Being served with a lawsuit can be one of the worst things that can happen to any business. The specter of long drawn out litigation causes immediate anxiety and young and inexperienced owners worry that their business may collapse. In short, panic sets in and panic is the worst response. There are two very good reasons not to overreact to being sued. First, most businesses are insured to protect against the risk of litigation. In such cases, the insurance company (with some exceptions) will step in and defend the action. Second, overreacting leads to bad decision making especially for those that are not insured or perhaps under insured. Whatever the scenario, there is little doubt that the most prudent step any business owner can take after being sued is an immediate consultation with an experienced business litigator. The second most prudent step is to act fast. It is important that business owners are aware of the deadline to respond to the complaint. They have thirty days from service to do so and need to be acutely aware of the deadline. Otherwise, on-the-ball attorneys on the other side will promptly move for default which at worst will result in a judgment and at best require significant additional attorney time to cure. If more time is needed to gather insurance documentation and/or obtain counsel, it is best to at least contact the opposing party or attorney and ask for an extension to “respond” to the complaint and confirm so in writing. Using the word “respond” instead of “answer” will allow you to respond to the complaint in any manner available under the law. Most attorneys will agree to this at least once.
Most people would be surprised at the number of business owners (in San Diego alone) that choose to ignore lawsuits only to find out later that judgment has been entered against them for tens of thousands of dollars or even hundreds of thousands of dollars. The existence of the judgment is often discovered only after bank accounts are attached or a Sheriff shows up one day to conduct a till tap (collecting money from the cash register at the end of the day to satisfy the judgment). Others will rush to resolve the matter without the assistance of an experienced business litigator hoping that they can avoid the problem by agreeing to resolve the dispute informally. While informal resolution is certainly preferable, signing agreements without legal representation is extremely risky. The attorney representing the other side is armed with tools to maximize the benefit to their clients. The harm to business owners under this scenario can be incalculable. Usually, unrepresented business owners have no idea of the true extent of what they are agreeing to. For instance, a business owner who agrees to pay off a debt in twenty-four monthly payments may unknowingly stipulate to forfeiting all of her shares in a corporation (a disastrous outcome) if she is late even one time on her payments. An experienced business lawyer will build a cushion regarding late payments into any agreement settling the matter.
After “not panicking”, the first thing any business owner should do upon being served with a lawsuit is to retrieve all insurance policies (including personal umbrella policies) that might in any way cover the business. In fact, any experienced lawyer would first ask about insurance policies. It would be malpractice to do otherwise. Moreover, attorneys aren’t interested in spending time on lengthy consultation and evaluation if a case is eventually going to be turned over to an insurance company who retain their own attorneys to handle litigation. Businesses pay considerable premiums to protect themselves from risk. When sued, they shouldn’t hesitate to tender their claims to insurers.
If the insurance company or companies reject all claims outright or there is uncertainty as to what insurers intend to cover, it is critical that an attorney is contacted right away. An attorney can offer advice regarding the insurance company’s refusal to defend. If it’s clear that no insurance company will step up to defend the action, the attorney will then discuss options. Of course, hiring an attorney is not free. However, many San Diego attorneys will consider representing parties in a non-litigation context in an attempt to informally resolve the case before requiring significant investment in the litigation. In cases where the damages sought are relatively small (less than or close to the anticipated cost of litigation) or in cases where the business knows it is at fault, an informal resolution may be practical. In cases where the opposing party’s demands are unrealistic or even absurd, attempts at informal resolution may be futile. Because the costs associated with informal resolution are significantly lower than the costs associated with litigation, it is always advisable to discuss this option with counsel.
Unfortunately, if informal resolution is unlikely and there is no insurance coverage, the only option left (aside from ignoring the lawsuit) is to defend the action. Yet, the cost of defending a lawsuit through trial can be prohibitive. Because every case is different, it’s difficult to estimate the total cost which in addition to attorneys fees includes actual costs such as court reporter fees, filing fees, jury fees, expert fees, deposition costs, copying costs, travel costs, etc. However, the simplest cases can easily result in fees well in excess of $50,000.00 and more complicated cases can cost hundreds of thousands of dollars. It’s important that all options are explored with counsel including bankruptcy and, while unlikely in most business scenarios, contingency fee agreements.
Whatever the case, the worst thing any business owner can do is to ignore the lawsuit and hope that it will go away (something that virtually never happens). Too much is at risk. If your business has recently been sued, contact an experienced San Diego business litigation attorney right away.