Protecting Yourself against Frivolous Lawsuits

Posted on February 22, 2012 in Planning & Advisors

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The “€œCase of the $65 Million Pants” got me thinking over the holiday about how small business owners can protect themselves against crazy lawsuits. Often, it’€™s not just (1) operating as a corporation or limited liability company to shield your personal assets, or (2) having the right contract provisions, or (3) knowing how to move a lawsuit along quickly.

Often, what can make the difference between surviving the nightmare and having it drown you is insurance. And not just the kind of insurance that covers a claim (although I think it would be hard for a dry cleaner to anticipate a $65 million claim). I’€™m talking about defense coverage. This is (or should be) a part of your policy that will pay for some or all of your legal fees in the event that someone sues you for a claim that is covered by your insurance policy. Generally, fee disputes aren’€™t covered. But if your business insurance coverage protects you against your negligence in providing your product or service, defense costs may well be included.

If you don’€™t have business insurance, get it. As you can see, people bring lawsuits for cockamamie reasons, and there’€™s no law preventing them from doing so. If you do have insurance, make sure your defense costs are paid by the insurance company. If they are excluded from the policy, you could end up footing the bill out of your own pocket! And if defense costs are included, find out if there is a deductible and how much it is. Sometimes, you may get a better overall rate on a policy by accepting a higher deductible. But, once again, the deductible is money that you will have to pay out of your own (or your company’€™s own) pocket. And those amounts can be in the thousands of dollars! Yes, insurance deductibles are tax deductible . . . but as a tax attorney friend once cautioned me, “Tax deductible does not mean free.”  Weigh the pros and cons of paying a little more over time against being hit hard with an unpleasant surprise.

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