No matter how good your work is or how fairly treat people, there is still a strong chance that you will find yourself on the wrong end of a lawsuit. In fact, over a ten-year span, more than 70% of companies will be involved in some type of litigation. It’s a prospect that can keep business owners up at night—and for good reason.
While you cannot predict who will sue you or when, here are three best practices that can be taken advantage of now to take some of the sting out of litigation when it comes:
1. Draft Contracts Carefully
2. Choose Insurance Wisely
3. Create a Document Retention Policy
Draft Contracts Carefully
When drafting a contract, the parties often focus on how the relationship will function when things are going well, such as how and when payments are made. To best position yourself for litigation, you need to think about how things will function when a relationship goes sour. Will disagreements be resolved in the courtroom or using alternative dispute resolution methods like mediation or arbitration? If the traditional legal system is used, where will the trial be held? A “choice of venue” clause designating your own backyard as the exclusive forum for litigation can greatly reduce your legal costs (if it does not outright deter someone from suing you in the first place).
In addition to determining the manner in which a dispute is resolved, contractual provisions can also limit your exposure even if the other side prevails. Damages can be capped at a specific dollar amount and certain categories of damages (like lost profits) can be precluded entirely.
Also, in evaluating contracts, make sure to review the terms of your deals with vendors and contractors in addition to those with your customers. Those third party contracts should include “indemnification” provisions requiring the vendors and contractors to defend you if a customer sues based on something they did or failed to do.
Choose Insurance Wisely
The basic considerations in any insurance policy are the cost of the premium, the types of claims covered, and the limit of the protection provided. While these aspects of the policy largely determine how much bang you are getting for your insurance buck, you should also be on the lookout for some common pitfalls to keep in mind.
First, does the policy have a “wasting provision” which reduces the amount available to pay any judgment or settlement by the amount the carrier has spent defending the lawsuit? Second, is the applicable deductible on a “per claim” or “per claimant” basis? If the latter, your deductible can multiply quickly. Third, does the policy provide coverage on a “claims made” or “claims accrued” basis? This is particularly important if you are changing carriers because a switch in the type of policy can create a gap in your coverage.
Once you have an insurance policy in place, make sure to promptly notify your carrier of any litigation. If a potential claim is not reported in accordance with the terms of the policy, it can become a barrier to obtaining full reimbursement of defense costs later.
Create a Document Retention Policy
With the rise of “e-discovery” where litigants probe not only a company’s physical files, but also its e-mail archives, the costs of gathering, reviewing, and producing materials have become significant. One way to reduce this burden is to have a Document Retention Policy that limits the number of files that would have to be searched. The policy does so by dictating that certain types of documents—like tax records or signed contracts—are kept for longer periods, while other types—such as internal routine emails—are regularly destroyed. To take advantage of such a policy, however, it must be in place and consistently used before a dispute is at hand. Once there is a reasonable threat of litigation it is too late as all relevant documents must be retained at that point.
If you are never served with legal papers, you should be proud and consider yourself fortunate. If that time unfortunately comes, however, knowing that you have already engaged in the above practices may help you breathe a little easier.