to a contract or agreement, and what it contains. Your verification might be a paper document that’s dated and signed by both parties, or an electronic signature.
  • The scope of work that outlines what you’ll provide a customer and when your products or services will be delivered.
  • Your pay and invoicing rates. Whether you’re paid by the hour or a flat fee, you’ll need to spell this out in your contract. It should also include when an invoice will be sent and payment should be received.
  • All timelines and deadlines for when you meet your obligations. You might also include any expectations of reasonable delays, from things like weather and supply issues.
  • A termination clause that stipulates how and when either side can sever the contract and for what reasons, such as your failure to meet a deadline or the client neglecting to pay you on time.

Consider forming an LLC

While a limited liability company can’t stop your business from being sued, this type of business structure can protect your personal assets from any business-related liabilities you may have in the event of a lawsuit.

The key difference between a sole proprietorship and an LLC is with a sole proprietorship, your personal and business assets and liabilities are one and the same. If your business is unable to pay a legal judgment or fine, any personal assets you hold could be at risk.

Doing business as an LLC creates a legal separation between yourself and your business. Even if your business loses an expensive business litigation case, your personal assets would be protected by the LLC.

Creating an LLC is more complicated than a sole proprietorship, and you may need the legal advice of a business lawyer.

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Get the right types of insurance coverage

While avoiding lawsuits should be an important part of your risk management plan, you should consider these small business insurance policies to fully protect your business from financial losses:

General liability insurance: This covers common business risks like customer injury, customer property damage, advertising injury, and copyright infringement. It protects your small business from the high costs of lawsuits and helps you qualify for leases and contracts.

Commercial property insurance: Landlords typically require this to sign a lease. It covers your business’s physical location, business supplies, and equipment in case it’s lost, stolen, or damaged.

Business owner's policy: A BOP bundles general liability coverage and commercial property insurance at a discount. It protects against the most common third-party lawsuits and property damage.

Product liability insurance: If you sell, manufacture, or distribute any type of physical products, this coverage can help with your legal expenses if someone sues you for property damage or injuries caused by your defective products.

Errors and omissions insurance (E&O): Also known as professional liability insurance and medical malpractice insurance, E&O insurance protects small businesses against the costs of client lawsuits over unsatisfactory work.

Workers’ compensation insurance: This is required in most states for businesses with one or more employees. It covers the medical costs and lost wages over work-related injuries and illnesses.

Commercial auto insurance: This policy is required in most states for businesses that own vehicles, and covers your legal bills, medical expenses, and property damage if a business vehicle is involved in an accident.

Hired and non-owned auto insurance (HNOA): This provides liability coverage for accidents involving personal, leased, or rented vehicles used by your business.

Commercial umbrella insurance: Once a policy’s limit is reached, commercial umbrella insurance provides additional coverage for liability claims made on general liability, commercial auto, or employer’s liability insurance.

Cyber insurance: Also known as cyber liability insurance, this policy insures against the costs of data breaches and cyberattacks. It covers things like customer notification, credit monitoring, legal fees, and fines.

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Handle disputes effectively

As mentioned above, using best practices for contracts, communications, and record-keeping won’t just help you avoid lawsuits, it can help in case of a disagreement or if you do wind up in court.

If a customer has a complaint, make sure you listen to their concerns and let them know they’ve been heard. Try offering a way of addressing their needs and a path for moving forward.

You should also gather all your documents and evidence involving this customer, such as any contracts or agreements, letters, texts, emails, and phone logs. This can help you remind yourself and the customer of whatever agreements you have, and you may need this information on hand if you seek legal advice.

If a lawsuit happens, you should stop communicating directly with the customer and immediately notify your attorney and your insurance company. If the customer’s complaint is covered by one of your insurance policies, your insurance provider may choose to represent you in court or to cover the legal bills you receive from your own attorney.

Insureon helps protect your small business with the right coverage

Complete Insureon’s easy online application today to compare insurance quotes from top-rated U.S. carriers. You can also consult with a licensed insurance agent on your business insurance needs. Once you find the right policies for your small business, you can begin coverage in less than 24 hours.

Mike Mosser, Content Specialist

Mike spent several years as a reporter and editor covering politics, crime, and the world financial markets. He’s worked for several newspapers, a financial newswire, and a monthly magazine. As a copywriter, Mike has produced SEO-based content, marketing, public relations, and advertising work for a variety of companies.

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