September 16, 2014

Small Business Bears A Bigger Share of Liability Costs

Tort Liability Costs for Small BusinessA study released just last week by the U.S. Chamber Institute for Legal Reform found that small businesses bear a disproportionate burden of tort liability costs. This is the second study (I reported on an earlier study two years ago).

This study evaluated small businesses with less than $10 million in annual revenues and at least one employee in addition to the owner, and found that:

  • Small businesses bear 69% of business tort liability costs but take in only 19% of business revenues. This is up from 2002, when small businesses paid 67% of tort liability costs on 19% of revenues.
  • The cost of the tort system to individual small businesses is $20 per $1,000 of revenue. In other words, a small company with $1 million in annual revenues will pay, on average, $20,000 in annual tort related costs.
  • Small businesses pay $20 billion of their tort costs out of pocket, as opposed to through insurance. This is up from $18 billion in 2002.

And you may be wondering, “What’s a tort?” It’s not some rich chocolate dessert. Tort is a legal term that refers to most kinds of legal liability other than a breach of contract or a criminal act. Tort liability might include slip-and-fall cases on business premises, product liability, professional malpractice, slander and libel, trademark infringement, patent infringement — the list goes on.

I would add this: certain types of businesses tend to attract tort liability claims more than others. Businesses with fleets of company vehicles; tech businesses that generate considerable intellectual property such as software; professionals such as doctors, lawyers and accountants; and retail establishments such as stores and restaurants that receive members of the general public — all tend to get more tort claims than businesses that primarily consist of office workers. Maybe one of you lawyers out there can shed light on other kinds of businesses that tend to be subject to tort liability.

Read: Tort Liability Costs for Small Business

3 Comments ▼

Anita Campbell - CEO


Anita Campbell Anita Campbell is the Founder and Publisher of Small Business Trends and has been following trends in small businesses since 2003. She is the owner of BizSugar, a social media site for small businesses, and also serves as CEO of TweakYourBiz.com.

3 Reactions

  1. I know this is an older post, but I have a question whenever I see this. How much of the tort burden borne by these small businesses is *undeserved*?

    Forget types of businesses. Is it possible that the reason this is happening is because small business owners, being less sophisticated, are more likely to produce products which lack safety precautions, to violate intellectual property rights, etc?

    This seems to be a fairly likely state of affairs to me. Small businesses aren’t likely targets of frivolous lawsuits because there are no deep pockets, after all. So if they’re getting sued… maybe sometimes they really deserve it and pay out because they screwed up.

    There may be something wrong with the system, it’s possible. But just because small business owners pay out disproportionately doesn’t convince me that there’s a problem. All it tells me is things that I already knew were true–that small software firms can be cavalier about obtaining necessary licenses, that small restaurants sometimes aren’t as good about training employees in food safety, that small retail stores are more likely to have an employee who doesn’t know how high things can be safely stacked. So a patent is violated or somebody gets food poisoning or a stack of heavy boxes falls off a shelf and conks some poor lady in the head… and somebody sues.

    This is how it looks to me, anyway. If the tort system were broken, big companies, who have lawyers around telling them they need to post hand-washing signs in the bathroom and do employee training to prevent sexual harassment claims and whatnot, would be bearing the burden because people would be suing the one with money and not the one who really did something wrong. Or am I crazy to think this?

  2. Hi Susan, I agree with you about some lawsuits having a basis.

    My point was not about “frivolous” lawsuits.

    Rather, I deal in facts: liability is a serious issue for small businesses and it can be quantified as this study shows. In fact, the costs will hit you harder as a small business than they will hit a larger business, because you have a smaller revenue base to absorb the impact of liability expenses.

    All the more reason that if you run a small business you’d better have appropriate insurance and even set aside a reserve for uninsured expenses. Yet, the vast majority of business owners, especially new and young business owners, never plan for liability costs as another expense item in their operating plans.

    Anita

  3. Hi,

    Just a comment from a person outside the USA, but there is a perception that americans tend to be too libelous.

    I remember a remark from an American friend: ” In America, Your company is not big or important enough until it has been sued.”

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