Understanding the Financial Risks of Litigation
Business owners who have never experienced litigation will likely point to legal fees as their primary financial concern. However, the monetary demands of litigation aren’t limited to lawyer and court costs.
Loss of market share
The negative publicity surrounding litigation can prompt loyal clients and customers to look elsewhere. Years of hard work could evaporate seemingly overnight. It could take a long time to recover.
Employee turnover
No employee is immune to the unsettling effects of a company’s perceived instability. Older employees close to retirement may be inclined to remain however, younger workers with less emotional attachment to the firm will likely feel that staying would harm their careers.
Insurance hikes
If the litigation reveals that your company is a bigger risk than previously assumed, your insurance company will react by raising your rates. The cost of doing business under the new arrangement could have a massive impact on your bottom line.
Proactive Measures to Minimize Litigation Risks
It’s best to build a company strategy to reduce the likelihood of costly litigation. A good program will be comprehensive, incorporating various tactics and tools. Often, it begins with legal protection.
Conduct legal reviews
Ensure all company legal documents comply with all relevant laws and regulations. Institute employee training beyond the firm’s legal department, to make sure workers understand what is proper legal and ethical behavior.
Pursue alternative dispute resolution
Avoiding a costly trial should be the goal of most defendants in a dispute. Fortunately, there are legal options for resolving matters in a low-key manner, away from the public spotlight using alternative dispute resolution methods. The best-known practices are arbitration and mediation.
Arbitration uses an arbitrator to hear the two sides and then make a decision. There are binding and non-binding arbitration. The two parties generally can’t appeal after a binding ruling but can after a non-binding decision.
Mediation uses a mediator to hear both sides with the objective of getting the two parties to communicate peacefully and effectively while reaching a bilateral agreement. The mediator, unlike an arbitrator, doesn’t issue a ruling.
You can often avoid court in favor of alternative dispute resolution methods using contractual clauses. Stipulate in your contracts that such practices will be used in the event of a disagreement. Few people will want to pursue alternative dispute methods, and then also go to court.
Maintain sufficient insurance
Does your current insurance policy protect you under the new business guidelines issued by an industry regulatory body or changes to existing laws? Move quickly to close any gaps in your coverage. Scammers often attempt to take advantage of such changes, looking for companies that are slow to adopt.
Create a litigation fund
Establish a special fund held in reserve for paying litigation expenses. Having money set aside will remove stress from your company’s normal operations. Ideally, if you invest enough capital in the fund, no department will have to curtail its business activities during litigation, due to the reallocation of its budget.