What Happens When Your Business is Sued?

Business Insurance and Liability Claims

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Image courtesy of [ McMillan Digital Art] / Getty Images.

One of the most difficult situations you may face as a business owner is a liability claim against your firm. The claimant may allege that he or she sustained bodily injury or property damage due to an accident caused by you or an employee. Many types of events can generate liability claims. Examples are auto accidents, defective products, faulty work, and slips-and-falls on your premises.

A liability claim will less disruptive to your business if you already have a plan in place for handling claims.

This article describes some steps you can take to establish such a plan. It also outlines the procedures your insurer will follow when a claim is filed against your firm. For the purposes of demonstration, the article describes an auto claim. However, the concepts presented below are relevant to all liability claims, not just those resulting from auto accidents.

Preparing for a Claim

Every business should have a plan in place to address potential liability claims. This plan should be established before any accidents occur. If you need help developing a plan, ask your insurer for assistance. Many business insurers offer their customers a variety of risk control services. These are often available free of charge.

  • Employee Training Train your employees on the procedures to follow when an accident occurs. Workers need to know how to obtain emergency services (including police, fire, and ambulance), and whom to contact at your company. Employees should be instructed on how to behave (polite and confident) and what to say. Workers should not admit any personal or company liability.
  • Documentation Be sure that all company-owned vehicles contain the proper documentation. This includes the current registration, proof of auto liability insurance, and an accident report form. Each driver should carry an up-to-date driver’s license.
  • Proper Insurance Every business needs adequate liability insurance. The limit on each policy should be high enough to protect the business from a catastrophic loss.
  • Surveillance and Monitoring Liability claims can be limited by surveillance and monitoring. Public areas can be monitored by cameras. Vehicles can be equipped with fleet telematics that record vehicle speeds, employees’ driving habits, and the routes driven.

Filing a Claim

Suppose that Mark, an employee of yours, is driving a company-owned delivery truck on a city street. Mark becomes distracted by a ringing cell phone and runs a red light. The truck broadsides another vehicle in the intersection. Kimberly, the driver of the other vehicle, suffers serious injuries. Your truck is towed to an impound lot. Mark is charged with a traffic offense and is released with minor injuries. How should you respond?

The first thing you should do is report the accident your insurance company, or to your agent or broker. Don't delay! Report the accident verbally right away. You will be asked to provide basic information such as the name of the employee, a description of your vehicle, and the name of the injured driver. You should follow up with a written claim report using forms provided by your insurer or agent. If you need help completing the forms, ask your agent or broker to assist you.

Secondly, you should ask Mark to provide a written description of the accident.

The description should be as detailed as possible. The information Mark provides will help you determine if a mechanical problem or other factors contributed to the accident. It should also confirm whether Mark was using the vehicle within the scope of your permission when the accident occurred.

Work With Your Attorney

Once your claim has been filed, your insurer should assign you an attorney. Your insurer has a duty to defend you and any other insured who is the subject of a covered claim. It also has a duty to pay damages on your behalf.

Speak with your assigned attorney as soon as possible. Provide him or her whatever information he or she requests. Your attorney might determine that a conflict exists between you and Mark. This could occur if, say, Mark was driving while intoxicated or if he caused the accident intentionally.

In this event, your insurer might deny Mark a defense, and defend you only. Alternatively, your insurer might provide Mark separate counsel.

If Mark is charged with a crime, you should consider hiring an attorney to assist at his hearing. Why? In most states, a guilty plea in a criminal matter is admissible in a civil case. A plea of "no contest" is generally not admissible. Without the advice of an attorney, Mark might plead guilty for the sake of expediency. He will have no understanding of how his guilty plea could affect your firm's liability.

While dealing with insurance paperwork and legal matters, don't forget that your vehicle is still in the impound lot. You or your insurer should make arrangements to retrieve the vehicle as soon as possible. Once you have access to the vehicle, you should remove any documents, valuables or other property it contains. You should also take photos of the vehicle. These may be useful if a dispute later arises between you and your insurer over the vehicle’s condition or value.

If Mark was injured in the auto accident, he will need to file a workers' compensation claim. Remember that workers compensation benefits are provided regardless of fault.  This means that Mark will be eligible for benefits even if the accident resulted from his negligent driving.

Negotiation with the Injured Party

Your insurer will make contact with the injured party (Kimberly). Instruct Mark not speak with her, her relatives or her representatives. Politely refer any calls or letters regarding the accident to your insurer or your assigned attorney.

Like many auto liability claims, the claim against Mark involves allegations of negligence on the part of an employee. Your company may be held vicariously liable for Mark's actions. Lawsuits based on negligence must be filed within a specific time period. The time period is determined by your state's statute of limitations.

Your insurer will request medical bills, lost wages, and other information from Kimberly and attempt to negotiate a settlement before a lawsuit is filed. Note that your insurer can usually settle a claim without your consent to avoid the cost of a lawsuit. Compensatory damages may include medical costs, pain and suffering, loss of income, an allowance for permanent injuries, property damage and the claims of spouses. In some states, no-fault laws may limit the amount of damages awarded.

Lawsuit

If Kimberly's claim cannot be settled, she may file a lawsuit against your business.  Kimberly will file a complaint with the appropriate court claiming negligence and damages. The complaint will name your company and Mark. Your business and Mark will be defendants, and your assigned insurance counsel will defend both of you.

While procedures vary by state, the following apply in most jurisdictions.

  1. Pleadings A complaint is filed and your attorney will file an answer to the complaint.
  2. Scheduling and Discovery The court will hold an initial conference and set a schedule for the remainder of the case. Both sides will also engage in discovery, which involves written questions, requests for documents, and oral testimony at depositions. You are obligated under the policy to cooperate fully with your attorney and insurer throughout the lawsuit.
  3. Motions Each side may file motions to prove or dismiss certain aspects of the case. For example, Mark ran a red light, so his liability is not in question. Thus, Kimberly may file a motion asking the court to rule only on the issue of damages.
  4. Final Conference and Attempt to Settle Prior to trial, the court will hold a final conference to determine whether the matter can be settled.
  5. Trial A trial will be held and a company representative is required to attend.
  6. Verdict and Judgment The court or jury will establish liability and award damages. The court will convert the verdict into a judgment, which is the amount for your company is liable.

Judgment

After the trial, the verdict is converted to a judgment. A judgment is a legal document that affords the plaintiff the right to recover a specific sum of money from your company. If you do not have insurance, the plaintiff is entitled to seize and sell your property, and to levy accounts receivable to satisfy the judgment.

Your insurer is obligated to pay the judgment if it is covered by your policy. Your insurer satisfies the judgment by paying damages. If the judgment exceeds your policy limits, your business is liable for the amount of the judgment that remains after your insurer has paid the policy limits.

 

Article edited by Marianne Bonner

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