Vicarious Liability Insurance – What Is It and Does My Business Need It?

Key Takeaways:

• As a business owner, you need to protect your assets and your ability to do business through strong risk management that mitigates the unforeseen risks that could occur at any time.
• Your role as owner is to ensure your company has comprehensive risk management solutions in place so that you can mitigate any exposure created on your behalf.
• You can minimize your financial risk by having a suite of liability policies that address vicarious issues or problems that come up during the course of business.

Most everyone has heard of ‘living vicariously’ through others — where you enjoy their exploits from the relative safety of your life. Think of the thrill you feel watching someone ascending Annapurna in the Himalayas while you are warm and safe in your living room.

What is Vicarious Liability?

When you own a business, you are exposed to ‘vicarious liability’, meaning that you and your business may be liable for mistakes, problems, or harassment caused by employees, subcontractors, or even a vendor’s materials.

Think about owning a restaurant where there is food poisoning, or a trucking company that has lost a customer’s belongings, or an accounting firm that has provided a client with documents containing calculation errors that have tax consequences. None of these may have been caused by the owner’s direct actions, but he or she is responsible for them, nonetheless.

As a business owner, you need to protect your assets and your ability to do business through strong risk management that mitigates the unforeseen risks that could occur at any time.

Vicarious Liability Insurance Definition

In any situation where you have someone else representing you or your business interests in any sort of official capacity, it creates an environment where you could be found to have vicarious liability. That could mean something that injures a customer or employee, physically or figuratively, or creates property damage through neglect or faulty craftwork or materials.

In legal terms, it falls under the “respondeat superior” doctrine (Latin for ‘let the superior answer’) and covers a broad range of potential issues.

Luckily, there are several types of insurance that you can carry to create a vicarious liability umbrella or shelter to protect you and your company should the need arise. First, let’s take a look at who you are covering with vicarious liability insurance.

The People Working on Your Behalf

As a business owner, you hire people to perform tasks and work on your behalf. The larger and more successful your business becomes, the more people you hire or engage bringing more opportunities for issues that create vicarious liability.

While not an exhaustive list, these include the following:

• Employees — Employees, including managers and directors, who are doing work and receiving wages under your direction. This includes full and part-time employees, seasonal workers, and temporary workers (you still have exposure even when hired through an agency).
• Board of Directors — These directors, whether paid or unpaid, elected or appointed, make decisions that can directly impact you, your employees and customers, your stakeholders, and your vicarious liability.
• Your Agents — An agent can be anyone who is legally empowered to act on you or your company’s behalf. This can include employees, as well as sales or distributor agents, licensing agents, or representational agents.
• Independent Contactors — These are any people doing work for you that you pay directly and don’t withhold taxes or pay benefits.
• Volunteers — If you direct their activities and they do something negligent, you could be vicariously liable. This can also include ‘volunteer activities’ that your employees participate in on behalf of your company even if they don’t get paid for their time.

Types of Vicarious Liability Policies

As a business owner, you want to ensure your company has comprehensive risk management solutions in place so that you can mitigate any exposure created on your behalf. At a minimum, you want to start with general liability insurance and then decide what to add on to supplement your coverage based on your type of industry, product, or service. Here are some types of vicarious liability insurance examples that might be appropriate to include.

General Liability Insurance

It’s always a good idea for any company to protect itself from any and all physical risks, like bodily injuries or property damage. Situations can include when an accident occurs on your premises when a customer is using your product when damage occurs to the customer’s property, or copyright infringement, slander, or libel.

Consequences can be astronomical, and coverage is broad so it makes sense that all businesses should carry general liability insurance.

Professional Liability Insurance

Often referred to as ‘errors and omissions coverage’, professional liability insurance covers more abstract concepts. These can include professional or work-related errors, violation of good faith, malpractice, negligence, or misrepresentation.

This type of insurance is usually thought of for professional services, such as doctors, lawyers, accountants, real estate agents. However, you can be exposed even when just giving advice.

For example, say you are a general contractor and advise a luxury resort on the type of pool equipment that would suit their needs for their new pool area. But it turns out to be inadequate which shuts down their water park during the height of the season. Could your company be liable for their loss of business? Possibly.

Employment Practices Liability Insurance (EPLI)

An EPLI policy will protect you from vicarious liability claims for things like employment discrimination problems, wrongful termination, harassment issues, and improper supervision. With the rise in harassment and retaliation claims, EPLI should be part of any vicarious liability coverage.

Worker’s Compensation Insurance

Covering employees who are injured or get sick from a work-related situation, this coverage can include not only medical treatment, but also disability benefits, missed wages, and death benefits.

