How to Prepare for Litigation as a Business Owner

Most owners of small businesses trust that doing the right thing, such as taking care of their employees, and respecting their customers and suppliers, will shield the business owners from litigation.  Unfortunately, statistics say otherwise.  A survey taken of small businesses in 2016 revealed that 32.5% of the businesses surveyed had experienced an event that exposed them to a potential insurance claim. Litigation, or the threat of it, is an inextricable part of business as usual in the United States.  Just like your home and possessions, your business enterprises need to be protected against unforeseen and unavoidable risks.  Preparing well-constructed, comprehensive contracts that consider jurisdictional laws and are tailored to your specific business, is a best practice that can anticipate risks and protect your business.

Review All Contracts for the Choice of Law, Jurisdiction and Venue Clause

Almost all written contracts have a clause about what law, jurisdiction, and venue apply in the event of litigation.  Most businesses consider the selection of these options to be trivial, and of little concern. But there can be costly consequences to this clause.  For example, if a contract is drafted by a corporate vendor located in another state, it is likely they will choose their local jurisdiction as the venue for all legal disputes.  Further, the same clause often will say that the parties agree that if there is a suit filed the jurisdiction will be in the corporate vendor’s state.  The clause may further state that the local business, for whom the contract was drafted, agrees to personal jurisdiction in the county selected by and convenient to the corporate vendor.   As a consequence, the local business agrees to the out-of-state corporate vendor accepting service of any summons issued in instituting a suit. Suddenly, you find that not only is your business being sued, but the litigation of that suit will also take place outside of your network of business contacts, and in place where you don’t have a relationship with trusted legal counsel.

To defend the lawsuit, you will need to engage legal representation in the jurisdiction identified in the contract.  Additionally, you will likely lose valuable time and incur costs to travel to the jurisdiction that had seemed irrelevant when the contract was first drafted, which will add considerably to the burden of defending the lawsuit. Drafting business contracts may seem to be a fairly routine and well-established part of your business practices, but the language and clauses included or excluded really do matter.  A contract should reflect a comprehensive understanding of all available protections your business can employ.  Ensuring that your business contracts are well-written and address your concerns is a significant first step toward litigation protection.

Act on all Legal Notices and Summons of Suits of Claims Promptly

Suits or administrative actions may be filed against you or your legal entity. All legal court and administrative actions require the timely filing of a written response within a specified period of time.  If you or your legal entity, as a defendant, fail to answer the written complaint by the deadline established under the law, a “default judgment” could be entered against you or your business. This means that after the court or the administrative body issues a default judgment against you, your liability is established and you have waived defenses to the claim.  At that point, the only remaining decision to be made after a default judgment is entered is how much the plaintiff or petitioner should be paid for the claim! 

Be aware that each jurisdiction limits, by law or court rule, the deadline for filing an answer or reply.  Most, if not all, issued court summons that accompany a complaint contain the deadline date that the answer or reply must be filed.  Specific deadlines for any administrative claims your business may receive will be set forth in the Notice of Charge letter as well.  A few common examples of deadlines to file an answer are as follows:

  • EEOC:  Position Statement due 30 days
  • Howard County OHR:  Position/Response Statement due 30 days
  • U.S. Department of Labor:  Between 21 and 30 days

As you can see, the clock starts ticking when a claim is filed. To avoid a default judgment, the defendant(s) should immediately seek legal counsel or notify their insurance carrier.  If a claim is forwarded to an insurance carrier, it will wind through their internal administrative process before ultimately being assigned to legal counsel for a defense.  This process will use precious time, condensing the time remaining for drafting and filing a formal response to the administrative claim. Missing the response time not only risks default judgements against defendant(s), it also jeopardizes claiming some defenses.  In some cases, if a defense is not brought up in time, the defendant(s) will lose the ability to bring up those defenses in the future (this is referred to as “waiving” a defense).  For example, a plaintiff must generally file suit within three years of the date of the accident or in a contract action within three (3) years from the date of the breach of contract.  If this defense is not raised at the time the answer to the complaint is due, it cannot be raised in the future and is waived.  An insurance carrier could claim it was prejudiced by the loss of this defense and deny its coverage as a result of a delay in reporting the claim to it in a timely fashion.

Careful consideration and protection of all available defenses in drafting and filing responses to claims sets the foundation for a favorable judgement.

Beware of Reservation of Rights Letters issued by Insurance Carriers

Many lawsuits and claims are covered by insurance carriers. Businesses should carry insurance coverage liability protection for the operation of business owned cars and for general liability claims for the operation of the premises of the business.  When a lawsuit or claim is received under these coverages they should be promptly reported to the insurance carrier.  Unfortunately, when insurance carriers review claims a “Reservation of Rights Letter” may be sent to the insured business.  These letters generally state that by accepting the claim and investigating the circumstances of the claim, the insurance carrier is reserving its right to later either limit its duty to indemnify the insured or to deny coverage for the reason stated in the letter.  For example, an insurance policy may only provide indemnity coverage limits of five hundred thousand dollars.  However, the lawsuit or claim states that the extent of the injuries sustained exceeds one million dollars. These facts are sure to generate the issuance of a “Reservation of Rights” letter, that puts the insured business on notice that any claim amount above contractual indemnity coverage is on them.  When this type of letter is received it is recommended that the business owner seek review of the claim and defense by a well-experienced litigation lawyer to review and investigate the limitation of coverage.  The scope of involvement by personal counsel will depend on a case by case basis, but when a “Reservation of Rights” letter is received retention of the assistance of personal counsel should be considered.

No business owner wants to face litigation.  However, whether you are planning routine business contracts, or facing the threat of a lawsuit or claim, ensuring that you’re working with corporate counsel can make all the difference in ensuring that your business is protected.  

For more information about this article or any other Litigation matter, please contact an attorney in our Litigation practice area.