Few things are more stressful or alarming for small business owners than being sued. Whether the legal action against your business or profession was launched by a customer, employee, business partner, or another organization, defending yourself can be costly, even if that lawsuit is considered frivolous or without merit.

How can you manage those costs and the potential damage to your business’s reputation? 

The answer is legal services insurance. Also known as legal expense insurance, it was first offered in Canada in the 1990s. Over time, it’s become more commonplace for small business owners, self-employed professionals and contractors, and entrepreneurs to add it to their business insurance policies.

Why your small business needs legal services insurance

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It’s a wise move, especially considering it’s not a pricey add-on for a policy (it typically costs around $200 annually). However, it may be an often-overlooked type of coverage that many business owners choose not to add.

What Is Legal Services Insurance?

Legal services insurance is a form of protection you can tap to shield your small business or yourself from the various legal expenses you incur if you need to hire and retain a lawyer, whether you are being sued, need legal advice, or if you wish to pursue legal action against another business or individual.

There are two types of legal event coverage insurance available in Canada:

  • Before-the-event (BTE) insurance. As the insured (that’s you) covers unanticipated events that unfold. It covers your legal costs, disbursements, court fees, and adverse costs (the opposing side’s legal expenses if you’re ordered to pay them). It usually covers legal matters such as employment, contract, and taxation disputes, if your business license is suspended or cancelled and property-related issues if you pursue a claim against someone else for damages or trespassing.
  • After-the-event (ATE) insurance is designed to cover you after filing a claim. If, as a plaintiff, you lose a case or are awarded less than a defendant’s settlement offer, ATE pays for disbursement for your lawyer and any adverse costs you’re ordered to pay.

According to the Insurance Institute of Canada, BTE insurance is more common in our country.  But ATE legal expense coverage is also worthwhile – you may wish to purchase it when you agree to hire a lawyer to pursue a case. Without it, you’re on the hook to pay your legal fees and possibly the defendant’s expenses if you go to trial.

8 Reasons Why You Need Legal Services Insurance

Here are eight reasons why you should consider adding legal expense insurance to your policy:

1. Lawsuits are expensive

Small businesses can face various legal challenges, including lawsuits from customers, employees, suppliers, or third parties.

Defending your business in a single lawsuit through the litigation process and a trial costs $10,000 at a minimum. It’s more likely to cost over $25,000 for a two-day trial, and the price tag increases dramatically afterwards.

Moreover, the cost of a lawyer’s hourly fees varies by their experience level. For example, the Law Society of Ontario’s fee schedule shows a senior counsellor’s hourly rate with over 20 years of experience is $350 per hour. On the low end, it’s $165 per hour to hire counsel with less than one year of experience since being called to the bar.

If you initiate a lawsuit, it can cost as much as $5,000 for an attorney to prepare and deliver a statement of claim. Responding to the defendant’s documents equals up to another $5,000. If your case proceeds to trial, it’ll likely add $5,000 to $15,000 to your legal bill.

 2. You are not immune to being sued

According to Statistics Canada, there were 765,967 active civil court cases in 2022 – a 10% increase from 2021. StatsCan defines a civil court case as disputes between people or organizations. 

Meanwhile, a 2022 study shows seven out of 10 Canadian small businesses have dealt with at least one legal issue in the last three years. Of those legal disputes:

  • 61% involved contract disputes and debt collection
  • 36% were due to employee-related disputes
  • 33% had to do with traffic tickets for business vehicles
  • 31% involved appealing a Canada Revenue Agency audit decision
  • 30% were for appealing a regulatory or business license decision or because of a health and safety investigation

 3. Common business transactions

Aside from the risk of third-party lawsuits, consider a few common business transactions any small business owner may need a lawyer to complete. For instance, the average cost of hiring a lawyer in Ontario to help secure a financing agreement is $3,680. In Western Canada, the average cost is $5,897, according to Canadian Lawyer’s 2021 Legal Fees Survey.

4. Managing employee disputes

Small businesses with employees may face employment-related legal challenges, such as wrongful termination claims, discrimination allegations, or wage and salary disputes.

Should a disgruntled employee take you to court in a labour dispute, the average national cost for a litigation claim or defence up to mediation or trial is $16,573. It’ll cost you $19,000 if you’re in Ontario and ranges between $18,000 and $185,000 if you’re in Western Canada, Canadian Lawyer’s data shows.

Furthermore, settling an employee-related dispute out of court or losing a case in court can run into hundreds of thousands of dollars. For example, one decision in 2018 by the Ontario Superior Court awarded more than $500,000 to the plaintiff against their former employer.

5. Contract disputes

Contract disputes or disagreements between small businesses or self-employed professionals and their customers, vendors, landlords, or other parties are common.

For instance, suppose you’re a professional photographer hired by a couple to take photos and videos of their wedding. You sign a contract with the couple months in advance outlining what services you will provide and your fee, which they pay upfront. Everything’s signed, sealed, and ready to go. However, three days before your client’s big day, a family member becomes seriously ill and is hospitalized. You need to cancel your contract with the client to be with your family member, and although you recommend them to another photographer, the couple decides to sue you for breach of contract.

Legal services insurance can cover expenses related to an experienced lawyer reviewing, drafting, or negotiating your contracts, ensuring your interests are protected.

6. Regulatory compliance

Running a business involves navigating numerous regulations and laws. Legal services insurance can help cover the costs associated with compliance-related issues, such as government audits, investigations, or administrative proceedings. Or, you may require legal advice on various matters, including launching a new business, licensing, and taxation.

7. Debt recovery

Even if you do excellent work, meet all deadlines, and deliver the products or services you were hired to as expected and on budget, there are no guarantees your client will pay you in a timely fashion. Most will, but sometimes they don’t, even after you send them a few reminders.

Waiting beyond an acceptable amount of time to be paid for your work makes managing your business’s cash flow challenging. Not getting paid at all is far worse. Legal expense coverage provides financial support for debt recovery if a client fails to pay you what you’re owed (which is an otherwise time-consuming, costly, and frustrating experience).

8. Intellectual property

Intellectual property (IP) issues, such as trademark or copyright infringement claims, can significantly impact small businesses, especially if your business is using artificial intelligence (AI) tools to research or produce content.

Dos and Don’ts If Your Small Business Is Sued

Here are a few recommendations on what to do and not do if you are threatened with legal action against your small business:

  • Do speak to an experienced business lawyer
  • Do contact a Zensurance broker, as you may need to file a claim
  • Do stay focused on running your business
  • Don’t ignore the lawsuit
  • Don’t contact the plaintiff directly

How Small Businesses Can Get Low-Cost Legal Services Insurance

We inhabit an unpredictable world. Any small business, self-employed professional, or contractor could be sued or require legal counsel for various reasons. 

Having legal services insurance makes it affordable to get the representation you need while continuing to run your business. Adding this coverage to your policy is a smart choice for any business owner or independent professional.

Zensurance can help you get the low-cost legal services insurance your business needs. Fill out our online application for a free quote. Our licensed brokers will shop our partner network of over 50 insurance providers to find the right policy for your business and customize it to ensure you’re protected.

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About the Author: Justin Tisdale

Justin Tisdale is a Team Lead, Professional Lines, at Zensurance.