As a business owner, you pay both federal and state unemployment taxes (FUTA and SUTA) but still need to carry worker’s compensation insurance. People often confuse these (possibly because they are often lumped together), but they are mutually exclusive and cover different issues entirely.

Directors & Officers Insurance (D&O)

All corporations have a Board of Directors whether publicly traded or privately-owned. D&O insurance covers the personal assets of all corporate directors in case of a lawsuit or vicarious liability claims made against a director as part of their role.

How to Protect Yourself from Vicarious Liability

Sometimes, things happen! Who doesn’t remember the woman who in 1992 dropped a cup of coffee in her lap at a popular fast-food restaurant in their drive-thru window lane in Albuquerque, New Mexico? She then sued the company because the hot coffee burned her skin and was awarded $2.9 million in punitive damages.

Part of the company’s liability stemmed from the fact that they had over 700 serious complaints about the temperature of their coffee and did nothing about it. The judge and jury saw that as total disregard for the public. If your corporate policy demands coffee to be kept at 180 to 190 degrees, enough to cause third-degree burns, you might want to rethink your policy rather than stand firm.

For the restaurant, this was probably more of a nuisance since the damages represented a single day’s profit from coffee alone. However, this would be a very expensive lesson for a small- or medium-sized business and one that can be avoided.

Whether you agree with the outcome of the trial or fully understand the facts, isn’t the point. The point is you as a business owner are responsible whether you think it’s pertinent or not.

This is about protecting you and your company both legally and financially.

What You Can Do Proactively

For any business, the first step is to ensure adequate insurance coverage and that means finding the best price for the protection you need. You may also want to talk with an insurance representative to discover any discounts for multiple policies when designing your vicarious liability coverage.

In addition, these areas should be formalized to provide a blueprint should you ever need to defend your business practices.

Company Policies and Procedures

Every company requires strong policies and procedures that are well documented and part of any new hire training. Policies and procedures should be reviewed and updated annually with changes thoroughly communicated to all staff members and stakeholders.

Some areas that should be covered might include:

• At-will employment as defined by your state
• Hiring, recruitment, and advancement policies
• Harassment and non-discrimination policies and how to handle complaints so that they stay within the organization instead of escalating to the state or federal level.
• Employee expectations including the code of conduct and resolution of conflicts, including workplace violence, drug and alcohol abuse, and disciplinary actions.
• Clear employee classification criteria – what constitutes full vs part-time, number of hours to be worked for each, overtime vs salaried positions
• Pay, timekeeping, and breaks
• Leave and personal time off
• Pregnancy leave
• Safety and health regulations to include OSHA training if appropriate
• Protocols for handling all financial matters, e.g., business expenses, and accommodation requests with standardized forms for submission

Human Resources Policies

Usually part of the overall company policies, Human Resource policies should be crystal clear, and all managers and supervisors trained and updated in the proper response to employee issues. You want to hire the best people and skip over those that are problematic or have a history of inferior performance. Careful hiring, screening, and employment practices may alleviate issues that bring vicarious liability into the picture, either internally or with customers, including:

• Good interviewing and hiring practices that are consistent, transparent, and above reproach in terms of being anti-discriminatory, but also weed out any potential problem hires.
• Thorough background checks, reference checks, credit checks, and psychological evaluations to ensure your hires are top quality.
• Well-written job descriptions that explain expectations and define measurable goals leaving nothing to interpretation.
• Clear documentation on all aspects of an employee’s journey from initial training through the evaluation process and any disciplinary counseling.
• A well-defined (and followed) disciplinary protocol — It’s a lot easier to defend a wrongful termination claim if you follow a prescribed policy of verbal counseling and written warnings that are well-documented, signed by all parties. Each incident should give clear expectations for performance improvements or the consequences for non-performance.

Customer Service Protocols

Customer service is always important, but it takes on a whole other nuance when heading off a potential vicarious liability claim. Quickly respond to all customer inquiries and complaints and you might save yourself a big problem.

Most people are amenable when approached with genuine concern and care. If you or your company has done something that needs to be addressed or fixed – by all means do it quickly. You never know when you might head off a vicarious liability problem or keep one from escalating.

To Sum Up

Accidents happen — but when it can be covered by vicarious liability coverage and limit your exposure, that’s the way to go. Today’s business owners can keep their business rolling smoothly while minimizing their financial risk by having a suite of liability policies that address vicarious issues or problems that come up during the course of business.

There is a multitude of business insurance possibilities, so speak with a seasoned expert who can design an overall insurance coverage package that’s right for you and your company and takes into consideration your insurance needs, the state where your company is headquartered, and your industry.

Talk to an insurance expert today by contacting Einsurance.com or simply call 1(844) 524-6500.