Last Update: April 20, 2016
There are many faces of lawsuit abuse, a rising majority of them being small business owners.
Roberto Guerrero, owner of San Francisco-based Cumaica Coffee shop is one of them. “It began when Roberto received a letter from a customer who claimed that certain features in Roberto’s store violated the Americans with Disabilities Act (ADA).”
“All were minor violations such as a recycling bin placed too close to a door and a pastry case located too close to a counter. Roberto did not realize his store was in violation of the ADA but quickly made the requested changes and notified the customer. The customer acknowledged that Roberto made the requested changes yet sued anyway and sought nearly $90,000 in damages,” according to the U.S. Chamber Institute for Legal Reform.
After a year of litigation, Guerrero wound up settling the case for $20,000. However, Roberto wasn’t the only small business owner targeted. At least 16 neighboring businesses were also sued by the same plaintiff. Two of them were forced to close.
Most small business owners, like Guerrero are unaware that they are courting potential disasters (legal action) that could cost them — their company and livelihood. In fact, if you think most business lawsuits effect Fortune 500 companies, think again.
Fifty-seven percent (57%) of lawsuits impact companies making less than $1 million in revenue and 1 in 3 small business owners are sued or threatened with a law suit.
Current trends and small business lawsuit facts may surprise you:
$100 billion: How much small businesses spend on legal action in the U.S. annually
25%: Number of harassment claims has risen since 2006
$404 Million: Price to settle discrimination related law suits each year
$104 Billion: Annual cost to settle tort liability
How to Protect your Business from Lawsuit Abuse
We live in a litigious society. “Any day you get served with a lawsuit is not a good day for your business. You cannot ignore the lawsuit without suffering a judgment against your business, and you know that defending the lawsuit will involve an uncertain amount of time and money.”
Lawsuit abuse hurts small businesses. Joe Ramirez, the CEO of Pacific National Security, knows this fact first-hand.
“[We] started the same way countless other small businesses got their beginnings: with a loan from a friend and a lot of hard work … After spending my own personal money, paying bills with credit cards and with no help from any banks, the entire company’s existence was threatened due to an abusive lawsuit,” said Ramirez.
“Although I had done nothing wrong, my business faced a class action lawsuit alleging violations of California’s incredibly strict employee regulations. Due to the extremely high cost of fighting the lawsuit, I was forced to settle with the plaintiff. It cost my business at minimum $40,000, which affected my financial capabilities and threatened the closure of the company altogether.”
Many small business owners have or will face a potentially threatening legal battle. Here are five simple ways to protect your business:
1. Never be surprised
Acknowledge the possibility of a lawsuit and takes steps to prevent it. Work to identify the areas of your business that are vulnerable as most lawsuits are preventable with an honest assessment of your business. Every entrepreneur should determine to what extent the operation of your business might expose you to legal liability.
If you have a small business insurance agent, inquire about your potential liability immediately.
2. Get everything in writing
You shouldn’t close a deal on a handshake, it must be done in writing –as painstaking as it may be. Details, such as deadlines and costs, can be fudged later if it is not in writing. Consult your small business attorney or utilize template-based contracts available online. However, it’s always a good idea to have a legal advisor review them.
3. Investigate and document complaints
When a customer or employee has a complaint — do something about it! Investigate and document the course of action you took. Develop a simple process that may include:
a. Establishing a written procedure for handling complaints.
b. Developing a central point of contact through which all complaints are routed.
c. Creating a Complaint Log to track complaints and spot patterns or practices that should be changed.
Finally, if your small business has been threatened with a lawsuit, consult with an attorney to discuss your findings and weigh the potential for settlement.
4. Invest in Legal Counsel
The cost of legal support is not cheap, but it is better than a multimillion dollar settlement down the road. Identify a trusted legal advisor that is experienced in working with small businesses.
5. Purchase Business Insurance
Once you’ve completed an honest assessment of your business, research business insurance coverage that is available for every conceivable risk your business might face. Liability claims costs companies billions every year; liability insurance can lessen or eliminate the potential for a massive claim against your small business.
Eric Gewirtzman is the Chief Executive Officer and Co-founder of SeaPass Solutions, a parent company of BOLT Insurance Agency. BOLT Insurance aims to offer a better way for small business owners to choose and buy their insurance. View the Courting Disaster: Small Business Lawsuits Infographic below to learn more about the most common lawsuits that small businesses face, how much it may cost you, and how to protect yourself.