Q: We're ready to launch a new product, and I wanted to explore liability issues. We currently "broker" business credit insurance (protect our client's investment in accounts receivable). We've become extremely active within one industry-gaining industry knowledge, contacts and financial information. We're now developing a credit report agency similar to a Dun & Bradstreet report, adding credit "advisories." How technical should we be with a "disclaimer?" Are we opening ourselves up to liability making credit advisories?
A: Investigating credit risks and reporting to your client on the credit status of the business or person investigated is similar to what Dun & Bradstreet does in their "comprehensive reports." Dun & Bradstreet's opinions cover a prospect's credit capacity, financial stress, payment habits, public filings such as bankruptcy or liens, business structure, operations/management, and banking relationships before rolling it all into a "financial summary." It wouldn't hurt to examine how similar companies present this information.
Liability could fly at you from two directions: the company being investigated (if the information is inaccurate, biased and so on) or the company for which you're investigating (when that good credit risk turns out to be a deadbeat).
Will you do all your own investigating or get information from a third party? If it's the latter, you'll have to verify its accuracy. It sounds as if you're reaching a conclusion based on the research since you're issuing a credit advisory. Advising someone to act on your conclusion is always riskier than just presenting the facts.
Aside from being meticulous in your research and obtaining liability insurance, you can call off the litigation hounds by including two things in your contract: a disclaimer and an indemnification or hold-harmless clause.
These are really two sides of the same coin, a disclaimer being heads and a hold-harmless being tails. The disclaimer sets out the negatives: This report isn't meant to convey legal advice, as a substitute for a meeting with your attorney or to verify that we've researched your state's laws on creditor's rights. A disclaimer basically says, "Look, I got the information you wanted. I've done a competent job and uncovered facts that will help you make a decision as to whether or not to extend credit to this person or business. The final decision is up to you."
A hold-harmless clause, on the other hand, sets out in a positive way what the client will do for you if someone attacks your report and uses it as a springboard to sue. Reliance on your report is voluntary, and you won't be responsible for mistakes due to anything but gross negligence. Loss to the client or a third party flowing from your report is their problem. Including language to this effect should help: "While we have used our best efforts to construct a complete and accurate report, client agrees to indemnify us and hold us harmless for any loss, damage, liability or cost (including reasonable attorneys' fees) to itself or third parties arising from the use of information contained in the credit report." Remember to always customize any standard language to fit your situation.
Risk management isn't mysterious: Think of what could go wrong, do your best to prevent it, and cover your derriere as completely as possible. In this race-to-the-courthouse society, you need all the protection you can get.
For more information:
- The United States Association for Small Business and Entrepreneurship (http://www.usasbe.org) is a nonprofit organization specializing in management education for entrepreneurs and small business.
- The Small Business Development Center program (http://www.sba.gov/SBDC) is an SBA resource partner.
- Protect Yourself From Business Lawsuits: and Lawyers Like Me (Scribner) by Thomas A. Schweich
- Asset Protection for Everyone (Sourcebooks Inc.) by B. Roland Frasier
When it comes to protecting customers (and yourself), you'd better cover all your bases. Check out "Damage Control" for tips on how to safeguard your business.
Joan E. Lisante is an attorney and freelance writer who lives in the Washington, DC, area. She writes consumer-related legal features for The Washington Post, the Plain Dealer, the Spokane Spokesman-Review and the Toledo Blade (Ohio). She is also a contributing editor to LawStreet.com and ConsumerAffairs.com.
In her practice, Lisante is counsel to ConsumerAffairs.com and was counsel for Zapnews, a fax-based customized news service for radio stations. Previously, she served as Assistant District Attorney in Queens County, New York, and Deputy District Attorney in Nassau County, New York.
The opinions expressed in this column are those of the author, not of Entrepreneur.com. All answers are intended to be general in nature, without regard to specific geographical areas or circumstances, and should only be relied upon after consulting an appropriate expert, such as an attorney or accountant.