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Risk Factors Inherent in Litigation

April 13, 2006

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When navigating the court system, the risk of loss from contract and tort liability can be significant for small business owners because the operation of a business naturally involves exposures to liability. Further, limited liability will not protect the owner of a personal service business (e.g., an accounting firm) who personally commits a tort.

However, the civil litigation system itself also represents a significant risk, because many factors make it more likely that an unjust lawsuit will be filed and, as a consequence, the defendant will be forced to pay significant monetary damages to the plaintiff--either to settle the case or as the result of a jury assessment. On the flip side, a plaintiff with a just but relatively small claim will be forced to forego making the claim for economic reasons that discourage litigation. By understanding these risk factors, and controlling them, the small business owner can significantly reduce his overall exposure to liability.

Many factors in civil litigation make exposure to liability, and thus risk of loss, so extreme:

• the combination of contingent fee arrangements for plaintiffs, hourly rates for defendants and the lack of a "loser pays" system makes litigation economically disadvantageous to a business owner being sued
• a business owner filing suit also faces economic disadvantages because of the lack of a loser pays system, and he or she usually cannot take advantage of getting legal help on contingency, but must pay upfront for hourly services, further discouraging action
• low burden of proof needed to win civil cases
• expert witnesses for hire
• liberal availability of pre-trial discovery
• right to a jury trial
• exclusion of evidence from trial
• ease of proving negligence
• ease of proving monetary damages for negligence
• impact of the government as a plaintiff

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