Protecting yourself from frivolous lawsuits

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When two of Clayton Kallman’s tenants decided to back out of their lease in 2008, the Gainesville rental property owner was faced with a potentially hefty loss.

To protect himself, Kallman decided to take legal action and hold the tenants to their obligation. Their response? They countersued, claiming they broke the lease because the apartment was infested with mold due to Kallman’s negligence.

After 16 years in the property management industry, Kallman knew he had his bases covered, so he fought the suit, proved the tenants’ claim was inaccurate, and won. Not only did he recoup all the money the tenants owed him, he got back half his legal fees as well.  “This is exceedingly rare,” he says. “The best that a defendant like us usually hopes for is for the plaintiffs to go away because they can’t prove anything.”

The Danger of Frivolous Suits
Many small business owners are concerned with unfounded or frivolous lawsuits. A person can bring a frivolous suit for any reason, and often it’s up to the business owner to prove the claim is false, rather than the plaintiff to prove it is true.

That can be a time-consuming and expensive process in any state, but significantly more of a concern in Florida, according to a U.S. Chamber Institute for Legal Reform poll. Business owners who took the poll placed Florida 42nd among states for legal fairness.

The institute also estimates that when suits are filed, small business owners bear the largest portion of the costs. Nearly 80 percent of the $152 billion that U.S. businesses will spend in legal fees in 2011 will be shouldered by small businesses.

“Everyone thinks it’s big businesses that are being targeted by expensive litigation, but it’s small business owners that are really paying the price for our broken legal system,” argues Mark Szymanski, director of communications for the U.S. Chamber.

But just because the cards appear to be stacked against small business owners doesn’t mean you don’t have a chance. Kallman’s attorney, Jennifer Lester of Gainesville’s Dell Graham law firm, says there are steps you can take to make yourself less vulnerable to a frivolous lawsuit, including these:
Insure Yourself. Lester says the first thing you should do is buy adequate liability insurance so you’re protected in the event of a lawsuit.

Even if you’re not worried about frivolous suits, it’s wise to have a good liability policy, Lester says, because sometimes legitimate problems arise that are out of your control.

If you have liability coverage, you should review the policy at least once a year, suggests online business resource AllBusiness.com, to ensure it is adequate for your changing needs.

In addition to liability insurance, you should also consider vehicle coverage and a “Directors and Officers” policy, which protects you and your key people from personal liability in the event of a claim against the business. And

AllBusiness.com recommends website coverage, which protects against claims or actions that result from something that appears on your website.

Practice Prevention. Beyond adequate insurance, the best way to foil a frivolous lawsuit is to respond quickly when a problem occurs.  For example, in Kallman’s case, he says he was aware that mold is a common claim tenants use when trying to void a lease, so, he says, “We’re fanatical with dealing with mold.” His property managers respond to mold complaints quickly, and they routinely inspect his properties to reduce the chances it will occur in the first place.

Lester says this approach is an incredible bargaining chip if your case ends up going to trial. When you show you’re diligent in dealing with potential problems, “it makes a good impression on a jury,” she says. It shows that “this isn’t a fly-by-night business, but this is a serious businessperson who has done the things he’s supposed to do.”

Document What You Do. If you do preventative work or deal with an existing problem, it’s important to document what you do. Documentation can show that you handled a specific complaint quickly. Also, your records can demonstrate you have a consistent pattern in dealing with similar issues, which can help convince a jury you’re conscientious about responding to problems.

Again, this is where Kallman’s preparation paid off, Lester says. His property managers had maintenance records, photographs of the apartment in question and work orders filed by the tenants that showed work had been successfully completed.  Kallman even hired an outside consultant to examine the unit for signs of mold. This was an expensive move but typical of what you have to do when handling a frivolous suit, he says.

Be Proactive. Even with a prevention plan and documentation in place, you could face a suit, Lester says, because the law allows any suit to be brought for any reason. That’s why experts suggest that business owners get involved and press the state to change the law.

William Large, president of the Florida Justice Reform Institute, says business owners should speak out, discuss their own problems with suits and lobby for legal reform. Not only could this save them time and capital on a lengthy court battle, he says, it could save their businesses.

“It’s important for small business leaders to tell their stories of ‘what litigation costs me,’” Large says. “Legislators have a large amount of respect for small business owners. They want to know their opinion.”

No matter what avenue they choose, Kallman says it’s imperative for business owners to protect themselves before they end up under attack. He also hopes they take heart from his success in fighting a suit.

“The truth of the matter is if someone is filing a frivolous lawsuit, and you are squeaky clean, you can get them for it,” he says. “It’s a lot of work, but it pays off.”

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