A lawsuit can crush your business, and there’s no fool proof way tot prevent someone from suing you if he thinks you’ve made a mistake, breached a contract or caused him to have an accident while on your premises. The good news is lawsuits are costly and time consuming, so most sane people won’t waste the time and money to sue you if the claim is not substantial and you do everything you can to make yourself an unattractive target. Here are five ways to reduce your liability risk:
1. Use your company as a shield. If you’re doing business as a corporation or LLC, people have to know that they’re dealing with your company, not you. Make sure your corporation or LLC name appears on your business cards, stationery, website homepage, company vehicles, office doors and all other places that are visible to your customers, suppliers and others. Make sure customers write checks to your corporation or LLC, not to you individually. Make sure you sign all business documents, checks and correspondence as a representative or your corporation or LLC (e.g., XYZ Enterprises, Inc. signed by “Your Name, President”).
2. Update your insurance. You should have commercial liability (“slip and fall”) and malpractice (“errors and omissions”) coverage with limits of at least $1 million per occurrence and $3 million total liability.
3. Disclaim legal liability in your contracts. Look at your form contracts with customers and suppliers. These should specifically disclaim any liability for: ”consequential, incidental and punitive damages,” express and implied warranties, “including but not limited to merchantability and fitness for a particular purpose;” and, any liability whatsoever in an amount greater than the amount paid by the customer or $100, “whichever is greater.” These disclaimers need to be in bold type or all caps so that they’re clearly visible. If you website has a “Terms and Conditions” section or a “User’s Agreement,” make sure these disclaimers appear there as well, and that people have to click on a box saying “I Agree” to your terms before they can buy goods or services from you online.
4. Transfer assets. Consider transferring personal assets into the hands of family members who are not involved in your business. To be effective, this must be done before something happens that results in a lawsuit.
5. Get rid of “high risk” customers. If you sense that a customer or client is a lawsuit waiting to happen, especially if he generates little sales for your business, now is the time to stop doing business with him. Let him down gently and refer him to another local business—preferably your biggest competitor or worst enemy.
One thing Cliff didn’t mention in his article which I think is very important when trying to avoid lawsuits is including an Alternative Dispute Resolution (ADR”) Provision in your contracts. Every year, millions of business contracts are written which provide for arbitration as a means of resolving disputes. Most provide for administration by the American Arbitration Association (“AAA”), a public-service, not-for-profit organization offering a broad range of dispute resolution procedures. ADR includes arbitration and mediation, you can also include in the ADR provision, that the parties try to work out the problem before the matter is submitted to ADR. Either way, every contract should have an ADR provision to allow the business to get its disputes resolved as quickly and cost effectively as possible.