How to Respond to a Demand Letter

A systematic approach to evaluating and responding to demand letters while protecting your business interests.

1. Calculate your maximum exposure immediately. Add up the claimed damages, potential attorney fees, and any statutory penalties mentioned in the letter. Compare this to your insurance deductibles and policy limits. This number becomes your settlement ceiling — never pay more than fighting would cost.
2. Estimate your defense costs. Business litigation averages $15,000-$50,000 for simple cases, $100,000+ for complex disputes as of 2026. Get quotes from 2-3 attorneys for initial assessment and potential representation. Factor in your time cost at your effective hourly rate.
3. Verify the sender's authority and claims. Confirm the sender represents the claimant through your state bar website. Review your contracts, invoices, and communications for the disputed transaction. Document any factual errors or timeline discrepancies in the demand letter.
4. Check your insurance coverage. Review your general liability, professional liability, and D&O policies for coverage. Submit notice to your carrier within 30 days even if coverage seems unlikely — late notice can void coverage entirely.
5. Respond within the deadline without admitting liability. Acknowledge receipt and dispute the claims factually. Request documentation supporting their damages calculation. Propose alternative resolution if settlement makes financial sense. Keep responses brief and factual — everything you write can be used later.
6. Document and preserve all relevant records. Issue a litigation hold to preserve emails, contracts, and communications related to the dispute. Create a timeline of events with supporting documentation. This becomes your defense foundation and prevents spoliation claims.