2. Legal Risk Management
Mitigating and Managing Legal Risk
Organizations seek to reduce the legal risks they have identified and assessed. Reducing legal risk exposure may be referred to as risk mitigation. It is worthwhile to highlight some potential methods to mitigate legal risk which may be overlooked or undervalued:
Insurance
Both individuals and businesses have significant needs for various types of insurance, to provide protection for health care, for their property, and for legal claims made against them by others. Insurance allows individuals to pay a certain amount today to avoid uncertain losses in the future.
Businesses face a host of risks that could result in substantial liabilities. Many types of policies are available, including policies for owners, landlords, and tenants (covering liability incurred on the premises); for manufacturers and contractors (for liability incurred on all premises); for a company’s products and completed operations (for liability that results from warranties on products or injuries caused by products); for owners and contractors (protective liability for damages caused by independent contractors engaged by the insured); and for contractual liability (for failure to abide by performances required by specific contracts). Depending on the business context, insurance may be required by law, or it may be a viable risk management application that businesses should consider and review regularly.
Regulatory review
Many firms find it worthwhile to preemptively hire an attorney to review products for regulatory and litigation risk before launching the product. For a fee, a specialized attorney can examine the product and provide a report on potential regulatory violations and lawsuit risks. Many firms might be surprised at the substantial increased risk of litigation based on innocuous statements on packaging, for instance.
Limitation and Exclusion Clauses and Safety Protocols
The use of liability waivers, exclusion clauses, hardship clauses (force majeure), warning labels, caution signs, safety rails, and related activities can help prevent litigation. Liability waivers may reduce litigation risk by requiring that individuals specifically agree they will not sue in case of injury during an activity as long as such limitation and exclusion clauses are not contrary to public policy or are unconscionable. Physical safeguards against injury can help reduce the probability of potential negligence lawsuits by preventing injury in the first place. Businesses that practice prudent preemptive tort defense can lower their legal risks substantially.
Knowing the law
Another way to reduce legal risk is to simply be familiar with the law. An attorney will not always be around to consult, or it may be cost-prohibitive to use their services at times. The law is vast and complicated, but many legal concepts foundational to business are easy to understand.
The more one knows about the law, the easier it is to avoid compromising legal situations, to be
conversant with those that can offer legal counsel, and to make decisions that balance legal and ethical interests with other strategic concerns.
Key Takeaways
- Approaching law from a risk management approach is crucial to evaluate the legal environment of business.
- Evaluating legal risk requires understanding the likelihood of legal action, the severity of the consequences, and the risk tolerance level of the company. Even low probability legal events can be so severe that risk averse firms should take action to avoid them, while even high probability legal events may not bother risk seeking firms.
- Preemptively avoiding tort liability (employing smart contracting principles) and enacting safety messaging and protocols can help to avoid business risks. Insurance against legal claims can also reduce uncertainty, at a price.
