Paid Risk on the rise: Is legal liability jeopardizing small businesses across Canada?

Seven out of ten Canadian small businesses dealt with at least one legal dispute in the last three years – a staggering 230% increase since we last checked back in 2015.

This is one of many insights gained from our most recent study with nearly 1,000 small business owners across Canada, our objective being to understand the prevalence of legal issues within the Canadian small business landscape, and to look at the impacts that legal disputes have had on small business owners.

As we’ve spent this past year playing catch-up with the market following a global pandemic, we’ve seen the looming threat of recession and the increase in prices take their toll on our businesses. It seemed fair to blame this staggering increase on COVID-19, until we found that only 38% of the legal issues faced by small business owners were related to the pandemic. The increase was only a reflection of a business owner’s everyday legal risk exposure, which made one thing very clear: legal issues are always present, with or without a crisis.

Running a small business is a permanent juggling act.

It’s important to talk about legal risk not only because of its obvious prevalence within the Canadian small business landscape, but also because the financial, mental and emotional impacts it has on these small businesses are alarmingly significant. Of the small business owners we surveyed:

• 53% said that the legal dispute(s) they faced had a large or moderate financial impact on their businesses
• 70% of those surveyed said that they had spent a lot of time dealing with legal disputes
• While 73% said that they experienced a lot of or a moderate amount of mental stress on a personal level while dealing with these legal disputes.

Perhaps our most alarming find, however, was that three out of ten of the small business owners surveyed personally knew another business owner who had been significantly impacted by or lost their business following a legal dispute. This number has more than tripled since our last study back in 2015.

There’s so much that goes into running a business, and legal risk consideration is often cast aside until there is an apparent need. When asked what they would do in the event of an unexpected legal issue, the majority said they would absorb the cost or get into debt in order to pay the lawyer fees. 37% even said that they’re not sure what they would.

This is changing, however, as increasing legal liability and legal costs now rank 3^rd in the top of mind risks that small business owners worry about, falling closely behind broad economic uncertainty, and data security, technology and cyber risks.

This comes as no surprise, since 60% of these businesses are spending, on average, anywhere between $5,000 and $50,000 on lawyer’s fees and other legal expenditures.

A reliable solution?

There may be a perception that many of the legal risks that business owners face are already covered by a typical commercial insurance portfolio. However, 48% of small businesses said that they either are not sure or know for certain that their current commercial insurance policies provide adequate legal expense coverage. Many common and day-to-day legal risks such as contract disputes, business licence suspensions, tax audits and even highway traffic tickets, all of which our research shows are major risks facing small business owners, are not covered.

It is also apparent that not all Canadian small business owners are aware that there are options available that can help them mitigate legal risk. Our study found that among those who believed they had adequate coverage, six out of ten were never warned by their insurer or broker about the financial and 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 that protection against legal risk is included.

We collectively owe it to business owners to discuss legal risk. We have long maintained that legal expense insurance is a priority risk mitigation solution that every small business needs to have within its commercial insurance portfolio. We strongly believe in our mission to provide access to justice to every Canadian, and we stand by our efforts to ensure their legal risks are well managed.