You should make it very clear when the new student join your class, make them sign that they understand that you are going to contact reasonably hard. That if they don't want that, don't join your school.I was taught old school, if I did something wrong, I was whipped with a stick, if the teacher felt like it, he would whip me again. Teachers can not get away with that anymore, todays students do not realize how easy they have it, and that is not helping them to the fullest. When I demonstrate a move on a student, I hit them hard enough to see I made a good contact, but they still complain when I only hit them just hard enough. I tell them, "if you can not handle me hitting you, you have already lost the fight with a real opponent". Many students can not get it trough their head that they need to be able to take a strike as importantly as being able to fight.
This is to protect you from lawsuit. I don't know where are you, in US, it's so easy to sue a business. You need to protect yourself.
That said, I agree with you. If anyone not willing to be hit, they should not join a MA class. Even with a lot of care, $hit happens. I remember one time when I was sparring, I stepped in to jab, at the same time, the guy stepped in with a front kick. It wasn't even supposed to contact if I did not step in. I took it on my ribs. For the next two weeks, i could not even laugh!!!