Handling a Demand Letter: What to Do When Your Business Receives One

By Hank FasthoffJuly 6, 2026

A demand letter is a written assertion of a legal claim accompanied by a request for payment, performance, or some other remedy. No one has filed anything with a court yet, but the letter is the opening salvo in a dispute, and how you respond to it often determines whether the dispute ends with a negotiated resolution or escalates into litigation.

Most business owners encounter demand letters a few times in the life of a business. A customer who claims a product was defective. A former employee who claims unpaid wages or wrongful termination. A vendor who claims you breached a contract. A competitor who claims you infringed its trademark. A contractor who claims you owe money for work performed. Each of these situations produces a letter from an attorney asserting a claim and demanding a response.

Your instinct may be to ignore it, respond immediately without counsel, or panic. None of those responses serves your interests. A demand letter requires a deliberate, informed response that evaluates the claim, preserves your rights, and positions you for the best outcome, whether that's a settlement, a defense, or a counterclaim.

What Not to Do

Don't ignore it. Ignoring a demand letter signals to the other side that you're not taking the claim seriously, which increases the likelihood of a lawsuit, and the claim survives your silence. Some demand letters trigger statutory deadlines (discussed below), and failing to respond within those deadlines can affect your rights, your available defenses, or the damages the other side can recover. Even if the claim has no merit, ignoring it is a missed opportunity to resolve a baseless dispute before it becomes expensive.

Don't respond without your attorney. A demand letter from an attorney is a strategic document designed to put you on the defensive and extract concessions. Your response is equally strategic. An off-the-cuff email admitting fault ("I'm sorry, we should have handled that differently"), offering payment without understanding the full scope of the claim, or volunteering information that the other side didn't have can all be used against you if the dispute goes to litigation. Let your attorney draft or review the response.

Don't admit fault or make statements about what happened. Anything you say in a response to a demand letter can be used as evidence. A casual acknowledgment that "we made a mistake on that project" becomes an admission in a lawsuit. Even expressions of sympathy can be construed as admissions in some contexts. Keep your communications factual and through your attorney.

Don't destroy, delete, or alter any documents related to the claim. Once you're aware of a potential dispute (and receiving a demand letter makes you aware), you have an obligation to preserve evidence. Deleting emails, discarding project files, or overwriting electronic records related to the claim can give rise to a spoliation inference, where the court instructs the jury that it may assume the destroyed evidence was unfavorable to you. Implement a litigation hold as soon as you receive the letter, notifying anyone in your organization who may have relevant documents to preserve them.

Evaluate the Claim

Before deciding how to respond, evaluate the demand letter with your attorney across several dimensions.

Does the claim have merit? Review the facts alleged in the letter against what you know happened. Pull the relevant contract, correspondence, invoices, and internal records. Determine whether the factual allegations are accurate, partially accurate, or fabricated. If the claim is based on a contract, read the contract and determine whether you performed your obligations and whether the other side performed theirs.

What's the exposure? If the claim has merit, estimate the potential damages. A breach of contract claim is typically limited to the difference between what was promised and what was delivered. A negligence claim may include consequential damages. A DTPA claim may include treble damages plus attorney's fees. Understanding the exposure range helps you evaluate whether the demand amount is reasonable, inflated, or a starting point for negotiation.

What defenses are available? Even meritorious claims can be defeated or reduced by defenses. Statute of limitations (was the claim filed too late?), failure to mitigate damages (did the claimant take reasonable steps to minimize its losses?), comparative fault (did the claimant's own conduct contribute to the harm?), waiver (did the claimant waive its rights through conduct or agreement?), and contractual limitations (does the contract limit liability, exclude certain damages, or require arbitration?) all affect the claim's value and the claimant's likelihood of success.

Statutory Demand Letters

Some demand letters are statutory prerequisites to filing certain types of claims, and the response timeline and content can affect the outcome of the case.

Under the Texas Deceptive Trade Practices Act (DTPA), § 17.505, a consumer must send written notice at least 60 days before filing suit, advising the defendant in reasonable detail of the specific complaint and the amount of damages claimed. During those 60 days, the defendant has an opportunity to inspect the goods at issue and to make a written settlement offer. If the defendant makes a reasonable settlement offer and the consumer rejects it, and the consumer later obtains a judgment that isn't substantially better than the rejected offer, the consumer can't recover attorney's fees. Responding to a DTPA demand letter within the 60-day window with a reasonable settlement offer is one of the most effective defenses available, because it limits the claimant's recovery of attorney's fees and treble damages.

