Legal risk on the rise

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Legal liability may be putting small businesses across Canada in jeopardy, according to a new study by ARAG Legal Solutions Inc., with legal woes rising in the last several years

A STUDY by a leading legal expense insurance company has found that small businesses are dealing with more legal headaches than they were just eight years ago. ARAG Legal Solutions Inc. spoke with nearly 1,000 small-business owners across Canada in August of 2022 and found that seven out of 10 small businesses have dealt with at least one legal issue in the last three years. That is up from a similar study of small-business owners done in 2015, when only three out of 10 said they had dealt with legal issues – a 230 percent increase in legal disputes in seven years. As of December 2021, there were more than four million small businesses operating in Canada. That is why the company carried out the research to understand the prevalence of legal issues within the Canadian small-business landscape, and to look at the impacts these disputes have on business owners, both financially and mentally. “Small businesses are the backbone of the economy,” said Jeff Kless, ARAG’s vice president, marketing and strategic initiatives. His team had looked back on their 2015 study, “and we wanted to see what has changed – how has the legal risk profile changed?”

Arag Legal Solutions Inc. (ARAG), part of the largest family-owned enterprise in the German insurance industry ARAG Group, is the Canadian market leader and managing general agent specializing exclusively in legal expense insurance (LEI). Working with brokers, insurers, and mutual partners, ARAG creates access to justice solutions for Canadian families, small business owners, and residential landlords. Visit them online at: www.arag.com/en/company/locations/canada/

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“This research shows that there is a gap in commercial portfolios, because a lot of commercial portfolios will not cover what we cover to a large degree. So we will fill in that gap”

Jeff Kless, vice president, ARAG Legal Solutions Inc.

Of note is that only 38 percent of legal disputes faced in the last three years were related to the pandemic, according to the study. About 62 percent were due to regular business operations. A surprising and worrisome insight was that three out of 10 small-business owners surveyed personally knew another business owner who was significantly affected by, or lost their business following, a legal dispute. That’s triple the number from the 2015 survey, when only one in 10 said that they knew a business owner thus affected.

Mental, financial strain As any business owner knows all too well, time is money – especially time spent on legal matters. Of those Canadian small-business owners that ARAG surveyed, 53 percent said that the legal dispute(s) they faced had a large or moderate financial impact on their businesses. About 70 percent of those surveyed said that they had spent a lot of time dealing with legal disputes, while 73 percent said that they had experienced a moderate amount to a lot of mental stress on a personal level when dealing with these legal disputes. There can be other costs, too.

Small-business owners also worry that legal disputes could negatively affect their businesses’ reputation and productivity, and future plans for growth and expansion. Not surprisingly, this increased legal liability is weighing on the minds of business leaders. Increased liability and legal costs ranked third when it came to top-of-mind risks that they were worried about, but these matters were only three points behind data security and cyber risks. That’s ahead of complying with tax code changes, complying with regulations and/or business licensing changes, and concerns about employee retention.

The study also found that the property and casualty insurance industry has a way to go in communicating with its clients. Six out of 10 small-business owners surveyed stated that their broker or insurer had never spoken to them about the financial impacts of a legal dispute. A further seven out of 10 said that their broker or insurer had never spoken to them about the mental impacts of a legal dispute. “As an industry, we could do better to ensure our small-business clients are aware of their options, and, as prudent risk managers, ensure protection against legal risk is included in their insurance portfolios,” said Kless. Legal insurance Some legal problems appear to come out of the blue, and businesses may be left scrambling on how to deal with them. The poll found that 41 percent of businesses surveyed would absorb the legal expenses as a cost of doing business. About 23 percent would access a business line of credit or take out a loan, while 21 percent would cut back on other operational expenses. Eight percent would divest business assets in order to cover legal costs. About 37 percent were not sure. “This research shows that there is a gap in commercial portfolios, because a lot of commercial portfolios will not cover what we cover to a large degree,” said Kless. “So we will fill in that gap and help business owners save a ton of money.”

“As an industry, we could do better to ensure our small-business clients are aware of their options, and, as prudent risk managers, ensure protection against legal risk is included in their insurance portfolio”

Jeff Kless, vice president, ARAG Legal Solutions Inc.

The report stated that some commercial policies do provide some legal coverage, but there are gaps in typical commercial portfolio coverage. They may not cover contract disputes, debt recovery, business license suspension, tax audits, or even speeding tickets. While an annual commercial LEI (legal expense insurance) premium in Canada can be only in the hundreds, about 60 percent of businesses are spending between $5,000 and $50,000 on lawyers’ fees and other legal costs. “There is no commercial portfolio that will help a small-business owner if they are audited by the CRA [Canada Revenue Agency],” said Kless. A regular commercial policy will also not help with a license suspension, “whereas legal expense insurance will help.”

ARAG can also help claim-covered clients connect “to a lawyer who's in their area. So if someone is located in Alberta, they’re going to get an Alberta lawyer who’s good at that area of law.” If a client has a legal question about, say, letting an employee go, “they want to make sure they do it right. They can speak to a helpline lawyer,” about the matter. “That’s risk mitigation.…We take that burden off of them, make it less stressful, help save time and help save them money because we cover those legal fees.” Interestingly, the study found that 31 percent of respondents did not know whether they even had coverage for legal expenses in their commercial portfolios. “Our research really shows that that we need to talk about it,” said Kless of having legal insurance. “It’s something we need to do as an industry, and just make business owners realize that it’s more than just a slip-and-fall policy. There are all these various things that are part of your day-to-day operations that could affect them financially, but more importantly, [it could affect] their time and mental health, as we can appreciate, having gone through the pandemic. There is a solution to help them with that. We’re not saying that we are the end-all solution, but there is a solution, and legal expense insurance can help small business owners address that.” For more information on ARAG, click on: www.arag.ca/en/arag-canada/

Businesswoman consulting lawyer with legal risks

Legal disputes faced by businesses

Contract disputes and collecting money owed

61%

Legal disputes related to employees

33%

A customer, supplier, or other third party causing damage, trespassing, or interfering with the use of business property

36%

33%

Highway traffic ticket for a business vehicle

Appealing a tax audit decision by the Canada Revenue Agency

31%

Appealing a regulatory or business license decision

30%

A health and safety investigation or prosecution

30%

A customer, supplier, or other third party causing bodily injury to business owner or one of their employees

27%

Owners worry about being sued by…

Employees

36%

Government regulatory or tax agencies

33%

Customers

32%

Suppliers

27%

General public

26%

Shareholders or other investors

22%

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