Protect Your Small Business from Frivolous Lawsuits

A March 2007 published study estimated that lawsuits cost U.S. citizens some $865 billion dollars annually. While much of this amount results from lawsuits aimed at physicians and other professionals, a significant portion is from suits leveled against small businesses.

Of course, the mother of all frivolous lawsuits against a small business came from Roy Pearson, who became infamous for suing a dry cleaner for $65,000 for losing one pair of pants. Pearson resisted the store owner's attempts to settle his claim. Should You Settle Your Lawsuit Out of Court? will help you understand when to stand strong and when to try to settle.

In this highly litigious era, it is very important for all small business owners to do what they can to minimize the potential for such lawsuits. Here are some steps you can take:

• Protect personal assets. Form an S or C corporation, a Limited Liability Company, or a Limited Liability Partnership. While this does not prevent lawsuits, it will allow you to separate your personal assets from those of your business.
• Spell everything out. List as many warnings as you feel are necessary -- even some that may seem obvious. Post these warnings in prominent locations. If you manufacture any of your own products, adhere a warning label to the products themselves. Believe it or not, there is actually a warning on a commercial fireplace log that reads "Caution -- Risk of Fire." Take nothing for granted; these warning labels can keep you out of court.
• Post store policies. Again, do not assume anything. Make policies for dressing rooms, merchandise returns, and all other activities very clear, and post these policies in well-lit, high-traffic locations. Signage should be visible at all times. Include store policies on company literatureand your Web site, and put return or exchange policies on receipts. The more you have clearly in writing, the more evidence there is that you informed customers.
• Clear all potential hazards quickly. Accidents, real or bogus, often occur around construction, maintenance, or repair work. Make sure to have spills or broken merchandise cleaned up quickly. Rope off areas where construction or maintenance is taking place; keep signs such as "Caution, Wet Floor" at the ready. Restock departments when the store is closed, or, if you must do it during business hours, block off the area where staff is working.
• Tape phone conversations. You've heard the message many times: "This call is being recorded to ensure quality service." It's also to make a record of what the customer is requesting, complaining about, or inquiring about -- and how your staff responds.
• Don't make promises you cannot keep. Make sure you can honor any promises you make; or, better, don't make promises at all. Let customers know you will try to get an item in or handle a service-related matter but avoid making a firm commitment to do so.
• Train your staff. Make sure employees know all store policies, rules, and regulations, including "make no promises." Maintain policies in writing and make sure all staffers have a copy of them; ask them to sign that they've received a copy.
• Be insured. Protect yourself by maintaining the coverage that you need against accidents, injuries, theft, and liability.

As you protect yourself from frivolous lawsuits, you also should think carefully before you sue anyone else. Ten Steps to Take Before You File a Lawsuit will help you get perspective.