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The costs and risks of a consulting business lawsuit

Learn how to protect your IT consulting business by understanding the liability risks and taking steps to safeguard your assets.

Small businesses face big risks when it comes to lawsuits

Starting a new consulting business comes with plenty of risks. But one of the biggest threats you might face is the possibility of a lawsuit.

Legal expenses for a lawsuit can add up quickly, and they may have a devastating effect on a small IT business. Recent statistics show that small businesses should be ready for litigation:

  • Over 50% of civil lawsuits target small businesses.
  • 90% of small business owners targeted by frivolous lawsuits settle to avoid high court costs.
  • Small business owners who earn $1 million per year spend an average of $20,000 of it on frivolous lawsuits.

The costs are even higher for larger businesses. For example, the car rental company Hertz recently filed a $32 million lawsuit against Accenture. Hertz tasked the company with a website redesign, but it failed to deliver a functional website or app.

Understand your risks

The best way to avoid a liability lawsuit is to know about the risks beforehand. Major risks for IT business consultants include copyright infringement, libel and slander, invasion of privacy, cybercrime, and more.

While installing software or creating a new app might not seem particularly risky, if something goes wrong, your client could sue, leaving you exposed to financial risk.

The rise of cybercrime

If you own a small IT business, you’re likely aware of the potential for cybercrime. While your business itself may not be a target, your customers’ businesses might be.

If you are involved in setting up your clients’ security or protecting their data, you could be found liable if they experience a data breach. Technology errors and omissions insurance (tech E&O) protects small tech companies like yours against data breaches that affect their clients and customers.

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How to protect your small business from lawsuits

You can’t guarantee that your IT business will never be sued. But you can take the following steps to help safeguard your assets.

Get everything in writing

Whether you meet with clients in person or over the phone, be sure to document your exchange in writing. Keep accurate records of when an agreement is signed, what occurred during each meeting, and any subsequent items discussed.

Be careful of what you say and do

Be careful not to make any claims about your business or your capabilities that could be considered questionable. Also, avoid making any public announcements or statements that could be interpreted as slander or libel. If you hire any employees, ensure that they follow the same guidelines.

Make sure you have adequate insurance

One way to safeguard your assets is by having the right kind of small business insurance to protect against lawsuits. Depending on the structure of your business and the type of work you do, your choices of lawsuit protection insurance will vary.

A few basic policies can help you manage your risk:

  • General liability insurance can offer small business lawsuit protection in the form of coverage for third-party lawsuits over bodily injuries, property damage, and advertising injuries.
  • Errors and omissions insurance (E&O) covers mistakes or oversights made while rendering your services. When bundled with cyber liability insurance, it's called technology E&O.
  • Cyber liability insurance can help pay for the cost of a data breach. If you own an IT business, consider third-party cyber liability coverage. It can pay for legal expenses if one of your clients suffers a breach and sues you.

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