Business Owners: Reducing Legal Costs Through Proper Risk Management

We live in a litigious society.  Individuals initiate lawsuits for a variety of reasons, some legitimate and others trivial.  In fact, in one infamous case, an elderly woman filed a lawsuit against McDonald’s after spilling the franchise’s coffee on herself, and suffering severe burns as a result.  The jury found in favor of the woman.  Proponents of Tort Reform argued the decision was an example of a system that was “out-of-control.”  Defendants of the jury system argued that McDonalds had prior complaints from customers that their coffee was just too hot and a liability when trying to drink coffee and drive simultaneously.

For better or worse, litigation is an extremely prevalent part of the American legal system, business, and society. Litigation can cost your business vast amounts of time and financial resources.  In some cases, a lawsuit may also pose irreparable damage to the reputation of your company.  While no business can be completely immune to the dangers lawsuits pose, certain measures can and should be taken in order to minimize your chances of facing a lawsuit. Adopting proper risk management strategies will allow you and your company to avoid the consequences of a lawsuit.

Before discussing these strategies, however, it is important to first discuss which types of business are more likely to face lawsuits. Certain types of business are greater risk of experiencing accidents in the workplace, and are thus at greater risk of facing personal injury lawsuits.  Some examples of businesses more likely to face personal injury lawsuits include, but are not limited to:

Business that entail:

• Driving
• Supervising or taking care of children
• Taking care of animals
• Supplying alcoholic beverages
• Making or selling food and other beverages
• Utilizing toxic chemicals

Nevertheless, any business that engages and interacts with others still faces the risk of being sued.  Business can be sued for a variety of reasons other than personal injury, such as breach of contract, imperfect information, and antitrust to name a few.  Every business is at risk of facing a lawsuit, if the proper risk management strategies are not taken.

What steps can I take to decrease the chances that my business will be sued? 

1. Creating Workplace Rules to be followed:

 These rules should be clear, and all employees should be aware of them.  The best way to accomplish this goal is by creating a manual listing these rules.  This manual should not only include technical rules about business operations, but also ethical ones.  All employees in your company should receive a copy of this manual, and should be required to read it and be aware of the material presented in it.

1. Creating Compliance Programs to Enforce these Rules:

In addition to creating rules and informing your employees of these rules, you should also create a compliance program to ensure these rules are followed.  This will not only decrease the chances that your business will be sued, but also assist your business in the event that it does face a lawsuit.  A judge will see that your efforts to operate with the confines of the law, and will be less likely to order your company to pay substantial damages.

3. Employ Good Business Practices:

At the most basic level, employing good business practices means acting within the confines of the law.  Good business practices, however, also encompass hiring employees with care, incorporating ethics into the business environment, as well as maintaining good relations with your employees.

You should be very cautious in hiring people to work at your business.  The advancements in technology allow you to discover a substantial amount of information about your employees before hiring them.  For instance, if you are hiring an individual to drive for your company, you should consider looking at his or her driving record.  Taking this action will allow to ensure that the individual does not have a history of getting into accidents, and will minimize your chances for facing a lawsuit for this reason.  You may also want to consider having a potential employee undergo a physical examination.  This will ensure that he or she does not have any sort of health condition, such as a visual, auditory, or reflex impairment, that would affect his or her ability to drive safely.

You may also consider checking a potential employee’s criminal record.  Hiring individuals of good character minimizes the chances that your employees will take actions that will prompt a lawsuit. Keep in mind, however, you can only choose not to hire someone if their criminal conviction relates to the tasks or duties he or she would be performing for your company.  Under California law, you must inform a potential employee that you will be completing any of these checks.  California law details various other specific rules on completing background checks; be sure to act in accordance with these rules.

