Accounting for Risk
When it Makes Sense to Settle a Professional Liability Lawsuit
(Even if You've Done Nothing Wrong)

Bookkeeping software site LessAccounting has the details New browser window icon. of a lawsuit that cost one small accounting firm $8,000, even though the claims were completely bogus.

Despite the fact that they'd done nothing wrong, the small-business owners chose to "settle" and pay a small sum to the client suing them. Why settle a lawsuit? By doing so, these small-business owners were able to keep their costs low (yes, $8,000 is low for a lawsuit).

Because settling can reduce the cost of a lawsuit, it's important to understand how settlements work. In this article we'll go over lawsuit settlements and when this strategy makes sense for independent accounting firms, bookkeepers, and investment advisers.

What Is a Lawsuit Settlement?

Risk Management for Accountants: What Is a Lawsuit Settlement?

Despite all the handwringing about lawsuits, many small-business owners don't really know how a lawsuit works. To understand why settling can be a good idea, let's start with the basics. Here's what happens when a client sues your accounting firm and you don't settle:

  • When a client files a lawsuit against you, you receive a notice — typically from a process server — that informs you that you've been sued and gives you a copy of the official court summons.
  • You hire a lawyer to review the lawsuit documents that have been filed in court.
  • Your lawyer files a response to the lawsuit and possibly a countersuit if they think the claim is unjust.
  • There is a long process of discovery, in which your lawyers and your client's lawyer request access to files, data, emails, and records from the other party.
  • The lawsuit goes to court, sometimes as much as a year after it was filed.

If you're not exhausted from reading that description, you should be. Before you even walk into a courtroom, you may have spent a year preparing your case. By that time, you'll already have a sizeable legal bill, sometimes for tens of thousands of dollars.

A lawsuit settlement occurs when both parties agree to a solution outside of court. Settlements can occur at any time, including once the case has gone to court.

Settlements are actually agreements — think of them like a contract — in which you and your client agree to certain conditions that will resolve the lawsuit. Settlements can include…

  • An agreement in which your client (the plaintiff) agrees to withdraw the lawsuit.
  • An assessment of damages you owe the client.
  • An agreement that says who was to blame.
  • An agreement that prohibits your clients from talking about the case and disparaging your reputation.
When Should Accountants Settle a Lawsuit?

When Should Accountants Settle a Lawsuit?

As we saw above, an accounting lawsuit can be a long, exhausting process. Even if you've done nothing wrong, you'll have to pay out the ear in legal costs just to defend your business. For this reason, many lawsuits settle out of court. Here are a couple of examples:

  • An accountant is sued unfairly. When a client sues you unfairly, your lawyers fire back and it looks like you're going to win. Why would you settle? Because lawsuits are all about cost. Even if you win, you'll have to pay for legal representation. It might be smarter for you to simply offer your client a low-ball settlement amount (maybe a refund of your fees) and be done with the case.
  • An accountant is a fault. If an account thinks there's a good chance they'll lose a professional liability lawsuit, it might make sense to settle out of court as quickly as possible. You'll pay your client the damages you owe and save yourself the hassle and embarrassment of having to go to court and rack up more legal fees.
How Professional Liability Insurance Helps

How Professional Liability Insurance Helps with Lawsuits

Professional Liability Insurance pays for your legal costs if your accounting firm is sued in a professional liability lawsuit. And yes, this includes coverage for settlements.

That's great news the owners of small accounting firms because it means that if a client sues you, your insurance company can help you avoid the hassle and cost of a full-fledged lawsuit.

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