Is your company ‘claim-ready’? Three steps to improve your prospects

Legal claims can have a major impact on a company’s finances. A company’s entitlement to make a legal claim – a right of action – or the need to defend such a claim can have balance sheet, profit or loss, or cash flow significance.

Provision may very well need to be made in the company’s ‘statement of financial position’ or its ‘income statement’, either because of the claim’s accounting value to the company or because of the contingent liabilities it represents or to which it gives rise.

The legal costs which the claim’s pursuit or its defence will involve will also be a major call on the company’s cash purse, likely for some period ahead. A claim can be financially highly consequential for the business.

It is therefore important that those responsible for running a company take steps to ensure they stand the best chance of winning a dispute when it arises. For example, why would a company director give focused attention to the preservation or exploitation of value of company property and assets generally, but not apply a commensurate level of care to ensuring that the company is in the best place for the prospects for a possible claim or its defence?

The rhetoric of that question is the door it opens to three measures a board can take to care for what should prudently be considered an asset or liability, as the case may be, of the company.

In very many cases, the ultimate strength of a legal claim will be found in the evidence, and as its evidential merit will more often than not turn on the documents – the vast amount of which will be electronic – and the evidence of witnesses of fact, implementing systems that ensure the preservation of evidence is a sensible step to safeguard asset value and mitigate liability risk. The ability of a company to turn confidently to the indemnity of its insurances against claims is also obviously going to be highly material.

So, three things to think about implementing at the outset of 2025:

• Do you have appropriate measures in place to locate and preserve documents that could be relevant and important to a claim? Do you have document management and retention policies, and, if so, are they fit for purpose? When a dispute arises, parties are under a duty to the court to ensure that documentary evidence is preserved and, in that regard, to suspend document destruction arrangements. Have you thought how you would discharge that legal duty if or when it comes to it?
• Do your staff exit arrangements address the potential loss of knowledge and information that are an inevitable consequence of a departure? What measures do you have in place to mitigate the risk or loss of witness evidence; to perhaps capture a relevant account before an employee leaves the premises? It is not uncommon for a staff departure to coincide with or to follow shortly after a claim comes to light. Careful attention to the management of an exit can be highly important.
• Do the company’s insurance policies reflect the company’s current risk profile? Are the policies suitable and the indemnities provided adequate?

This is not an alarmist case for disproportionate action, but, through the lens of a company’s financial statements, the waving of a flag to some simple checks that can be made to maximise business asset value in a claim and mitigate risk in respect of future liabilities and expense.