How To Protect Your Business From a Lawsuit
Understand best practices to avoid a lawsuit for your business
on September 21, 2022
Updated on January 11, 2023
If you’re a business owner, you want to do everything possible to prevent a lawsuit against your company.
Business lawsuits are time-consuming. They often result in significant financial losses as well as reputational damage to the company, business partners, shareholders, or others connected with the business.
It’s important to “recognize that in most cases, litigation is not a good business… it’s a rare instance where litigation is going to make [a company] money or improve the company’s bottom line,” says Georgia business litigation attorney Benjamin I. Fink.
This article will cover different ways to avoid or mitigate the risk of a lawsuit against your business. It will also cover what to do if your business gets sued despite your best efforts to protect it from a lawsuit.
If your business is involved in a lawsuit, it’s best to speak with an experienced lawyer about your situation to ensure the best outcome.
Types of Potential Lawsuits
Every business lawsuit is different, involving specific people, events and legal claims. However, some of the most common types of business lawsuits include:
- Breach of contract
- Breach of fiduciary duty
- Intellectual property infringement/theft
- Personal injury cases, including
- Products liability for defective products or a business’s failure to warn of a dangerous product
- Premises liability for when a customer is injured or experiences property damage due to hazardous conditions
- Malpractice cases, often in the healthcare context
- Employment law issues, including
- Workers’ compensation for workplace injuries
- Wrongful termination
- Workplace harassment
- Discriminatory employment practices
- Accidents involving a company car or truck
Who can sue a business? Many different parties may bring a lawsuit, including:
- Customers (personal injury cases, malpractice)
- Employees (employment disputes)
- Other companies (breach of contract, intellectual property)
- Shareholders and business partners (breach of fiduciary duty, intellectual property)
Ultimately, who sues will depend on what happened and the legal claims involved.
How Can I Protect My Business?
There are several preventative measures businesses can take to avoid potential lawsuits.
It’s also important for businesses to have insurance covering potential liabilities for the company.
There are “numerous ways [to try to avoid legal action],” says Fink.
For example, take breach of contract lawsuits. “If a company is negotiating a contract with another company,” says Fink, “have a lawyer involved [to] help identify potential issues or areas of dispute and hopefully avoid those from coming up if the business relationship doesn’t work out.”
In other words, instead of fixing potential legal issues later, avoid them by creating a legally sound contract from the beginning.
Another way to avoid many kinds of business lawsuits “is to have really good policies and procedures in place within the company to ensure that you’re in compliance with the law,” he says.
Policies and procedures are typically included in an employee handbook provided to employees when they are hired.
However, simply having policies and procedures in place isn’t enough.
“Another [way to avoid legal problems] that often gets overlooked is training,” says Fink. “[Make] sure that you not only have the policies and procedures but that the employees are educated on them and understand what [the policies] say and why they exist.”
Human resources often conducts training in company policies and procedures. “It’s important to make sure that people aren’t engaging in conduct that’s going to lead to liability for the company,” says Fink.
In addition to having excellent policies and training, businesses need insurance coverage for claims that could arise.
Insurance companies offer various policies geared to the needs of different businesses. Some of the most common types of business insurance policies are:
- General liability insurance. Also referred to as small business insurance, this is a liability policy covering the most common injuries or accidents that may occur at a business, from slip and falls to property damage. General liability also covers legal fees if you face a lawsuit.
- Professional liability insurance. Also known as “error and omission insurance,” this type of insurance helps cover the costs of a lawsuit when your business is sued for making errors that result in another company or client’s financial loss.
- Malpractice insurance. This insurance helps cover legal costs when professionals are sued for malpractice. Doctors and other healthcare providers, lawyers, and counselors are examples of professionals who often get (or are required to get) malpractice insurance.
- Workers’ compensation insurance. Most states require businesses to have workers’ compensation insurance to help cover costs when an employee is injured in the workplace or job site.
- Commercial auto insurance. If your business employs drivers or deliverers, this insurance helps cover the costs of injuries from work-related auto accidents.
It’s best to speak with an insurance company representative about different insurance policies and the combination that works best for your business.
What Business Structure Is the Most Protective in the Event of a Lawsuit?
Another factor in protecting your business in the event of a lawsuit is how your company is legally set up, and includes asset protection, personal assets, and bank accounts.
- Sole proprietorships. Many small business owners set up their business as a sole proprietorship since this is the simplest and cheapest way to do so. However, a significant risk with this business structure is that it doesn’t protect the business owner’s personal assets (home, bank account) from liability if the business is sued. In other words, if the business is sued, the owner’s assets will be at risk.
- Limited liability company (LLC). Unlike a sole proprietorship, this type of business structure offers asset protection for the business owner by separating the business owner’s assets and the company. If an LLC is sued, the business owner is not personally liable.
If you are considering starting a business, or are currently a business owner with a sole proprietorship, speak with a lawyer about your options for protecting your assets.
What Should I Do if My Business Gets Sued?
Despite all their best efforts, many business owners cannot avoid a lawsuit at some point in their business life.
In the event of a lawsuit, it’s imperative to “call a lawyer” for legal advice, says Fink.
“Another thing [business owners can do] and that’s a real big issue these days is evidence preservation,” he says.
“As soon as possible, and maybe even before calling a lawyer, make sure that none of the emails or documents or any other electronic communications related to the dispute are lost or destroyed,” says Fink.
“For example, if you have a setting on everybody’s company email that emails over a month old get deleted for some reason, [make sure] you immediately suspend those kinds of document destruction procedures to make sure that nothing related to the dispute is destroyed.”
It’s also important to keep accurate records so that you have evidence to defend your business if your business is sued.
Questions for a Business Attorney
If you are a business owner confronting a lawsuit, get legal counsel from a business lawyer as soon as possible.
Many business litigation lawyers provide free consultations. These meetings let you get legal advice and help you decide if the attorney and law firm meets your business needs.
To get the most out of a consultation, ask informed questions such as:
- What are your attorney’s fees?
- Do you work on a retainer, by the hour, or some other billing method?
- What are the defenses in this lawsuit?
- How long will a lawsuit last?
- Should we settle or go to trial?
Once you have met with a lawyer and gotten your questions answered, you can begin an attorney-client relationship.
Look for a business litigation attorney in the Super Lawyers directory to find the right lawyer for your business-related legal issues.