What to do if your business is facing a civil lawsuit

Insureon Staff.
By Insureon Staff
April 14, 2014
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A civil lawsuit against your business can be stressful and expensive, but there are ways to mitigate the costs, including small business insurance. Compare quotes online with Insureon.
A gavel on a table next to a pile of cash.

If your business ever faces a lawsuit, it will likely be tried as a civil case, as opposed to a criminal one. What’s the difference, you say?

Civil cases are brought to the court by one party (the plaintiff) who says another party (the defendant) did something to cause them an unfair loss. For example, one of your clients could claim your photography studio ruined his wedding day by not capturing certain moments. In order to get even for this perceived loss, the plaintiff usually asks for money or some other kind of restitution.

On the other hand, criminal cases involve crimes. These cases are used to regulate and reinforce the social laws that prevent us from threatening the safety, health, or welfare of others. When a defendant is found guilty in a criminal case, they are punished for it. Some, for example, spend time in prison.

Think about the difference between criminal and civil cases this way: criminal cases lead to possible punishment, whereas civil cases aim to end in conflict resolution. Which is not to say that forking over your time, a $20,000 settlement, and $5,000 in lawyer’s fees won’t still feel like a punishment.

Read on to learn more about civil lawsuits and how your business can mitigate the high cost of litigation.

What disputes lead to civil lawsuits?

Since the goal of a civil lawsuit is to end a dispute between two parties (businesses, nonprofits, and individuals), it’s important to be aware of the civil wrongs that lead to these cases. Most civil wrongs that small businesses encounter are called torts. Torts are divided into several categories, including but not limited to:

Property torts. Example: You are a pet groomer who specializes in show-dog styling. One day, you are working on a Pomeranian who falls off the grooming table and breaks two legs. The Pom’s show days are over. The pet owner sues you not only for the cost of veterinary care (in this case, the pet would likely be considered “property”), but also $500,000 dollars in damages since this award-winning pooch can no longer work the show circuit.

Liability torts. Example: Your business sells a product that ends up giving a customer a severe allergic reaction due to an undeclared allergen. The customer files a lawsuit against your business. (For more information on this type of claim, read our blog post “5 tips for understanding potential product liability.”)

Dignitary torts. Example: You are a freelance transcriber who tweets about one of your client’s shoddy payment methods. Your client sues you for defamation, claiming that the tweet is untrue and damages his business’s image. (Read more about this real-life case here: “How commercial general liability insurance can protect you from an $82,630 tweet.”)

Infringement liability. Example: Your small brewpub names a beer after Starbuck’s Frappuccino drink. The corporate coffee giant threatens to sue you for trademark infringement. (Seriously. Read “How to protect your bar or café from a Starbucks lawsuit” for more on this story.)

Negligence. Example: You own a learning center that offers tutoring services for grades K-12. The mother of one of your students is angry because her daughter needs to be held back a grade. She claims you weren’t doing the kind of job that is expected from a professional and is suing you for the cost of the tutoring and $150,000 in emotional damages to compensate for her child’s low self-esteem.

Unfortunately, small businesses are often the target of tort lawsuits. In 2008, they amounted to 81% of all tort liability costs [PDF] in the United States. As a small business owner, you are most likely to be sued by an unhappy client, customer, or patient, even though most of these claims are meritless.

Some of the easiest claims to bring against a small business owner are professional liability (also called errors and omissions or malpractice) claims. These lawsuits often deal with negligence – the allegation that your work does not meet professional standards. Often, these cases turn into “he said, she said” arguments that cost business owners a lot of time and money.

How errors and omissions insurance can protect businesses from civil lawsuits

Let’s imagine that you own the learning center from the previous example. You’ve already tried to resolve the issue with tips from our “How to prevent professional liability lawsuits” post. However, the client is determined to bring the case to court, and you are served with a formal complaint.

Hopefully, you have errors and omissions insurance, which is going to make the next steps of the lawsuit process a lot easier. E&O coverage helps small businesses finance the cost of claims that relate to their services. If you have insurance, your first step is to contact your insurance provider immediately. Your provider will:

  • Help you find a lawyer that specializes in E&O lawsuits
  • Manage your defense
  • Pay for the cost of legal representation

From there, your case could be dismissed, dropped, settled, or go to trial. For more information on how these lawsuits pan out, read “Understanding errors and omissions (malpractice) lawsuits.”

Remember: E&O insurance can only protect you from one kind of tort liability lawsuit. There are other small business insurance policies that can cover the torts mentioned in the previous section. Contact one of our insurance agents to learn more.

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