Published on March 18, 2022

Getting sued is a small business owner's worst nightmare. Here's what to do if it happens to you.

• If you're sued, the first thing you need to do is contact a business attorney.
• It's normal to feel overwhelmed, upset, and indignant, but if you want to keep your business and its reputation intact during this time, it's important to follow every step of the process carefully.
• Common types of business lawsuits include breach of contract, slip-and-fall accidents and other premises liability, and discrimination.
• This article is for small business owners who have been sued, or who worry about being sued.

Your small business is being sued. Now what? Lawsuits can be filed by employees, clients, vendors or even another business, but no matter who filed it, or if you win or lose, a lawsuit against your company can cost you a lot of money. Business News Daily spoke with legal, human resources and insurance experts to compile a step-by-step guide to help you through your lawsuit, as well as missteps you should avoid.

Please note that this article does not replace legal counsel. If your business is sued, we urge you to consult an attorney before taking any action.

Step 1: Review the case with an attorney

The first thing you should do when you receive the suit papers is review them carefully with an experienced business lawyer. Braden Perry, a partner and attorney with Kennyhertz Perry, advised checking the caption and service information on the lawsuit to ensure that it contains the proper entity or person associated with the issues.

If this information is incorrect in any way, you may move to dismiss the action in its entirety, Perry said. If it is correct, you should proceed with reviewing the allegations and put a litigation hold, or preservation order, in place. This requires the company to preserve all data that may relate to the legal action.

"It is extremely important that you preserve all records that have any relationship to the case, no matter how tangential," said Krishna Narine, a partner and attorney at Lauletta Birnbaum. "Such records include documents and electronic material, such as email and web pages, photos, videos, and voice messages. If you have a document destruction policy, suspend it until you have consulted with your lawyer. In addition, if appropriate, take pictures and/or video and be sure to include identification of the time and date of those images."

DO NOT: Communicate directly with the plaintiff

Many of our experts reminded business owners that anything they say regarding the lawsuit can be used against them, so you should not contact the plaintiff at all.

"Once a lawsuit has been filed, you should not communicate with the plaintiff at all," said John R. O'Brien, a retired Chicago-based attorney of O'Brien Watters & Davis. "The time for talking things out and resolving issues amicably ended when they filed suit, so all communication should be through your company's attorney. If the plaintiff is someone that you must communicate with – a current employee or another company that you have an ongoing relationship [with] – you should make it clear that you will not discuss that lawsuit with them."

Key takeaway: If your business is sued, contact a business attorney to review the case. Do not contact the plaintiff to attempt to resolve the issue on your own.

Step 2: Inform your insurance provider of the complaint

A variety of business insurance policies exist to cover companies in the event of a lawsuit. Ted Devine, CEO at 771 Advisors, said third-party injury claims and accusations of defamatory remarks about a competitor are typically covered by general liability insurance. Client allegations that your work caused them a financial loss are often covered by a professional liability policy. Suits from employees may be covered by employment practices liability insurance or employer's liability insurance, which is included in some workers' compensation policies.

DO NOT: Assume your insurance will cover the suit

Certain types of lawsuits may indeed be covered by a general liability policy, but do not assume that this is the case. Turner said that business owners should consult with their insurance provider to confirm whether or not the lawsuit is covered, as the specific circumstances of the suit may exclude it from the policy.

Step 3: Decide how to proceed and respond to the complaint

When you receive a lawsuit, you are issued a deadline to submit a written response to it, typically within 30 days, although this may vary from state to state. According to a blog post on the Foster Swift law firm website, your answer should include the following items:

• Admittance or denial of each of the plaintiff's allegations
• Your defenses and counter/cross claims against the plaintiff or other defendants
• Whether you want a jury trial or an alternative resolution (e.g., an out-of-court settlement)

Before you respond, there are a few important things you need to consider.

"You need to understand the nature of the claims against you and the potential liability and exposure to your business so you can make a business decision on how to proceed with the case," said Jessica Gray Kelly, a partner at Sherin and Lodgen. "Litigation costs can rise quickly, so if the claim is only for short money, or there is a nonmonetary way to settle the dispute, that may be a better business option for the company."

Kelly recommended asking your lawyer to explain the litigation plan, potential exit strategies and estimated costs at different stages of the proceeding. You should also discuss whether it makes sense to propose alternative dispute resolution to the plaintiff.

DO NOT: Ignore the suit

Failure to respond to a lawsuit within the allotted time frame gives the plaintiff the right to file a Request for Default after another 30-day period. This means the plaintiff will win the case, and whatever judgment the court makes against you will be enforced.

Step 4: Find a defense attorney (if you don't have one)

If your company has a lawyer on retainer, or your insurance carrier is providing an attorney, you won't need to take this extra step to find someone to defend your case. However, depending on the complexity of the case, you may want to seek out an attorney who specializes in the type of lawsuit you were served.

"You will want to retain counsel who is familiar with the type of claims alleged in the complaint, and if possible, who is familiar with the court in which the case has been filed," Narine said. "For example, defending a slip-and-fall case brought by a customer is substantially different from defending a defective-product case. This can be particularly important if a case is brought by an employee, as there are a wide variety of employer-employee disputes, some of which require very specific knowledge, such as employment discrimination cases."

Charles Krugel, a management-side labor and employment lawyer, advised thoroughly researching attorneys and getting recommendations from trusted colleagues. From there, you can evaluate the quality of the attorney by asking questions such as:

• Have you ever handled a case like this before?
• How much can I expect to pay at the outset, and where will the money go: damages, back pay, front pay, legal fees?
• Where is this case heading, or where can it go?
• Do you have testimonials from former clients?

DO NOT: Stick with a poor communicator

As with any important business matter, clear, consistent communication is the key to ensuring litigation goes as smoothly as possible. Legal defense is expensive; therefore, you want a knowledgeable, forthright attorney. Krugel said to be wary of lawyers who won't give you a straight answer or attempt to withhold information from you.

During and after the case

The litigation process can be long and stressful, but here are a few pieces of advice to follow throughout the case and beyond.

• Don't try to cover anything up. "Be completely honest with your lawyer about the facts; they will come out sooner or later, and it is better for your lawyer to be prepared for them than be caught by surprise." – Jessica Kelly 
• Be diligent and prompt. "Review the attorney's invoices promptly. Ask questions when you have questions. The more you delay in responding to the attorney's requests, the more it costs you." – Keith Dennen 
• Stay focused on your business. "Don't lose sight of the fact that you have a business to run and a bottom line to think about. Put aside any feelings of anger or pride. Oftentimes I hear clients say, 'We didn't do anything wrong; why should we pay this person?' The answer is that winning the case can cost a lot more than settling. You must make a calculation: Will the company be better off, financially, if it pays the plaintiff $20,000 than if it spends $30,000 to win the case? As the saying goes, 'A bad settlement is often better than a good trial.'" – John R. O'Brien 
• Protect yourself from copycat suits. "In light of any recent employment lawsuit, you should take proactive steps to create an HR foundation that includes creating or updating your handbook; delivering anti-harassment and anti-discrimination training to all employees and management; creating a detailed complaint procedure that is published to all employees; and providing management training on dangerous areas, such as interviewing, discipline, and terminations. This will not only make an impression on the current case, but it could also stop later accusers in their tracks." – Joseph Campagna, owner of human resources consultancy My Virtual HR Director
• Keep your head held high. "Do not let a lawsuit rattle your entrepreneurial feathers. Remain calm and continue to work in your business's best interests." – Merlyne Jean-Louis

Original Article: You're Being Sued: A Guide to Handling a Business Lawsuit