The US civil litigation system was a $260 billion industry in 2004 — a 5.9 percent increase over the previous year. That’s roughly $886 per citizen. What’s behind these incredible numbers?

First, when someone is injured, physically, mentally or economically, the first question usually asked is: “Who can I blame?” Usually the answer is someone perceived to have “deep pockets” — a business, a successful professional or an employer.

The effect is compounded by the fact that American juries are typically juries of the plaintiff’s peers, not the defendant’s. Jury sympathy results in the “Robin Hood” syndrome: Jurors see someone with an injury and want someone to pay for it (usually someone with deep pockets).

Finally, plaintiff’s attorneys feed the litigation frenzy by working for free until a case is settled or a jury award is received. This creates an un-level playing field for defendants, who nearly always must pay their own litigation costs and attorneys’ fees. The specter of un-recoverable costs and fees often forces a defendant to settle with a plaintiff, even though the case may be frivolous.

By incorporating asset protection methodologies into thoughtful business planning business owners can legally avoid unnecessary litigation costs and protect their property from potential creditors and litigants. In other words, proper asset protection removes the incentive to sue by creating serious doubts in the minds of a plaintiff and his or her attorney that the lawsuit will be successful.

The key to asset protection is to implement it well in advance of any claims and to utilize a variety of tools and techniques, including the following.

Insurance

Insurance may be the first thing that comes to mind when discussing risk management. Insurance is important and is the bare minimum that business owners should have to protect themselves. It takes more than just insurance, however, to protect a business owner from liability, or to protect the assets of the business or the personal assets of the business owner. For example, in the rising area of employment litigation, many employee claims, such as sexual harassment or wrongful termination, may not be covered by insurance.

Proper business structure

Many businesses are operated as sole proprietorships or general partnerships. These structures leave the business owner’s personal assets vulnerable. For example, if a business is successfully sued as a result of negligence, a dispute with a customer or vendor, or even the negligent or intentional acts of employees or partners, a sole proprietor or general partner will be personally liable; their own assets — including their home and personal savings — are subject to the judgment.

The fundamental shield against this type of liability is to create a business entity to operate the business, such as a limited liability company or a corporation. As long as a business entity structure is properly implemented and maintained, it will shield the business owners from personal liability if the business is successfully sued.

Sound employee policies

Employee lawsuits are on the rise. Employee claims come in many forms, but often result from a disgruntled employee who was fired and who then alleges some form of sexual harassment or discrimination based on race, religion, gender or age. Unfortunately, these lawsuits usually end up as “he said, she said” arguments that a jury must decide, and\—\you guessed it\—\the jury frequently sides with the employee because the boss has deep pockets and the employee was “wronged.”

One way to prevent and protect against these claims is to have sound employment agreements and policies, such as a mandatory arbitration policy for settling employment-related disputes and employee claims. The US Supreme Court has affirmed the legality of binding arbitration agreements and policies in the workplace, leveling the playing field for employers by preventing employees from filing a lawsuit just because they can.

In addition to a binding arbitration agreement, a business owner should also consider a comprehensive employee policy manual as well as confidentiality and non-disclosure agreements to protect employer information.

Note that the asset protection steps discussed above only address minimizing and preventing certain types of “inside” liabilities. Inside liability is the liability caused by a particular activity that a business owner tries to resolve at the lowest level and prevent from affecting other areas of the business owner’s life. For instance, if an employee sues the business for wrongful termination based on discrimination and the business is properly structured with suitable agreements and policies in place, the business entity, not the owner, will take the brunt of any resulting liability and the owner’s personal assets will be safe.

Medical, dental, chiropractic or other type of professional malpractice are also considered an inside liability, but in Washington state a legal entity, such as a limited liability company or a corporation, can be “pierced” in cases of malpractice and the professional can be held personally liable for the negligent acts.

“Outside” liabilities are those liabilities that result from some other area of a business owner’s life, such as a car accident, and may result in a lawsuit that risks everything including all business and personal assets.

In today’s litigious atmosphere, a well-thought-out asset protection plan may be the business owner’s only defense against the range of potential inside and outside liability pitfalls they face. By implementing an asset protection plan that addresses their specific liability risks, business owners can help ensure that the business plans they put together so carefully will have a chance at success.

(Editor’s Note: John Kenney and Doug Lineberry are partners in Lineberry Kenney, PLLC, a law firm that specializes in asset protection and other areas of business law. Visit www.lklawgroup.com or email john@lklawgroup.com for more information This article is designed for informational purposes only and is not intended as legal advice. You should seek the advice of your own attorney or corporate counsel if you have specific questions about the issues addressed here.).