If there’s one thing that raises a small business owner’s stress and anxiety, it’s being sued by a customer for alleged wrongdoing, accidents, or mistakes.
And the threat of litigation against any business owner in Canada is real. According to a Zensurance survey of 1,000 Canadian consumers, a majority (69.3%) said they would sue a small business if injured in a slip-and-fall accident, and 84.7% would pursue legal action if involved in an auto accident with a business vehicle.
If someone sues your small business in Canada, you will receive formal legal documents – typically a statement of claim – outlining the allegations and damages being sought.
Once notified, you typically have a set timeframe to respond, which involves gathering records and possibly hiring a lawyer. The legal process can take months or even years, and the defence costs can quickly climb to tens of thousands of dollars.
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Don’t be alarmed or guided by fear of legal disputes. This article explains what happens when a business owner is sued in Canada, how business insurance can help pay legal defence costs and settlements, and how to reduce your risk of facing a lawsuit.
How Much Can a Lawsuit Cost a Small Business in Canada?
In general, costs may include lawyer fees, court costs, expert witnesses, settlements, or court judgments. Even claims without merit can still involve legal defence expenses. For many small businesses, these unexpected costs can put serious strain on cash flow.
A single lawsuit that goes all the way through the litigation process and trial could cost your business a minimum of $10,000 to defend. For a two-day trial, costs often exceed $25,000, and complex or prolonged cases can be far more expensive.
How Business Liability Insurance May Help Cover Legal Costs
When a small business owner hears the words “you’re being sued,” the first fear is usually the cost.
Business liability insurance is designed to help protect business owners from the financial impact of third-party lawsuits and claims. However, coverage against legal expenses or claims depends on your policy and the circumstances of the lawsuit.
Your business could face a lawsuit demanding financial compensation for reasons such as:
- Third-party bodily injury or property damage
- Negligence or failure to perform services properly
- Professional errors or omissions
- Breach of contract
- Wrongful dismissal or employment-related claims
Even if a lawsuit against your business is determined to be unfounded, you still need to defend yourself, and legal costs can escalate quickly.
For example: one of our hairstylist clients was sued by a customer after accidentally cutting their ear. Their general liability insurance covered $10,000 to settle the claim, avoiding significant out-of-pocket expenses.
6 Ways to Reduce the Risk of Being Sued As a Business Owner in Canada
Running a business always comes with risk, but many lawsuits are preventable. Most claims don’t start with bad intentions – they begin with misunderstandings, accidents, or unmet expectations.
Here are six practical steps to take to reduce the risk of being sued:
1. Use Clear, Written, and Signed Agreements
A lot of disputes between business owners and their customers come down to, “That’s not what we agreed to”. Clear, written contracts drafted or reviewed by a lawyer and signed by your customers before doing work for them sets expectations and can prevent any disagreements. Don’t simply rely on having your customers sign a waiver.
2. Follow Safety and Compliance Regulations
Third-party bodily injuries arising from accidents on your business premises or because of your operations are common. So, just like your parents told you, “follow the rules!”
Adhere to all provincial, federal, and industry-specific safety regulations. Keep workspaces hazard-free, train employees properly, and document regular safety inspections and maintenance – especially if you operate a retail location, construction business, or service-based operation.
3. Communicate With Customers When Early Problems Arise
A lot of disputes with customers can escalate into lawsuits if a customer makes a complaint and feels ignored or dismissed. Staying silent isn’t the right way to handle such situations, and often makes it worse.
Respond promptly and professionally, address concerns without admitting fault, and document all communications. Early resolution often prevents legal action.
4. Avoid Offering Services Outside Your Expertise
Trying to “be nice” to a customer or prospect is, well, nice, but it can also sometimes increase risk or inflame a situation. Setting clear boundaries and expectations with your customers and avoiding offering services beyond your expertise, giving casual advice, or guaranteeing something you cannot control can land you in hot water.
5. Maintain Accurate Records
Detailed documentation of contracts, invoices, emails, photos, and completed work can help resolve disputes early.
But if a claim does arise, maintaining accurate records can bolster your defence if litigation does arise. It also demonstrates professionalism.
6. Review and Update Your Liability Insurance
Insurance can’t prevent lawsuits, but having the right coverage can significantly reduce the financial impact.
Regularly review your insurance coverage to ensure you’re not underinsured or ask your broker for help. Be sure to update your policy as your business changes and grows at least annually.
Frequently Asked Questions About Liability Insurance to Cover Lawsuits
How does liability insurance protect my business from lawsuits?
Commercial liability insurance is designed to help cover legal defence costs, settlements, and judgments for certain claims. Coverage varies, so it’s essential to understand what your policy includes.
Can a customer sue me personally for my business mistakes in Canada?
It depends on your business structure and the nature of the claim. Sole proprietors may face personal exposure, while incorporated businesses often have more separation, making liability insurance especially important.
What should I do first if someone threatens to sue my small business?
Start by documenting everything, then seek legal advice. Contact your insurance broker immediately. They can help determine whether you should file a claim and guide you through next steps.
How to Get Liability Insurance Online to Protect Your Small Business From Lawsuits
Protecting your company’s financial viability and well-being begins with a comprehensive, customized business insurance policy designed for your specific risks.
Zensurance, Canada’s leading digital business insurance brokerage, makes it fast and easy to get coverage online at a competitive price. We help protect hundreds of thousands of Canadian business owners and independent professionals.
Get a free quote in under five minutes by completing our online application.
Our team of knowledgeable insurance brokers is ready to ensure you are adequately covered for any scenario that could disrupt your business and threaten your operations.
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