You may think basic business insurance will protect your organization if something goes awry. However, your company may be held responsible if an employee does something wrong. It is called vicarious liability.

An employer’s vicarious liability is when a business owner is held financially liable for the damages caused by the actions or inactions of anyone representing their company. It is known as a form of “strict liability” – when someone is liable for damages regardless of the intent. That means your organization will be responsible for paying damages caused by an employee even if the business didn’t authorize or perform the actions and isn’t at fault.

The word ‘vicarious’ is derived from the Latin word, vicarius, which means substitute. That’s why vicarious liability means one party is liable for the actions of another.

A business owner concerned about vicarious liability

How Can a Business Owner Be Vicariously Liable?

There are many instances where a business can be vicariously liable. Here are a few examples:

  • An employee must deliver an item to a customer a few hours away. He stops for a coffee break but gets in a car accident with another driver after he starts to drive again.
  • A real estate clerk is given the authority by the lawyer that employs her to set up meetings and get clients to sign important documents. She transfers $200,000 from a client to herself for one transaction instead of sending the money to a developer.
  • A retail employee cleaning the floor with a mop gets called over by a fellow employee to help with something. While he’s away, a customer trips on the mop and falls, breaking their leg.

It’s important to note that employers can be vicariously liable for employee wrongdoings, whether intentional or not.

What Kind of Businesses Are Susceptible to Vicarious Liability?

There’s bad news, and then there’s bad news: Virtually every kind of business is susceptible to vicarious liability.

Employers may be vicariously liable for off-duty conduct depending on an employee’s contract. However, in most cases, your business is only responsible for actions when the employee is working.

However, if a contract says the employment relationship includes responsibility for behaviour outside of the workplace, your company may be held vicariously liable for an employee’s actions.

It’s a good idea to ensure that a legal professional reviews contracts with experience in employment contracts to help protect your business from the possibility of vicarious liability for off-duty conduct.

There is also good news: Your vicarious liability is limited to the length of time you employ a worker. That means your company won’t be held liable for their actions before or after the organization employs them.

Also, employers typically won’t be held responsible for the actions of independent contractors. However, there have been cases where employers have been held liable for their independent contractors’ wrongdoings. In other words, there’s always a chance your business will be vicariously liable if an independent contractor does something wrong.

How Can Insurance Shelter Businesses From This Type of Risk?

Vicarious liability can be costly for businesses. However, there are a few different types of specialized insurance that can help protect your company:

  • Commercial general liability (CGL) insurance: CGL provides coverage for claims of third-party bodily injury or property damage caused by your business because of an unexpected accident or negligence. If your business is sued, CGL insurance will usually take care of compensatory damages awarded against your business and any legal costs, even if the lawsuit is lost.
  • Commercial umbrella insurance: Not just for a rainy day, this comprehensive policy gives you an extra layer of protection when liability claims are above your standard limit. For instance, it increases the coverage on a CGL or a commercial auto insurance policy. Suppose one of your employees is in a car accident while making a delivery and is deemed to be at fault. In that case, an umbrella insurance policy will provide additional coverage to pay for damages after the primary policy limit is exhausted. You must have commercial auto or CGL insurance before purchasing commercial umbrella insurance.
  • Errors and omissions (E&O) insurance: Also known as professional liability insurance, E&O insurance protects businesses against claims of mistakes, inaccuracies, negligence, misrepresentation, missing deadlines, or the inability to deliver a service as promised. It’s recommended coverage if you provide advice or services to clients because it allows for financial support in the event of a lawsuit. The professionals purchasing this type of policy usually include health and wellness practitioners, accountants, consultants, contractors, and engineers.

Protecting Your Business From the Risk of Vicarious Liability

While you or your company may not be at fault for an employee’s actions, you may still be liable.

You wouldn’t leave the front door to your office or shop wide open overnight, so don’t leave the door open to the threat of a vicarious liability claim or lawsuit against your company. 

Speak to a Zensurance broker and ask for a review of your existing policy to ensure you are adequately protected from vicarious liability and other risks your organization faces.

– Reviewed by Justin Tisdale, Team Lead, Professional Lines, Zensurance.

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About the Author: Craig Sebastiano

Craig Sebastiano is an award-winning business writer based in Toronto. He has written for a variety of financial publications and websites. He has written about several topics, including investing, insurance, real estate, mortgages, credits cards, banking, pensions, saving for retirement, and taxes.