Potential Small Business Risks
In some ways, owning a business is like being a parent. There’s the joy of training your employees to perform in ways that help your business flourish. But there’s a distinct downside, namely that opening any business is flooded with managing risk, specifically liability risks. In the same way that parents end up having to cover the costs of their teenager crashing a car, the bill resulting from a workplace mishap, whether you instigated it or not, usually falls in your lap.
Whereas large corporations have the resources to pay entire rooms of expert lawyers who specialize in making lawsuits go away, a claim filed against a small business can turn out the lights and put the “for rent” sign in the window. That’s why, if you’re a small business owner, it’s essential to understand the many potential liability risks you’re inheriting and the insurance that can help reduce those risks. Read on for everything you need to know about potential small business risks.
Employer Liability for Employee’s Bad Actions
One of the most common lawsuits that small business owners face stems from bodily harm or property damage caused by an employee. And, fair or not, you inherit the responsibility of your employee’s gaff due to the legal doctrine of Employer Liability for Employee’s Bad Acts.
This principle is also commonly referred to as “respondeat superior,” which in Latin means “let the master answer.” Modern translation: anything bad that happens while an employee conducts business is the owner’s fault.
So, why are you held accountable for damages that you didn’t even cause? The US legal system abides by respondeat superior for two reasons:
- Because you reap the benefits of anything that one of your employees does well, the US legal system feels it’s only fair that you conversely take the rap for any harm or damage an employee causes
- The legal system’s ultimate goal is for the injured person to receive just compensation. The best chance of accomplishing this is to send the bill straight to the top of the chain
Does That Mean You’re Responsible for Your Employees’ Actions 24/7?
Though respondeat superior casts a wide net, it doesn’t mean you’re responsible for what your employees do once their shifts are over.
For example, if they hit someone with their car while leaving the employee parking lot on their way home, that’s not on you. You’re only culpable for the actions that your employees take, as it’s often put legally, “during the course of employment.”
So, What Exactly Falls Within “the Course of Employment?”
For most businesses, an employee’s job description entails a multitude of tasks, many of which require leaving the business’s premises. This makes the phrase “within the course of employment” one littered with gray areas.
To help litigators navigate this ambiguity, the US law of torts has established two distinct concepts: the detour and the frolic.
- Detour – A detour takes place when an employee takes a minor departure from an assigned task. For example, let’s say you run a local pizza shop and send a driver out on a delivery. Let’s also say the driver takes an alternate route so they can drive by the beach and catch the sunset. If the driver gets in a crash that hurts someone, you’re culpable. Yes, the driver veered from the path they were supposed to take, but they were still performing their assigned task of delivering the pizza
- Frolic – A frolic, on the other hand, occurs when an employee takes a major deviation from their assignment. Using the same example, say your driver completed a delivery and then decided they wanted to hit the casino before they bring the car back to your shop. If the driver hurts someone in a collision, you’re not culpable since the driver committed an action that was completely unrelated to their original assignment
It’s important to note that, even in cases of a clear-cut frolic, a crafty lawyer may still succeed in putting the blame back on you. For example, if your delivery driver’s legal team is able to prove that you should have anticipated your driver’s frolic to the casino due to their documented history of gambling addiction, the damages are once again your problem.
Acts Outside of Employment
Though the principle of respondeat superior is primarily only applicable to employees’ actions during the course of employment, the US legal system does allow for circumstances in which you can be held accountable for your employees’ actions outside of their assigned duties.
The most common example of this occurs when an employer fails to conduct a thorough background check on a prospective employee with a criminal record. In the eyes of the law, the employer’s negligence in the hiring process increases the chances of putting customers in harm’s way.
The legal system is particularly harsh on cases in which you hire an employee for a job directly related to their criminal past. For example, it would be a costly no-no for you to hire a delivery driver with DUI’s on their record.
Slip-and-Fall Accidents
The other common lawsuit filed against small businesses are premise liability claims, or as they’re often referred to, “slip-and-fall” incidents. These types of risks usually result from failure, on your part or an employee’s, to address a safety hazard at your location.
The usual suspects in slip-and-fall incidents are:
- Wet floors or changes in flooring
- Torn carpeting
- Potholes or cracks in the walkway outside your premises
- Rain or snow resulting in slippery and/or icy conditions outside your premises
- Poor lighting
- Narrow stairwells, especially when they don’t include guardrails
- Objects that obstruct walking areas or are placed in precarious situations
“Slip-and-fall” incidents aren’t dictated by any one specific rule, but rather judged on a case-by-case basis centered on three guiding principles. Largely speaking, you’ll be responsible for a customer’s slip-and-fall injury if you or an employee:
- Created the safety hazard (e.g. you spilled a tray of drinks on the floor)
- Knew of the safety hazard but didn’t take any action to correct it (e.g. the stairs outside your building didn’t have a guardrail, and you never took measures to have one set up)
- Didn’t take any action on a safety hazard that you weren’t aware of but existed for so long beforehand that you should have been aware of it (e.g. the taillights on the delivery truck have been out for a week)
In all cases, common sense rules the day. Naturally, the phrase “should have known” makes the third outcome the vaguest one to judge. And unfortunately for small business owners, it’s also the most frequent one.
