Operating a business entails a certain amount of risk, particularly the risk of litigation. Nobody wants to be embroiled in a lawsuit, so it makes sense for business owners to understand litigation risks and to do what they can to prevent issues that could result in a lawsuit or insurance claim.
Defining litigation risk
Litigation risk is the likelihood that major actions and decisions lead to lawsuits. Every individual or business is at risk of being sued by customers, partners, employees or competitors. However, business litigation is the least desired method to resolving a problem due to the high legal costs. To avoid lawsuits, the owners of companies often pursue settlements or mediations outside of court.
Risk analysis and reduction
Litigation risk reduction is a system of analyzing the decisions that increase and decrease risks. Business professionals use various methods to prevent risks from turning into actual problems.
The most common method of risk reduction is identifying the risk factors. Litigation occurs more often to large companies that earn massive profits and can afford to pay their legal expenses. Companies that are brand new and lack sufficient insurance coverage are likely to be sued and lose their cases. Small business owners have fewer litigation risks but face greater losses if they are sued due to their limited resources.
Every professional or company that provides a service faces litigation risks. Medical professionals can be sued if they provide the wrong treatment advice to their patients. Large companies can be sued for fraud or breach of contract in class-action lawsuits. Due to the costly legal fees, most companies try to identify and prevent the risks of litigation before it occurs.