Litigation Risk
Litigation risk is the possibility that legal action will be taken because of an individual's or corporation's actions, inaction, products, services, or other events. Corporations generally employ some type of litigation risk analysis and management to identify key areas where the litigation risk is high, and thereby take appropriate measures to limit or eliminate those risks. Companies can face litigation from customers who claim displeasure with services and products, disruptions and loss of service, or injury and harm that relates to the company’s operations, staff, products, and services. Given the various potential sources for litigation risk, publicly traded companies must include provisions in their budgets to cover their legal costs, according to generally accepted accounting principles (GAAP) as well as international accounting standards. Litigation risk is the risk an individual or company will face legal action.
What Is Litigation Risk?
Litigation risk is the possibility that legal action will be taken because of an individual's or corporation's actions, inaction, products, services, or other events. Corporations generally employ some type of litigation risk analysis and management to identify key areas where the litigation risk is high, and thereby take appropriate measures to limit or eliminate those risks. They vary wildly from jurisdiction to jurisdiction.
Understanding Litigation Risk
Litigation risk can be regarded as an individual's or corporation's likelihood of getting taken to court. In a litigious society, all members are at some risk of litigation. Large firms with deep pockets can be especially prone to litigation risk since the rewards for any plaintiffs can be considerable. Corporations typically have measures in place to identify and reduce risks, such as ensuring product safety and following all pertinent laws and regulations.
Special Considerations
Factors organizations must consider when assessing their litigation risk include the costs of mounting a legal defense in court, and whether or not other forms of resolution, such as a settlement, is more feasible. The costs of losing the case in court may have to be weighed against the upside potential for winning the case. For instance, startups frequently face lawsuits from entities who claim to hold patents that they assert have been infringed by the introduction of the product or service they are offering.
With the limited resources available to many startups, such litigation may be too costly for the business to bear, forcing them to seek a settlement or, potentially, cease operations.
Types of Litigation Risk
Companies can face litigation from customers who claim displeasure with services and products, disruptions and loss of service, or injury and harm that relates to the company’s operations, staff, products, and services. A corporation may also be confronted with lawsuits over its contracts with other businesses and individuals or intellectual property and patents the company makes use of in its products.
The financial performance and related bookkeeping at a company may be recurring risks for potential litigation. For instance, if shareholders become displeased with a company’s earnings in a given quarter or over a longer period of time, and they believe management is at fault for their action or inaction. Should a company need to restate its earnings due to an error, or intentional misrepresentation of material elements that affected the company, shareholders might sue the company for the lack of disclosure.
Given the various potential sources for litigation risk, publicly traded companies must include provisions in their budgets to cover their legal costs, according to generally accepted accounting principles (GAAP) as well as international accounting standards.
Related terms:
Accounting
Accounting is the process of recording, summarizing, analyzing, and reporting financial transactions of a business to oversight agencies, regulators, and the IRS. read more
Class Action
A class action is a legal course in which a plaintiff brings forward a lawsuit on behalf of a group of people who've suffered a similar loss. read more
Contributory Negligence
Contributory negligence is the plaintiff's failure to demonstrate care for their own safety. Often, defendants use contributory negligence as a defense. read more
Default Judgment
A default judgment is a binding judgment issued by a court for a plaintiff when the defendant fails to respond to a court summons or appear in court. read more
Directors and Officers Liability Insurance: Overview
Directors and officers (D&O) liability insurance covers directors or officers of a business or other organization if a lawsuit is brought against them. read more
Generally Accepted Accounting Principles (GAAP)
GAAP is a common set of generally accepted accounting principles, standards, and procedures that public companies in the U.S. must follow when they compile their financial statements. read more
International Accounting Standards (IAS)
International Accounting Standards are an older set of standards that were replaced by International Financial Reporting Standards (IFRS) in 2001. read more
Jurisdiction Risk
Jurisdiction risk is the risk that arises when operating in a foreign jurisdiction. For banks, this can pertain to areas that are high-risk for money laundering and terrorism financing. read more
Mandatory Binding Arbitration
Mandatory binding arbitration requires the parties to resolve contract disputes before an arbitrator rather than through the court system. read more
Risk Analysis
Risk analysis is the process of assessing the likelihood of an adverse event occurring within the corporate, government, or environmental sector. read more