An Additional Note on Premises Liability
Premises liability dictates that culpability for slip-and-fall incidents at your location lies with not only you, but also any third-party that enabled you to operate out of the space. So, if you rent or lease your building, the commercial real estate company who provided you with the space is considered just as responsible as you are.
There are few quicker ways to convince a commercial real estate company to kick you out of their building than when a lawsuit gets dropped on their desks.
Other Potential Liability Risks
When it comes to potential risks for small businesses, respondeat superior incidents and premises liability tend to be the two biggest offenders.
But based on the nature of your business and how many employees you staff, your business operations may also lend themselves to several other potential liabilities, including:
Harassment
While the workers’ compensation insurance you’re required to purchase by law will cover one of your own employees enduring a bodily injury, it doesn’t protect you from employee claims related to emotional trauma. And that’s a significant problem considering the fact that harassment is rapidly becoming one of the most frequent workplace-related claims.
As an employer, a risk management plan is important because you will be held accountable for any workplace-related harassment claims unless you prove beyond reasonable doubt that:
- You took prompt action to rectify past reported incidents of harassment and prevent future incidents from occurring, or
- The employee filing the claim didn’t take appropriate measures to report past incidents and avoid situations that could result in harm
All harassment cases also require a third party to conduct a swift, impartial investigation. And because reports of workplace harassment are so rarely documented and are oftentimes supported by nothing more than “he said, she said” testimonies, harassment claims are a nightmare to contest in court.
Failure to Protect Customer or Employee Data
Computer hackers today are only getting craftier, which means that businesses are more susceptible to data breaches than ever before. And if your business is in an industry that regularly deals with confidential customer information such as social security numbers, medical records and financial statements, you’re a prime target.
Because data breaches are so difficult to detect initially and involve information that’s sensitive in nature, data breach lawsuits are among the most devastating a business can endure. You lose not only your customer’s trust, but also upwards of millions of dollars in the data recovery process.
Product Liability
If your business sells products that customers can take home with them, you’re automatically vulnerable to product liability.
Different states have varying product liability laws. But all 50 states agree that, if a purchased product either causes bodily injury to a customer or fails to meet their safety-related expectations, the business owner who sold the product and the product manufacturer split the blame. And the person who files the claim doesn’t have to be the same customer who originally bought the product. It can be anyone who was injured by the product any time after purchase.
Product liability lawsuits can come about in the following ways:
- Design Defects – A flaw in the product’s original design presented danger
- Manufacturing Defects – The manufacturer failed to follow either the designer’s instructions or their own specifications in manufacturing the product
- Marketing Defects – The product was improperly labeled, failed to warn customers of its potential dangers, didn’t come with sufficient instructions, or was (intentionally or not) misrepresented
Product Liability for Restaurants
The same concept of inaccurate labeling or failing to warn customers of danger makes the possibility of product liability ripe for small businesses in the food industry as well.
It’s extremely common for restaurant patrons to blame an illness on something they ate, which puts any establishment serving meat or fish at constant risk. Plus, do you know how the coffee cups at all food and beverage establishments now include a printed label warning you that the coffee’s hot? That’s because of an incident that happened in 1994 when a woman sued McDonald’s for failing to warn her that her coffee might burn her tongue.
Whether your restaurant serves coffee, fajitas on sizzling pans, or a hard-shell taco that a customer chipped their tooth on, restaurant owners always have to be on their toes and be prepared to mitigate risks.
Professional Liability
When your business doesn’t sell any products but rather offers services, you don’t have to worry about anyone complaining that you sold them a dangerous toy or undercooked chicken. You do, however, have to worry about people blaming you for giving them bad advice if something goes wrong. This is where having professional liability insurance comes in.
The more your customer has at stake when they rely on you for consulting, the harder a professional liability claim hits your wallet. Thus, the following businesses are particularly prone to professional liability claims:
- Practicing physicians and medical specialists (the average cost of a malpractice settlement is $425,000!)
- Attorneys
- Financial advisors
- Accountants
- Real estate brokers
Conclusion
Being a small business owner comes with a wide variety of risks to manage, many of which are caused by factors outside of your control. Thankfully, NOW Insurance has a solution for all them, and is ready to help you choose a plan that suits your unique business.
Call us now so you can rest easy later knowing you’re armed for the worst-case scenario with the best insurance and risk management for your business.
Resources
- “Business Liability” by editorial staff at FindLaw.com
https://smallbusiness.findlaw.com/liability-and-insurance/business-liability.html - “Business Liability Insurance” by Julia Kagan
https://www.investopedia.com/terms/b/business-liability-insurance.asp - “Get Business Insurance” by The US Small Business Administration
https://www.sba.gov/business-guide/launch-your-business/get-business-insurance