Kim King wasn't surprised when she was sued last January. Nor was King, the CEO of King Security Services, a San Francisco -- based supplier of security guard services to businesses, inclined to back down from a fight. The way she saw it, the claim -- filed by five job applicants who said they'd been denied employment without justification -- was bogus. Surely, a jury would agree. And if not, there was always the insurance -- an employment-practices liability policy designed to cover the costs of just such actions. "You get to be a certain size and you know it's going to happen to you," King says. "It's not if -- it's when."

Fortunately for King, the suit was dismissed three months after it was filed. The cost for her attorney's fees: $22,000, a few thousand dollars short of the $25,000 deductible on her $1 million insurance policy. But the insurance still helps her rest easy. "This time, there was no basis for the claim," King says. "But in the future, if a jury awards a million dollars to a plaintiff, how would I pay it?"

That's no idle question. Private businesses are increasingly the target of lawsuits, brought for a range of practices -- including wrongful termination, sexual harassment, and discrimination. Part of the problem is the sheer number of new employment laws -- from the Americans with Disabilities Act to new regulations governing family and parental leave. The slow economy hasn't helped either, says Dennis M. Brown, a labor and employment lawyer in the San Jose office of Littler Mendelson. "It's not easy for someone to find another job today," says Brown. "If people feel they've been treated unfairly, there's a level of bitterness that fuels lawsuits."

No wonder that in the last five years, one in four private companies has been sued by a current or former employee, according to a recent survey by Chubb Group. What's more, 44% of the executives surveyed said it's likely they'll face a claim in 2004. And the price tag can be considerable. Simply settling a harassment or discrimination claim can cost upward of $100,000 -- not including attorneys' fees. Indeed, according to the U.S. Chamber of Commerce Institute for Legal Reform, small businesses bear 68% of tort costs in the U.S. -- including settlements, awards, and defense costs -- or $88 billion a year.

Clearly, insurance costs are more manageable than a damages assessment. And in recent years, the insurance industry has introduced a wide range of products and policies to help business owners minimize their risk. Yet many entrepreneurs fail to consider the likelihood of a lawsuit -- until a complaint lands on their desk. And by then, it's often too late. "There's a big denial factor," says Tom Hams, director of employment-practices liability insurance in the Chicago office of Aon Risk Services. In many cases, business owners believe they'll never have a claim large enough to justify the expense of insurance policy premiums and deductibles. That's especially true at small family-owned firms, where the prevalent attitude often is, "My employees would never do that to me."

That's how Nick D'Asta, VP and treasurer of finance at W.S. Darley & Co., a manufacturer and distributor of fire-prevention equipment in Melrose Park, Ill., feels about his 165 staffers. The average length of tenure at the family-owned firm is nearly 20 years. "The culture here makes you feel like you're part of the family," says D'Asta. Turnover is low, and the company has never been sued by an employee. Nonetheless, eight years ago, Darley & Co. purchased employment liability insurance as part of an umbrella liability policy. "We'd much rather our premium dollars go to loss prevention than to be paid out in claims," D'Asta says.

Most major insurance companies now offer employment-practices policies, and the pricing is competitive, so even a fledgling outfit can get some protection. Premium costs vary widely and depend on a variety of factors: the size of your company; your past claims history; and whether you have written policies in place and a dedicated human-resources department. The policies cover claims of harassment, wrongful termination, workplace torts, slander, emotional distress, and negligent misrepresentation. Most include third party coverage -- for example, if a customer sues the proprietor of a retail store.

Let's say you purchase a $1 million policy with a $25,000 deductible. Six months later, an employee files suit, alleging that she has been sexually harassed by her department manager. You retain a lawyer to litigate the case, although under most policies, the attorney will be assigned to you by your insurer. In any case, the fees come out of your own pocket until you reach the deductible. In other words, if your lawyer charges $250 per hour, you'll pay for the first 100 hours worth of work.

Now, let's say litigating the case has gone beyond those 100 hours. In fact, three months and 240 billable hours after the suit was filed, you enter into settlement discussions and reach an agreement: You will pay the plaintiff $20,000 in damages. You've already covered $25,000 worth of legal expenses; the remaining $35,000 in legal costs, as well as the settlement, comes out of your $1 million policy, leaving you with $920,000 of coverage should another lawsuit be filed within the policy year. Had you not settled and gone to trial, the insurance would have paid legal costs and, if you lost, judgments and plaintiff's lawyers' fees. But if a case goes to trial and a guilty verdict is rendered, your insurance carrier might drop you. The best you can hope for is a hike in premiums.

More than anything, size matters -- the more employees you have, the more likely it is you'll face a claim, regardless of what kind of business you run. Consider King. Within 10 years of taking over her father's business in 1990, King had 300 employees. The company now has 450. "My attorney called and said, 'With your size, you've got to get insurance," she says. "I'm fortunate -- we have a low turnover rate, so we've got more loyalty. But I can't control what 450 people are doing out there. There are no guarantees."