Plenty of businesses fail because of crazy legal liability. They get sued out of existence. We’ve seen it happen at our law firm, and we don’t want it to happen to you.

The information here could save your company’s life. That’s not an exaggeration.

Imagine this situation, if you will:

You built a website for a client. You delivered everything on time. The client paid you on time. You go about your business. A month later, you get an angry letter from a lawyer saying that because a feature that you did not implement correctly, your client lost tens of thousands of dollars in sales. Even though you only got paid a couple thousand dollars, your client wants you to pay them ten times that amount!

Now, dig this:

You produce an ad campaign for a client. As part of your work for them, they supplied you with some amazing illustrations. You used these illustrations and they loved the work that you did. Your client pays you on time. You go about your business. A few months later, you learn that you have been named in a lawsuit filed by the artist who created the illustrations. The artist claims that the company never had permission to use the illustrations. The artist alleges they were harmed to the tune of hundreds of thousands of dollars, and that you were a party to the harm.

Both of these stories have happened before. Both of these stories will happen again. Similar cases have destroyed companies.

The good news: you can protect yourself from this type of legal fallout easily. 

Indemnification Clauses

The word “indemnification” sounds like a mouthful; it merely means that someone else takes responsibility when something goes wrong.

Most contracts include some indemnification provision that outlines who takes responsibility for specified and unfortunate events. For instance, a contract may include a clause stating that a client takes responsibility if they supply infringing content to a designer.

For business contracts, we often include provisions that cover things like copyright infringement. These prove useful in scenarios like the second one given above, where someone accuses the company of infringement.

A proper indemnification clause lists the types of situations where a party to the contract takes responsibility when things go wrong. This list can include things like copyright infringement, defamation, negligence, non-compliance with regulations, etc.

Limitation of Liability Clauses

Limitation of liability clauses work hand-in-hand with indemnification clauses.

A limitation of liability clause limits the total amount and kind of liability. So that means that you might limit the amount that you can be liable for to a set amount. You protect yourself from being sued for an amount higher than the amount stated in the limitation of liability clause.

These clauses also include a legalese-looking bit that states that a party bears no liability for incidental, consequential, or other types of damages. This addresses the first situation where the client alleges that they suffered further losses from a contract breach.

Limitation of liability clauses protect from that type of excess liability.

Limited Liability Companies

Limited liability companies — if you operate them correctly — shield company owners’ assets from legal damage.

That means that if someone sues your company, your home, your car, and your personal bank account are not at risk. Even if your company gets destroyed by legal liability, you get to keep your assets.

If you operate your company above-board, then you get to keep the limited liability protection offered by business entities such as LLCs and corporations. If you run things willy-nilly, you jeopardize that protection.

Our law firm advises most business owners to create a company as soon as possible so that they can take advantage of the protection early on.

Liability Insurance

Finally, liability insurance offers another layer of protection. A variety of policies exist and usually go by the name of general commercial liability insurance, errors and omissions insurance, or something similar.

Whatever the name, these policies should cover you if certain things go wrong — liability insurance functions just like auto insurance in that regard.

Business owners do well to review these policies carefully so that they know what exactly they cover and what they do not. Also, many policies have requirements for coverage, such as reporting incidents on time. Understand these requirements to take full advantage of the coverage.

Putting It All Together

Almost any business can use the ideas above. Many companies take advantage of all of them. While each of them involves some level of investment, they pay dividends the first time something goes wrong.

Beyond that, the peace of mind offered by being proactive about these legal liability issues frees up mental resources. This allows you to focus on building your business.

Finally, keep in mind that everything that you just read may not apply to your business. In other words, it’s not legal advice. Only a lawyer that you hire can give you legal advice. Enterprises have a ton of variables, so it helps to get professional advice when figuring out how to navigate these issues — it’s easier than you think.

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