Within your company, you should also try to incorporate ethics into your business environment.  For instance, when completing a project at your company, you should always consider the ethical implications of this project.  Furthermore, all employees should be aware of these implications.  This not only ensures that your company acts in an ethical manner, but also ensures that your employees understand the importance of acting in this way.  Furthermore, taking these actions can help create a positive public image of your business.  In short, incorporating ethics into your business environment will minimize your company’s chances of facing a lawsuit.

Finally, you should be sure to maintain good relations with your employees.  Remember, lawsuits can be filed against your company not only by your customers or other companies, but also by your employees.  First and foremost, you should be sure to treat all of your employees fairly. You should be especially sure to treat your employees fairly when disciplinary actions are necessary.  You should create an established and consistent punishment system.  This should minimize the chances of your business facing a discrimination-based lawsuit from a bitter or upset employee.

You should also institute certain policies at your workplace, such as a sexual harassment policy.  This allows your company to deal with sexual harassment cases, rather than through the litigation process. Generally, an employee can only sue for sexual harassment only if complaints made to your company’s management are disregarded.

3. Use Quality Control Measures to Ensure Your Product or Service Meets Legal Standards:

Quality control measures ensure that the product your business makes or the service it provides meets certain legal standards. For instance, if your company makes software, your product should not have bugs that produce computer viruses.  If your product does not meet certain standards, your company could face a higher risk of being sued.

One way to ensure the quality of your company’s products or services is through frequent assessments of these products or services.  This includes evaluating the production process involved in creating your company’s goods, or evaluating the services your company provides.  Your company may also want to allow for consumer review of your products or services, by placing such a link on your company’s website. You could also ask your consumers if they would like to complete a survey when they call your company for other.  Typically, consumer reviews allow for a candid evaluation of the strengths and weaknesses of your company’s product or service.

What steps can I take to both decrease the likelihood of being sued and he impact of any lawsuit in the event my business is sued?

1. Incorporate Your Business

By definition, a corporation is a “legal entity” separate from its owners. This generally means that, in the event of a lawsuit, only the assets of your business will be at risk, not your own personal assets.  Of course there are exceptions: For example, if you are an officer in your company (or own the company) and you are engaged in intentional or reckless misconduct, you could still face personal liability. (This is sometimes called: “Piercing the Corporate Veil” doctrine.)

2. Use Internal Audits & Annual Contract Review to Ensure Legal Protection

The Institute of Internal Auditors classifies internal auditing as “an independent and objective assurance and consulting activity designed to add value and improve an organization’s operations.  It helps organizations to accomplish its objectives by bring a systematic, disciplined approach to evaluate and improve the effectiveness of risk management, control, and governance processes.”  Essentially, internal audits provide an unbiased, outside opinion about the way your company conducts business, and the steps you are taking in regards to risk management.  Internal audits also evaluate whether your business is being conducted in an honest manner.  While you are not obliged to follow the advice and suggestion of your internal audits, you would certainly be wise to do so.  Following their advice will likely improve the way your business, as well as minimizing your chances of facing a lawsuit.

A well-drafted contract can save you thousands of dollars and keep your business from going to court.  You may wish to consider consulting an attorney when drafting your company’s contracts.  He or she can ensure that certain clauses are included in your contracts that can help you minimize the risk and cost of litigation.  Some clauses you should that should be present in your contract in order to help you control costs and avoid court include:

•  Indemnification Clause (Sometimes called: Hold Harmless Clause)

An indemnification clause should be included in a contract when multiple parties are involved in the creation of a product or provision of a service.  An indemnification clause explicitly states which party is responsible for which risks in the event of a lawsuit.  Normally, it exempts one of the parties of legal and financial responsibility for legal claims and actions in the event of a lawsuit. (See article: What is an Indemnification or Hold-Harmless Clause? Are they Enforceable in California?)

