Contingent liabilities are losses or costs that a business is anticipating, that cannot be accurately predicted because they are dependent on the outcome of an event in the future. For example, the business may be involved in a lawsuit in which they are being sued as a defendant. They may be anticipating that they will have to issue a damages award to the plaintiff; in this case, the lawsuit may be included in the company’s accounting books as a contingent liability. The liabilities would be “contingent upon” the outcome of the legal case.
Contingent liabilities cannot really be completely avoided. Any business operation will necessarily involve factors that cannot be completely predicted or determined. Something as simple as a slight shift in usual weather patterns can create unforeseen losses for a company (for example, if the delivery of a product is dependent on good weather).
However, contingent liabilities can often be dealt with properly by taking steps such as:
- Avoid taking payment for goods or services on credit or on a clients word; you should ask for payment up front as much as possible, especially if you have performed your part of the bargain.
- Make sure to include records of any contingent liabilities in the business’ accounting books. While the amount might not be completely determined, you can still avoid errors by at least making note that the company might have a pending debt.
- If you must make payment, try to make payments in full rather than installments if you can afford it. While this is not always feasible in all cases, avoiding future installment payments can eliminate more issues associated with the payments.
For some companies, contingent liability insurance can often be obtained to protect the company from losses associated with such issues. These may vary depending on the type of business and depending on state laws.
One of the most common disputes involving contingent liability has to do with company records. It is common for a company to make an oversight by failing to include a contingent liability in the expense sheet. A company’s balance sheet should reflect contingent liabilities by making footnotes that describe the source and extent of any potential liabilities. Failing to take such steps can cause more problems for the business down the road.
Even worse, a company might intentionally avoid the mention of contingent liabilities in their records. This can be done for example for the purpose of avoiding tax liability on the debt. Altering business records or “cooking the books” is illegal and can lead to various criminal penalties. Again, it’s much better to include a contingent liability in company records, even if they aren’t fully known.
Finally, as in any insurance arrangement, disputes with an insurance company can arise in connection with a contingent liability insurance package. This can include a refusal by the insurance company to back the company (i.e., a breach of insurance contract terms).
Contingent liabilities can often create a complicated situation for a business. You may wish to contact a qualified business lawyer if you need advice with the contingent liability laws in your area. An experienced business attorney can help you manage your budget by informing you of how the laws might affect your business. Also, you may wish to hire a lawyer in the event that you need to file a lawsuit over a contingent liability issue.