A business operates for the purpose of generating a profit, but litigation could greatly eat into that bottom line. Agency principals must be aware of what could subject them to a lawsuit.

Before even getting to trial litigation costs can quite high, especially for small businesses like many employee benefit brokers, explains Walid J. Tamari, founder of Tamari Law Group LLC in Chicago.

At the same time, many businesses do not adhere to proper corporate formalities. “Some [brokerages] may forget, some may not know,” Tamari explains. “But at the end of the day, none of those reasons matter. … If you don’t adhere, there is a potential for exposure.”

Litigation and proper business practices are something agency owners need to be thinking about, adds David Contorno, president of Lake Norman Benefits in Mooresville, NC. Under HIPAA, all brokers must get a business associate agreement from each and every client, which protects personal information.

“When we onboard a new client and ask them to sign [the agreement], I have yet to have one client say they are familiar with the document,” Contorno says.

Not thinking about potential litigation means you’re likely to invoke Murphy’s Law, explains Susan Combs, CEO of New York City-based brokerage Combs & Company. However, she adds, an agency owner cannot live their life in fear, but rather needs to make sure they are protected.

She points to E&O insurance, the primary purpose of which is to provide litigation costs if a broker is brought into a lawsuit. A broker, Combs explains, must ensure their E&O policy covers their entire practice.

A broker must also stay educated. “With the Affordable Care Act, a broker needs to make sure they stay up and educated,” Combs says. “If you advise a client improperly, you are opening yourself up for a lawsuit.

To overcome these challenge, Tamari, a business and civil litigation attorney, shares five items that are likely to expose a business to litigation and the high costs that come along with it:

Also see: "7 reasons employers are hesitant to adopt private exchanges."

1) Failing to maintain corporate formalities: “Businesses that fail to maintain proper corporate formalities expose their shareholders to potential liability by creating an opportunity for plaintiffs to argue that the court should pierce the corporate veil,” Tamari says. “If a court pierces the corporate veil, plaintiffs may be able to pursue recovery against, not only the business, but its shareholders as well.”

Bloomberg/file photo

2) Failing to properly document business agreements and transactions: Documenting commercial transactions and understandings creates a roadmap for business relationships while simultaneously establishing the parties' expectations, according to Tamari. “When businesses fail to keep appropriate records, changes in circumstances and differing recollections can create controversy between the parties, which can, and often do, erupt in litigation,” he adds.

3) Failing to protect trade secrets and confidential information: “While businesses expend substantial time and resources developing proprietary competitive advantages, it is equally important that efforts are made to protect confidential information,” according to Tamari. “In fact, the law imposes unique obligations on businesses to proactively take steps to protect their trade secrets. For example, if a former employee brings a trade secret to their new employer, the former employer may have to resort to litigation to enforce its rights to the trade secret, and it may prove more difficult if the proper steps to document and protect the proprietary information have not been taken.”

4) Failing to choose an appropriate dispute resolution mechanism: According to Tamari, “absent a clearly articulated arbitration provision stating the manner in which a dispute between the parties will be resolved, a business will be required to litigate in state or federal court.” He adds, “Litigation, as opposed to arbitration, is an inherently public process,” which could result in exposure of a business' trade secrets.

5) Failing to select a forum to resolve disputes: “Businesses that operate nationally or globally could incur substantial, even insurmountable, legal expenses if made to litigate wherever they conduct business,” Tamari explains. “A plaintiff could be entitled to pursue claims against a national or global business in a variety of jurisdictions if the parties' agreement is unclear or silent about the location where disputes will be resolved.”

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