•  Limitation of Liability Clause

A limitation of liability clause attempts to limit the damages on what one party can collect from the other in the event of a lawsuit or other claim against them. For instance, two different companies may agree that in the event of a legal dispute to limit any damages to a certain sum. However, this agreement must be written into a limitation of liability clause in both of the companies’ contract, and agreed upon by both parties during contract negotiation. (See our article: “What is a Limitation of Liability Clause in a Contract?  Are they Enforceable in California?”)

• Alternative Resolution Dispute Clause (“ADR”)

ADR complements the court system by making methods available to resolve some disputes at less cost, in less time, and often without the win-lose outcome that characterizes conventional litigation.  Some examples of methods available include mediation, and nonbinding and binding arbitration.  (See our article: “How a Well-Drafted Contract With an Effective Alternative Dispute Resolution (ADR) Clause Can Save You Thousands in Legal Costs and Keep You Out of Court”).

4. Purchase Insurance

Purchasing insurance does not protect your business from being sued. However, in the event of a lawsuit, having insurance can substantially reduce the damage your company will face.  Furthermore, an insurance company can help guide your business through the litigation process. If you purchase insurance and your company is sued for act or omission covered by insurance, an insurance company is responsible for:

• Obtaining attorneys to act on behalf of your company.
• Paying the fees for these attorneys.

AND

• Paying for any damages you incur if a judge rules against your company.

It is important to understand, however, that there is not a universal insurance policy that covers all work-related disputes or accidents.  Different types of insurance cover different types of disputes or accidents.  Some common types of insurance that you should consider purchasing to protect your business include:

• General liability insurance

This type of insurance is the most basic, minimal type of insurance you could purchase for your business. General liability insurance covers any accidents that occur on property owned by your business in which someone is hurt.  This includes accidents that your business may not actually be at fault for, such as an employee tripping on your property and subsequently breaking a bone.  Purchasing general liability insurance does not mean an employee or any other individual cannot sue your company for accidents that occur on your premises. However, if someone does sue your company for this reason, an insurance company will pay for the damages.

• Automobile liability insurance

This type of insurance protects your business in the event one of your workers gets into a car accident during the course of work.  If your business operations involve driving, then you are required to purchase automobile liability insurance under California law.

•  Worker’s compensation insurance

This type of insurance protects your business in the event that an employee is harmed in the course of work.  For instance, if your company utilizes toxic chemicals in making its products, and an employee becomes ill as a result of working with these chemicals, he or she may sue your company.  If your business possesses a worker’s compensation insurance policy, then an insurance company will pay for any fines your company is ordered to pay. Workers’ compensation insurance is required under California law.

• Product liability insurance

This type of insurance covers any harm caused one of your company’s products.  For instance, if a child swallows your product and dies as a result, an insurance company will pay for any damages that your company must pay.

• Professional errors and omissions insurance

This type of insurance covers any complaints made that your business did not fulfill the terms of a contract you created, or complaints that your business made any other sort of professional “errors.”

Since every business is different, it is important to analyze what risk management strategies are best suited to your needs to decrease your liability and minimize the risk of a lawsuit.  One cost-effective way to do this is to have an experienced business attorney review your company and conduct a confidential legal risk analysis of your business. If you have any questions or are interested in such an analysis, please contact Berkeley-Oakland-Walnut Creek Business Law attorney Richard Korb at 510-524-0903 for a free consultation.

[1] RICHARD E. KORB is a seasoned attorney with 30 years of business and real estate litigation and transactional (contracts) experience. Over his legal career, Richard has successfully litigated and resolved over 300 court cases in the fields of contract law, real estate, employment, unfair competition, bankruptcy and general civil law and he has drafted and negotiated over 250 contracts and licenses for large and small companies alike. Richard leverages his experience as a former partner in a 100-person law firm and chief counsel for a public software company to assist individuals and companies, from start-ups to multi-nationals, with a broad spectrum of legal matters.  In addition to his legal practice, Richard is a court-approved mediator and serves on the Alternative Dispute Resolution (ADR) panel for both the Alameda and Contra Costs County Superior Courts.