What to Do When a Customer Sues Your Business in California
Two documents produce the same panic and require different speeds: a demand letter from a customer's attorney, and a summons and complaint delivered by a process server.
The demand letter gives you time. The summons does not — in California you generally have 30 days from service to file a response (CCP §412.20), and a default judgment entered against a business that ignored a complaint is very difficult and expensive to unwind.
Whichever one you're holding, the first move is the same, it takes fifteen minutes, and most business owners get it wrong: you tender the claim to your insurer before you respond to anyone.
The first 24 hours
1. Do not contact the customer
Not to explain, not to apologise, not to fix it. Every message you send becomes evidence, and an admission made in good faith can compromise coverage under the policy's cooperation and voluntary-payment conditions.
2. Do not fix, discard, or "clean up" anything
If the claim involves a slip and fall, a product, equipment, or a physical condition, preserve it exactly as it is and photograph it. Repairing the hazard before it's documented destroys your best evidence. Preserve the digital record too: security footage (which frequently overwrites in 30 days or less), point-of-sale records, work orders, texts, and emails. Send a written litigation-hold instruction to your team today.
3. Tender the claim to every policy that might respond
This is the step that matters most. Notify your insurer in writing, immediately, and send the demand letter or the complaint with it. Late notice is one of the most common reasons a defence gets denied — and the notice condition in your policy doesn't wait for you to decide whether the claim has merit.
Tender it to every policy that could conceivably apply, not just the one you think fits. Overlapping tenders cost nothing. A missed one can cost the entire defence.
Your agent should do this for you the same day. If you're a TSM client, that call goes to us and we handle it — see how to file a business insurance claim.
4. Calendar the response date immediately
Thirty days from the date of service, in writing, on the wall. Insurance defence counsel needs lead time; do not let this date arrive with the file still sitting with an adjuster.
Just been served? Don't answer it and don't call the customer. Call TSM at (209) 524-6366 (Modesto) or (530) 221-3031 (Redding) and we'll tender it to your carriers today.
Which policy actually responds
Business owners frequently assume "I have general liability, I'm covered." Sometimes. It depends entirely on what the customer is alleging.
What the customer alleges | Policy that typically responds |
Slipped, fell, was injured on your premises | General liability (bodily injury) |
Your product injured them or damaged property | General liability — products/completed operations |
Your work damaged their property | General liability, or a builder's risk / installation floater |
Your advice, design, or professional service caused financial loss | Professional liability / E&O — not GL |
Defamation, false advertising, copyright in an ad | General liability — personal & advertising injury |
A vehicle was involved | Commercial auto (and possibly hired/non-owned) |
Data breach exposed their information | Cyber liability |
A discrimination, harassment, or wrongful termination claim | EPLI — not GL |
A claim against you as an officer or director | D&O |
The single most common coverage gap in a small-business claim is the professional liability one: a general liability policy excludes liability arising out of the rendering of professional services. If the complaint is about your judgement rather than your conduct, GL may not respond. Our comparison of general liability vs professional liability sets out the line.
And if the person suing you is an employee rather than a customer, you are in employment practices liability insurance territory — a separate policy that a surprising number of California small businesses don't carry. See also the hidden risk of employee lawsuits.
The duty to defend is broader than the duty to indemnify
This is the most valuable thing to understand about liability insurance, and most policyholders learn it too late to use it.
Under California law, an insurer's duty to defend arises if the claim is potentially covered — it's triggered by the allegations in the complaint read against the policy, not by whether those allegations turn out to be true. The duty to indemnify (to pay a judgment or settlement) is narrower and depends on what's actually established.
The practical consequence: a claim that will ultimately fail can still obligate your insurer to pay for your defence. So when a carrier declines a defence because "the customer's allegations aren't true," that is not, by itself, a valid basis. Ask for the declination in writing with the specific policy language relied on, and have your agent review it.
Defence costs are also where most small-business liability claims actually land. A defended claim that settles for $30,000 might carry $60,000 in defence costs — which is why whether defence is inside or outside your limits is a policy detail worth knowing before you need it.
What to expect once it's tendered
Acknowledgement and assignment. The carrier acknowledges the claim and assigns an adjuster.
A reservation of rights letter. Very common, and not a denial. It means the carrier will defend while reserving the right to contest coverage on specified grounds. Read which grounds — that tells you where the coverage fight would be. If the reservation creates a genuine conflict between you and the insurer, you may be entitled to independent counsel of your choosing at the insurer's expense.
Assigned defence counsel. The carrier appoints and pays. The lawyer represents you, and you're entitled to communicate with them directly and to be kept informed.
Your cooperation duty. The policy requires it. Respond to counsel promptly, produce documents, attend the deposition. Failing to cooperate is a coverage defence you can hand the carrier for free.
A consent-to-settle provision, sometimes. Some professional liability policies require your consent to settle, and some contain a "hammer clause" that shifts the extra cost to you if you refuse a settlement the carrier recommends. Know which you have.
What to do while the claim runs
Keep operating, and keep documenting. Litigation moves slowly. Two years for a personal injury claim (CCP §335.1) and three for property damage (CCP §338) are the outer limits for the customer to file at all, and cases take longer than owners expect after that.
Fix the underlying problem — carefully. You can and should correct a hazard. Do it after documentation, and record it as a safety improvement, not as an admission.
Watch the review sites, but don't litigate in public. A public argument with a plaintiff is discoverable and unhelpful.
Review your limits at the next renewal. A claim in progress is the clearest possible signal about whether your limits are right. This is also when an umbrella policy stops being theoretical.
The three things that prevent the next one
Written contracts with indemnity and insurance requirements, especially if you use subcontractors. If a sub's work causes the injury, you want their policy in front of yours — and that only happens if the contract required it and you collected the certificate and the additional insured endorsement.
Documented safety and incident procedures. Incident reports, inspection logs, and training records are what convert a defensible claim into a defended one.
A programme reviewed against what you actually do now. Most coverage gaps come from a business that changed — new service line, new location, new product — and a policy that didn't.
Our review of common business insurance claims in California covers what's actually being filed against businesses in this state.
FAQs
How long do I have to respond to a lawsuit in California?
Generally 30 days from service of the summons and complaint (CCP §412.20). Tender to your insurer immediately — well before that deadline.
Will my general liability policy pay for a lawyer?
If the claim is potentially covered, the insurer's duty to defend is triggered, and defence is generally provided even for claims that ultimately fail. Whether defence costs erode your limits depends on your policy form.
What does a reservation of rights letter mean?
The insurer will defend you while reserving the right to dispute coverage on stated grounds. It is not a denial.
Do I have to tell my insurance company about a demand letter if no lawsuit has been filed?
Yes. Most policies require notice of a claim or circumstances that could give rise to one. Late notice is a common basis for denial.
What if the customer's claim is completely baseless?
It still needs to be defended, and defence is exactly what the policy is for. Never ignore a complaint on the basis that it lacks merit.
Tender first. Everything else second.
TSM Insurance has stood between Central Valley businesses and claims for 100 years. If you've been served or received a demand letter, call us before you respond to anyone — we'll get it in front of every carrier that might owe you a defence, today.
Modesto (209) 524-6366 · Redding (530) 221-3031 · Talk to a TSM advisor
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