When Dawn Giugliano woke up from an hour-long nap on a beach in Puerto Rico last year, the 27-year-old Long Islander claims she got quite a surprise: The metal ring attaching the cups of her Victoria's Secret bikini top had seared a mark in her chest.

To seek compensation for her alleged burns, Giugliano earlier this month hit Limited Brands, Victoria Secret's parent company, with a $2 million lawsuit in Manhattan District Court. Giugliano's case is an "isolated incident," and the company is "investigating the matter," wrote Limited Brands spokesperson Jennifer Ortiz in an e-mail.

With $10.6 billion in sales, Limited has deep pockets--the kind that make plaintiff lawyers salivate. But small businesses also can find themselves on the wrong end of a crushing liability suit, especially in an increasingly litigious environment.

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In 2005 the cost of all liability torts in the U.S. (including damages, lawyers' fees and administrative fees) accounted for nearly 2.09% of gross domestic product, or $261 billion, versus 0.62% back in 1950, according to a survey by consulting firm Towers Perrin. (A tort case involves a civil wrong and seeks damages for harm done to people or property.)

In 2004, the median jury award in product-liability cases was $1.8 million, estimates the National Small Business Association, a lobbying group; plaintiffs' success rate: 61%.

While interpretations of liability law vary drastically from state to state, these cases basically boil down to two principals.

First, companies must take care not to put customers in "unforeseen" danger, assuming that those customers act in a "reasonable" manner when interacting with the product or service. Repeatedly jabbing a bottle of Coca-Cola in your eye and suing for damages probably wouldn't fly in court, for example. (Then again, what constitutes "reasonable" behavior to any given set of jury members is anyone's guess.)

Second, companies have to provide sufficient warning of "foreseeable" danger; hence the proliferation of all those goofy warning labels on product packaging and company Web sites.

Thanks to a $3 million jury award in 1992 for 79-year-old Stella Liebeck, who famously burned herself by spilling coffee in her lap, McDonald's now warns its customers that its coffee is, well, hot. (Starbucks and Dunkin' Donuts use similar warnings, too.) But things have gotten much crazier since then.

Home appliance-maker Rowenta reminds customers to not iron their clothes while wearing them. Just to be sure that youngsters can't cop the old super-power plea, Houston-based retailer Frankel's Costume warns users that just because they are wearing a Superman costume doesn't mean they can fly. And when Apple introduced its iPod "shuffle" digital music player in 2005, the company added a "Do Not Eat" warning on its Web site. Parody or paranoia? The company wouldn't comment.

Laughs aside, the bad news is that there are myriad ways companies can fall prey to liability torts. The good news for small businesses is that they have shallow pockets. Rather than try to win a judgment in excess of a small firm's liability insurance policy (and potentially force it to liquidate assets, which complicates payment), plaintiffs in many states can sue all along the company's supply chain to sweeten the spoils. "Plaintiffs go after not necessarily who's at fault, but the company that has the most money," says Rodney Dean, partner at Dean & Gibson in Charlotte, N.C.

Take the 70-employee furniture wholesaler in California that recently got threatened with a suit when a retail customer who purchased one of the company's wine racks claimed that her son found a dead cat in the shipping container and suffered psychological trauma.

The plaintiffs now plan to go after both the wholesaler and the retailer--a major house wares chain--but recently offered to settle with the wholesaler for $100,000, says Scott Hauge, owner of San Francisco-based CAL Insurance & Associates, the wholesaler's insurance broker. (Hauge chooses to protect all names in the case.) "It's kind of absurd," he moans.

The Best Defense

The best way to ward off pesky plaintiffs--beyond not designing, building or selling potentially dangerous products--is to buy a decent insurance policy. Hartford Financial Services Group and American International Group are glad to help.

Service companies may only need regular liability insurance, while manufactures may also want to pile on a product-liability policy. "I often see small business owners purchase general liability insurance [and] believe it covers the product they sell," says James Case, partner at law firm Case & Dusterhoff in Portland, Ore.

Some policies cover punitive damages, others don't. Still others pay out per claim. Say you have a $1 million policy and a plaintiff wins a $500,000 award; with a per-claim policy, the insurance company still agrees to cover up to $1 million for each additional claim (as opposed to just the $500,000 left from first claim). Of course, each scuffle will push up your premiums, notes Hauge.

When it comes to insurance, remember that it's not just the size of the policy but the language that matters. You may think you are covered for every conceivable contingency when in fact there are plenty of escape hatches for savvy insurers.

Likewise, be clear about all potential risks, and keep the insurance companies updated on any significant changes to your business. If you don't, and something happens, they may be able to argue that you weren't forthcoming about the risks and refuse to cover the claim.

Remember: When things go bad, plaintiffs are lower on the totem pole than creditors. As a practical matter, plaintiffs are often willing to settle for a fraction of the judgment instead of forcing a company into bankruptcy, says Dean. One long shot: If you know that your insurance company could have settled the case earlier for far less than the final judgment, you could turn around and sue the insurance company. (Like we said, it's a long shot.)

Sadly, tort reform is by no means gathering steam on Capitol Hill these days. Until it does, watch out for those dead cats.