According to a 2004 Tillinghast-Towers Perrin report, U.S. consumers pay hundreds of dollars extra for products and services to offset the costs of companies’ lawsuits.
“The U.S. Chamber of Commerce and the Institute for Legal Reform report that America’s civil justice system is the world’s most expensive,” says Kirk Barry, team lead for complex casualty claims at Westfield Insurance.
Smart Business discussed with Barry how business owners can take a proactive approach to litigation risk and respond effectively to lawsuits to avoid unnecessary costs.
Why do business owners need to be prepared for a lawsuit?
Lawsuits have time limitations that require the defendant to answer a complaint (lawsuit) within a specific period of time, normally 30 days or less. If the defendant does not respond in time, the court can award damages to the plaintiff, to be paid by the defendant without the defendant having any opportunity to defend himself or herself.
A business owner may have insurance coverage that provides a defense against allegations covered by the policy. If the business owner fails to promptly notify his or her insurance carrier about the lawsuit, the business owner may forfeit coverage.
Business owners should contact their insurance agent immediately to determine if there is any insurance coverage for the lawsuit. Insurance agents and insurance carriers can help guide business owners through the process and let them know (whether) they need to hire their own attorney to provide an answer to the complaint and represent them against the allegations.
What preventive actions can companies take to minimize the chance of a lawsuit?
Training employees about how to conduct themselves and represent the business reduces the chance of being sued.
Create a company vision statement that includes ethical conduct as a key to the company’s success, and then live it and breathe it by communicating it to all levels of the organization. Create and distribute an employee handbook that is rigorously followed, and have each employee sign and date an acknowledgment that he or she has reviewed it.
Conduct meetings to educate employees on matters that can affect both them and the company as the result of certain actions or inaction. Standard reporting procedures for employees involved in on-the-job accidents protect the company and also potentially protect employees. Use corporate counsel or an outside vendor if necessary. Some investment upfront may save the company in the long run.
Be proactive. Watch for trends that may affect the business and its stakeholders. As appropriate, move to change the way the business is handling situations.
Another issue to consider is that contracts with other companies can expose business owners to defending or indemnifying other individuals and entities for their actions. Read contracts and understand how they can affect the business. Having an appropriate party review contracts is a proactive step in litigation avoidance.
In addition, business owners may be able to transfer risk to another party via contractual language that commits the other entity to buying appropriate insurance coverage for both companies.
How can companies be prepared to respond to a suit?
Prior to being sued, identify individuals within the organization who have authority to accept the service of a suit and train them on appropriate action steps. This provides consistency and helps avoid missing deadlines, which could lead to a default. It’s also important to educate employees about what to do if they are sued directly.
Throughout the process, open and honest communication with the attorney and insurance company assists in the planning, strategy and execution of any available defenses from the start. New or changed information during the litigation process will only hurt a defense later. When a company is legally liable for its or its employees’ actions, a prompt response helps protect those involved.
A business will need to provide all documents to its insurance company and attorney, but it is also important to keep copies, including postmarked envelopes, for its records and to immediately record the date of service of suit. Do not discuss the allegations with or provide documents to anyone outside of the business other than the insurance company and your counsel until appropriate guidance is provided.
Kirk Barry, team lead for complex casualty claims, can be reached at (330) 887-0248 or [email protected]. In business for more than 157 years, Westfield Insurance provides commercial and personal insurance services to customers in 17 states. Represented by leading independent insurance agencies, the product Westfield offers is peace of mind and a promise of protection is supported by a commitment to service excellence. For more information, visit www.westfieldinsurance.com.
