What to Do When You’re Sued

Small businesses seem to have a bulls eye on them because they are frequent targets of lawsuits. Some are certainly legitimate claims for a company’s actions or negligence. However, many lawsuits are frivolous lawsuits designed to squeeze a settlement despite limited, contrived, or no proof of wrongdoing.

The NFIB reports that small businesses pay $35.6 billion annually out-of-pocket to settle frivolous lawsuits. What should you do if you’re served with legal papers?

Pay attention
Whether or not the claim is bogus, it won’t go away without action on your part. Try to identify whether the claim is real or bogus (you may need professional help for this).

For example, there are a number of patent trolls who file frivolous patent infringement cases. Making this determination will help determine your course of action.

Notify your insurer

If a claim relates to anything for which you have coverage, tell your insurance company immediately. The failure to do so is a violation of your policy, which can mean that the insurer won’t pay a claim even if it would have done so with proper notification.

Bring in an attorney
Your insurance company will defend you for covered claims and you may want to rely on this “free” representation (it’s what your premiums have been paying for).

If your policy doesn’t apply to the case at hand or you want your own representation, contact a lawyer skilled in the area concerning your claim (e.g., employment law if a former employee is making a claim; a negligence attorney if a customer has a slip-and-fall claim).

Before you settle
Weigh the pros and cons of settling a claim.

Pros:

  • You save time and aggravation that would result from contesting a claim.
  • You know the extent of your legal fees.

Cons:

  • Your insurance premiums may rise.
  • Your legal fees for contesting a claim could mount.
  • You’ve given in on principle.

Final thought
As in the case of an IRS audit, you can take steps to minimize your exposure, but you can’t completely insulate yourself from being a target.

Open
Close

Big Ideas for Small Business®
Find it for free on the App Store.
Get