For any small-business owner, vicarious liability is a key concept to understand. Why? Because, thanks to vicarious liability, you and your business can be held liable (and therefore financially responsible) for things that you didn't actually do. In other words, even if you play by the rules at all times, you could find yourself in hot water because of work done or mistakes made by your contractors, employees, or agents.
Here's a look at what vicarious liability is and how it can wreak havoc on your business finances.
Vicarious Liability: Taking the Heat for Someone Else's Work
Just as “living vicariously” through someone else involves taking pleasure in another person's exploits, vicarious liability means that you can legally be held responsible for another person's wrongdoing. This is possible because of how certain legal relationships work.
Here's an example: say one of your employees mops up a spill at your café but forgets to put out a “Wet Floor” sign. A customer comes in and slips on the wet patch. If the fall leads to an injury, the customer could sue your business for damages, and your entire business could legally be held liable – and be responsible for paying any lawyer's fees, court costs, settlements, or judgments associated with the suit. So even though your employee's actions led to the incident (and even if you reminded the employee to put up the sign), you and your business could be considered responsible in the eyes of the law.
Luckily, business insurance protects you in cases of vicarious liability: a General Liability policy, for example, would cover you in this example and others involving the injury of a third-party on your property.
Who Has Vicarious Liability?
As a business owner, you could be vicariously liable for the actions of…
- Your employees. In order for liability to pass from an employee to you or your business, the employee must be acting within the scope of their job or professional duties. And even if an employee acts against directions you give them (as in the example above of failing to put out the “Wet Floor” sign), you could be considered liable.
- Agents you work with. “Agent” is a classification that includes anyone who works on behalf of someone else (this someone else is called a “principal,” and would be you). Agents can be either independent contractors or employees, and they have the authority to alter or create legal relationships between the principal and third parties. Typically, in vicarious liability cases involving the agent-principal relationship, both the agent and the principal assume some liability, meaning that the person harmed by the wrongdoing can seek damages from both parties.
- Independent contractors you hire. One reason some business owners choose to work with independent contractors is to avoid exposure to vicarious liability. While the general rule holds that principals (you) are not liable for work done by independent contractors, there are a few situations in which vicarious liability can pass up the chain. These include instances when you are negligent (e.g., you hire a contractor who isn't qualified for the work they're required to do); when you hire a contractor to complete tasks that, by law, you're required to do yourself; and when you hire a contractor to complete work that is inherently dangerous to third parties.
Protect Yourself from the Costs of Vicarious Liability
Vicarious liability is more or less inescapable for business owners. But that doesn't mean your bottom line has to suffer because of mistakes or oversights that other people make. Various types of business insurance specifically protect you from the costs of both direct and vicarious liability – that is, from the costs associated with mistakes you make and those made by your employees and agents, usually by covering the expense of defending yourself against claims brought by people harmed by those mistakes or oversights.
- General Liability Insurance protects you from the costs of lawsuits over personal injuries or third-party property damage caused by you or your employees or incidents that happened on your business property.
- Errors and Omissions Insurance (Professional Liability) shields you from the costs of mistakes and oversights you and your team make while performing your work (or from the costs of lawsuits over perceived mistakes).
- Workers' Compensation Insurance covers the cost of injuries and accidents that happen to your employees on work time or while completing work duties, whether or not you're responsible for causing them.
Want more information about the vicarious liabilities you face and how to protect yourself against them? Fill out our online insurance application or call an insureon agent to chat (800-688-1984).