Frivolous Lawsuits: A Serious Threat to Nation's Small Businesses
By Stephen Parezo
April 2005Being a small business owner these days might seem like being in a shooting gallery when considering that they are easy targets for frivolous lawsuits. With the current tort system costing Americans well over $200 billion per year, many entrepreneurs list being sued among their greatest fears, which for some mom and pop operations could mean the end of the line for their business.
"It's a concern that's always there," said Kevin Walter, a media manager in the Midwest Region for the National Federation of Independent Business, the nation's largest small business advocacy group. "The potential is always there. They have to be concerned because it's costing them a fortune to be prepared for when the inevitable lawsuit comes."
According to the NFIB, smaller companies make excellent targets for frivolous lawsuits because of their willingness to settle out of court rather than going to trial, which cost $100,000 on average to fight. That's why the NFIB stands solidly behind an effort to generate some reform in this area through a bill sponsored by Rep. Lamar Smith, R-Texas, called the Lawsuit Abuse Reduction Act. LARA was drafted with the intent to limit the number of frivolous lawsuits by making attorneys and plaintiffs accountable for bringing these cases to court.
Fees represent a significant hit
The bill would make lawyers and their clients accountable for bringing these suits to court deemed frivolous and force plaintiffs to pay the legal costs of the defendant and a "three-strikes" rule that would automatically suspend any lawyer that brings three frivolous lawsuits to court.
As to how LARA will play out, Brad Close, one of the NFIB's in-house lobbyists on this issue says when you look at the tort reform agenda there are still major bills that have to be worked out first involving asbestos and medical liability. But make no mistake: frivolous lawsuits represent serious threats to America's small businesses.
"For our size members they seem to be impacted by these kinds of suits more often," said Close. Frivolous lawsuits are often filed just to harass small business owners but they still cost owners' legal fees and time which could range from $2,000 to $5,000. "Our typical member's business averages $50,000 a year," he said. "If you take $5,000 out that's a significant hit."
What's most frustrating to entrepreneurs is that they often don't' have the ability to fight these lawsuits.
"When we're lobbying on these issues for our business owner members, it's usually the family that owns the business," Close said. "They don't have a team of accountants or lawyers who can take care of things. People look at the justice system as a way to make a quick buck."
Close draws the distinction that LARA makes it fair to both sides since it also applies to frivolous defenses by small business owners.
Having employee agreements up front
Steve Feinberg, a Fiducial franchisee in Londonderry, NH, related that for most of his small business clients, frivolous lawsuits come from the employees. That's why he recommends some sort of employee agreement up front.
"I had a client call me up the other day because she knows that one of her employees is ripping her off and she has no up front agreement," said Feinberg. "I told her to just tell the employee that it's her last day and blame me, the accountant, due to financial conditions, i.e. if she can't prove what's been done, just make her go away and collect her unemployment."
The bulk of the problems Feinberg's clients encounter are in labor and employment law in terms of frivolous lawsuits for grudge employees.
"The easiest thing for a grudge employee to cause havoc is to start making phone calls to the labor department," he said.
One of the best defenses against such lawsuits is having proper and adequate insurance. Having a good insurance agent is a must.
Perhaps the best way for a small business to guard against frivolous lawsuits is to meet with an insurance expert who will take the time so that they can go through and recommend proper limits and the correct insurance program, according to Judy George, vice president of commercial insurance for the Windham, NH-based Lakeside Insurance Agency.
"I sit with small business owners and not a lot of agents take the time to do that because they're after the bigger accounts," said George, a 25-year insurance industry veteran. "But small business owners need us more. They need protection."
What bothers her is that America has become a "sue-happy society" which ends up costing policy holders more in premiums with some of the funds earmarked for defending against these lawsuits.
Illustrating her point, George noted that in the 1990s a small general grocery store in New Hampshire would get hit by one or two lawsuits per year from people who said they slipped on ice outside their store. Since the store owners also owned the building which was close to nearby apartments, it became known as a "good slip and fall location" with the insurance company paying out $10,000 per lawsuit.
While the store owners exercised every due diligence possible on their property which was shoveled and sanded, their insurance company decided it was more cost-effective to settle the case out of court. The owner eventually decided to close up shop and went out of business rather than face a continuing cycle of these frivolous lawsuits.
"The purpose of liability is for if you're negligent but he did all the things he was supposed to do," George said.
What has appeared more frequently on her radar screen for frivolous claims the last four to five years are worker's compensation issues. Now before a small business hires a job applicant, they often conduct pre-employment screening. They also find out if the applicant ever filed a worker's compensation claim before to alleviate any potential problems.
Many small business owners learn by their mistakes. One of George's clients owns a welding and fabrication shop that has 11 employees. Due to past problems, the shop owner has adopted hiring practices that includes all applicants now having to go for a physical exam. They must also submit a copy of their driving record. This way, the owner at least knows some of the capabilities of those he's considering hiring.
"Frivolous lawsuits can come from employees or a third party so it's hard to protect yourself from the unknown," George said. "A good insurance agent will take the time to make sure you have enough insurance and the right coverage for what you do."
Limiting exposure to risk
Bob Sperling, a tax advisor on Fiducial's Tax Hotline, says that anyone dealing with the general public runs the risk of lawsuits since there's no way to reduce the risk without cutting off contact. What can be reduced is the businesses' exposure to risk.
"This is generally done by combining a liability protection entity, such as a corporation or an LLC and adequate liability insurance," said Sperling. "Liability protection from the use of a legal entity is usually recommended if there are any employees of the business. If the sole proprietor has no employees, the liability protection is, practically speaking, only extended to creditors as an individual is always personally responsible for his/her own actions."
Former entrepreneur Roger Bierman, now a franchisee relations manager for Fiducial's North Central Region, once operated several small businesses including an Exxon service station.
"Back in my day I had proper insurance so that I wouldn't get caught off-guard when we switched from full-service to self-service," said Bierman.
He recalled that a number of customers had trouble operating the dispenser hoses when they had to pump their own gas for the first time. Despite having operating procedures posted along with a reminder that instructed them to seek assistance if they had any questions, Bierman says when some businessmen spilled gas on their suits they wanted him to buy them a new one. There also was an airline stewardess who claimed she ruined her uniform by spilling gas on it. She also wanted him to buy her a new outfit.
"What I did was tell her to take it to the dry cleaners and I'd reimburse her," he said. "In most cases, that did the trick."
In today's litigious-prone atmosphere, Bierman observed that many people are looking for a quick buck and don't want to take responsibility for themselves.
"It goes back to advertising on television for attorneys," he said. "Anybody who has seen these types of attorneys that are out there are promoting lawsuits. I see that a lot. It's amazing the lengths people go to. I really think that's created awareness for these frivolous lawsuits."
STEPHEN PAREZO is the Media Manager for Fiducial.