A checklist for reducing the risk of liability.
The New Year presents a great opportunity for small business owners to review their operations and implement procedures to reduce the risk of liability for the coming year. Business owners face the risk of liability on many fronts, whether from transactions with customers, government regulation, or claims from employees.
The most efficient way to address legal liability issues is proactively, by implementing policies and procedures that limit or reduce the risk before the claim is made. Consider the following checklist when reviewing your operations for the coming year:
Record retention: Regardless of the liability asserted, the records and other information retained by a business will go a long way toward reaching a successful resolution. The converse is also true: the lack of records and relevant information will place the business at a distinct disadvantage in resolving litigation, as a business may be unable to defend itself from allegations made by the opposing party. The primary rule is to thoroughly document all business transactions and retain the documentation for a period of 10 years. Every business should also maintain a trustworthy procedure for backing up its electronic data on a daily basis.
Internal governance: Every business entity is governed by internal governance policies of some kind, whether as a corporation, limited liability company, limited partnership, or some other form. A corporation is usually governed by a code of bylaws, while a limited liability company is generally governed by an operating agreement. Internal governance procedures are sometimes ignored, particularly in small businesses with a limited number of owners who conduct their internal affairs in a casual manner. Ignoring these governing procedures may prove problematic in two instances: 1) where a shareholder uses the noncompliance to advance a position that is inconsistent with the stated policies of the company; and 2) where creditors use the noncompliance to prove that the business is not entitled to shield the owners from liability, since it failed to honor its own internal procedures.
Employment agreements: Employment litigation is a significant risk to any business. Accordingly, every business should maintain a current and complete employment agreement for each employee, and employment agreements should be reviewed annually to ensure that all appropriate terms of employment are included. In addition, every business should adopt an employee handbook and review the handbook on an annual basis for accuracy and completeness. The handbook will go a long way towards defining the expectations of the employer, and describing the requirements for compliance with federal and state employment laws. Above all, work expectations should be carefully defined and performance issues should be addressed immediately.
Customer contracts: Business owners face a wide range of responsibilities in operating a business, and they sometimes neglect to review the terms of a particular customer contract until a dispute arises. While most disputes are resolved informally by negotiation, a few may involve a significant outcome that cannot be resolved by negotiation. The provisions of a particular contract as well as any standard terms that may apply should address a wide range of issues and be drafted to limit the risk of loss as much as possible. For example, a business’s liability may be significantly reduced by including a limitation of liability clause in the contract.
Appropriate insurance: Business owners should be well acquainted with insurance policies that provide protection against different types of loss, including general liability, product liability, professional liability, commercial property, and so forth. These policies often impose a “duty to defend” on the insurer, by which it agrees to provide legal representation on behalf of the insured in the event of litigation. These policies should be reviewed and supplemented on a regular basis, particularly where a business continues to grow and different needs arise.
David L. Simmons, J.D., MBA, is a partner of Drewry Simmons Vornehm LLP, a law firm with offices in Merrillville, Carmel and Indianapolis.