Under the RCLA (Texas Property Code Chapter 27), a homeowner must send written notice of construction defects at least 60 days before filing suit. The contractor has 35 days to inspect and 60 days to make an offer. Responding within these timelines preserves the contractor's ability to control the cost of repair and limits the homeowner's recoverable damages.

Under the Texas Insurance Code § 541.154, a claimant must provide 60 days' written notice before filing suit for unfair settlement practices. The notice must describe the complaint and the amount of damages.

If the demand letter you received is a statutory pre-suit notice, the response deadline isn't optional. Missing it can affect your defenses, your exposure, and the damages the other side can recover.

Check Your Insurance

Before deciding how to respond, determine whether the claim is covered by your insurance. CGL policies cover third-party bodily injury and property damage claims. Professional liability (E&O) policies cover claims arising from professional services. Cyber liability policies cover data breach claims. D&O policies cover claims against directors and officers.

If the claim is potentially covered, notify your insurer promptly. Most policies require notice "as soon as practicable" after you become aware of a claim. Late notice can give the insurer grounds to deny coverage. If the insurer accepts coverage, it may provide a defense (select and pay for an attorney to defend you) and may pay any settlement or judgment within policy limits. Even if you believe the claim is meritless, notify your insurer, because the duty to defend is broader than the duty to indemnify, and the insurer may owe you a defense even for claims that ultimately have no merit.

Response Options

After evaluating the claim, checking your defenses, and reviewing your insurance coverage, you have three basic options.

Settle. If the claim has merit and the demand amount is within the range of your exposure (or the cost of defending is greater than the cost of settling), a negotiated settlement may be the most efficient resolution. Settlement avoids the cost, time, and uncertainty of litigation. It also avoids a public court filing, which may affect your reputation or your relationships with customers and vendors. If you settle, obtain a full release of all claims related to the dispute, and make sure the release covers not just the claimant but any related parties who might assert derivative claims.

Negotiate. If the claim has partial merit or the demand amount is inflated, a counter-offer or negotiated compromise may produce a resolution that both sides can accept. Most demand letters are written at the high end of the claimant's range, and the claimant expects negotiation. Your response should address the factual basis for the claim, identify the weaknesses in the claimant's position, and propose a resolution that reflects the actual exposure rather than the inflated demand.

Reject and defend. If the claim has no merit, the demand is unreasonable, or you have strong defenses, a firm denial may be appropriate. Your response should state that you dispute the claim, identify the basis for your position, and make it known that you'll defend any lawsuit. If you have a counterclaim (the claimant owes you money, breached the same contract, or caused the harm it's complaining about), your response should reference it.

How OGC Accelerates the Response

When your outside general counsel receives a demand letter, the attorney already knows your business, your contracts, your key relationships, and your risk tolerance. An attorney who's been reviewing your contracts for the past two years doesn't need to read the contract for the first time when the demand letter arrives. An attorney who helped you draft your employee handbook doesn't need to be briefed on your termination procedures when a former employee's attorney sends a demand. The institutional knowledge that your OGC has accumulated through the ongoing relationship reduces the time from "we received a demand letter" to "here's our analysis and recommended response" from weeks to days.

Practical Recommendations

Forward the demand letter to your attorney the day you receive it. Don't wait to see if it goes away, don't respond on your own, and don't assume the claim is meritless without evaluating it. Time is the most valuable resource in demand letter responses, and you lose it by waiting.

Implement a litigation hold immediately. Notify your team to preserve all documents, emails, text messages, and electronic records related to the claim, the claimant, and the underlying transaction.

Check your insurance before you decide how to respond. If the claim is covered, your insurer may provide a defense and pay any settlement, which changes the cost-benefit analysis of every response option.

If the demand letter is a statutory pre-suit notice (DTPA, RCLA, Texas Insurance Code), respond within the statutory deadline. Missing the deadline can cost you defenses and increase your exposure.

Don't treat every demand letter as a crisis. Most demand letters are the beginning of a negotiation, not the beginning of a war. Your attorney's job is to evaluate the claim objectively, advise you on the range of outcomes, and help you choose the response that produces the best result for the business.