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Are Your Clients Putting Your Business At Risk?

You take steps to protect your small business, whether by setting up security cameras outside your store or encrypting your sensitive business data to protect it from cyber crooks. But did you ever stop to think that your clients and customers could be putting your business at risk — without you even knowing it?

More than 35.2 percent of respondents in a survey of over 1,000 small business owners experienced an event last year that could have led to an insurance claim. Some of the incidents won't surprise you. Here’s a look at some of the most common types of incidents:

•    Employee injury: 10.6 percent of companies experienced this type of injury.
•    Burglary or theft: 8.8 percent
•    Fire, storm damage or cracked pipes: 6.6 percent
•    Customer injury: 2.4 percent
•    Product that caused injury or damage: 2.3 percent

However, you might be surprised to learn that by far the number-one source of insurable incidents is a client complaint or contract dispute. Nearly one-fourth (22.2 percent) of small business owners in the survey say they have suffered from this type of incident.

Client complaints and contract disputes can be one of the most expensive types of disputes to resolve, according to the survey, which reports that the median cost of a contract lawsuit is $91,000. This type of dispute most often happens to service businesses, such as accountants, consultants or IT companies. Your client may claim that you made an error in performing the work (for example, an accounting error that cost the client money), that you were negligent or that you otherwise failed to fulfill the terms of the contract.

How can you handle a client complaint or contract dispute? Prevention is the best solution. Before entering into any project with a customer, even a long-time customer, make sure you have a detailed contract and that both sides have approved any changes to the contract. The contract should clearly specify the scope of the work, as well as what will happen if the client wants to change the contract after it is signed or add to the deliverables. Take the time to carefully listen to the client when crafting the contract and confirm that you understand their expectations.

What if, despite all your best efforts, a client still claims you didn't fulfill the terms of your contract? Many small business owners prefer to try to resolve such disputes on their own, without involving their insurance company or going to Small Claims Court. To successfully resolve the dispute, start by acknowledging why the client is upset, then really listening to them describe the problem as they see it. Often, acknowledging someone's frustration without getting defensive goes a long way toward repairing the damage.

Assuming that you are in the right, you don't want to give the client a refund or redo all the work you did for free. Instead, propose a choice of two solutions and let the client decide which one they prefer. You may need to take some time to think this over to come up with solutions that you think are fair. When clients feel that they have control over the process, they’re more likely to be satisfied with the outcome.

Getting professional liability insurance (sometimes called errors and omissions, or E&O, insurance) can help protect your business in case a client contract dispute can't be resolved amicably. This type of insurance protects your business against claims that you or your employees were negligent, made an error or otherwise failed to live up to the terms of your contract. While you may not always want to call in your insurance agency to handle a conflict with a customer, it's nice to know that you have the option of getting backup if you need it.