What is Vicarious Liability Insurance and How Does it Work?

Vicarious liability is a legal concept where a person is held responsible for actions committed by someone else. So, with vicarious liability, you may be held responsible for an injury suffered by another person. Vicarious liability is also called imputed liability.

It should be no surprise to you that you can be sued due to your own actions. But did you know that you or your small business can also be held financially and legally responsible for the actions taken by someone else? This is what’s known as a vicarious liability or imputed liability.

So, if you want to protect yourself from the possible risk created by others, it’s important that you understand the definition of vicarious liability and how it could apply to your small business.

What is Vicarious?

Before we can dive into the details of insurance and liability, it’s important to understand the meaning of “vicarious.” The Merriam-Webster Dictionary gives it two primary definitions:

  • Experienced or realized through imaginative or sympathetic participation in the experience of another
  • Serving instead of someone or something else

So, a parent who lives vicariously through their kids tends to view their children’s conduct and activities as a reflection of their own self-worth. They might not let their son quit cub scouts because they always regretted quitting themselves, or they may encourage their daughter to join the cheer squad since they were captain of the team in high school.

This brings us back to insurance and liability. Just like how “living vicariously” involves taking joy in someone else’s actions, vicarious liability means that you can be held legally responsible for someone else’s conduct and misdeeds.

In vicarious liability cases, the liability stems from the relationship and power dynamics between the two parties (instead of whose fault it actually was).

Vicarious liability meaning

The original vicarious liability meaning comes from its legal Latin term, “respondeat superior,” which is translated as “let the master answer.”

Vicarious liability is a form of strict liability, meaning liability in the absence of negligence. It exists when two parties have a special relationship based on a business or family connection. Here are some common legal relationships that involve vicarious liability:

  • Employer-employee: Employers are vicariously liable for acts their workers commit in the course of employment.
  • Partnership-partner. Partnerships are vicariously liable for acts committed by their partners. Individual partners may also be liable for the acts of their fellow partners.
  • Parent-child. Parents may be held vicariously liable for negligent acts committed by their children.
  • Corporation directors and officers. Corporations are vicariously liable for negligent acts committed by directors and officers while performing their duties on behalf of the organization.

A vicarious liability case could arise when an employee at your cafe unintentionally spills hot coffee on a customer. Should this accident lead to bodily injury, your restaurant could be held liable.

Even if you told your employee to be careful, your business may be liable for damages (by law) because the employee was doing the work you had paid them to do. This is exactly what could happen in a vicarious liability example.

If they didn’t work for you, they wouldn’t have any reason to be pouring coffee. But, since you exert control over them while they’re on the job, you can be considered vicariously liable, particularly if you don’t take actions to prevent those mistakes by exercising “duty of care.”

It’s worth noting that you can be held liable for damage, even if they are acting against directions you gave them. 

Why Are Businesses Responsible for What Their Employees Do?

Employers are vicariously liable for the acts of their employees under a legal doctrine called respondeat superior, which is Latin for “let the master answer.” It essentially means the employer is responsible for things like negligence, libel, wrongful conviction, and other civil wrongs (also known as torts) committed by their employees.

Business owners have the right to control the work their employees perform and to dictate how that work is carried out. They also have a legal duty to maintain a safe workplace, employ competent workers, and train their employees properly.

Because businesses have control over their workers and the workplace, they are liable if an employee acts negligently and accidentally harms a third party. To sue the employer for compensation, the injured party need only prove that the worker was negligent, the worker’s negligence caused their injury, and the worker was an employee of the employer. Because of the respondeat superior, they don’t have to prove that the employer was negligent. 

The concept of respondeat superior extends to the use of autos. Employers are vicariously liable for injuries sustained by third parties in auto accidents caused by employees driving vehicles on the employer’s behalf. Employers are responsible whether employees are driving company-owned vehicles or their personal autos.

When Are Workers “On the Clock”?

The doctrine of respondeat superior applies only to acts employees commit in the scope of employment. Employers aren’t responsible for negligence employees commit “off the clock.”

When an accident has occurred, whether a worker was on or off the clock when the incident took place can be a matter of debate.

Many disputes involve accidents that have occurred while a worker was commuting to or from work, at an off-hours social event, or combining a personal errand with a work-related task. To help resolve such disputes, courts have developed the rules outlined below. 

Commuting to Work

Many states have a law similar to California’s “coming and going rule,” which states that employees aren’t in the course of employment while commuting to and from their workplace in their personal vehicles. An exception applies if the employer pays the worker for the commute time or asks them to run a work-related errand on their way to or from work. 

A worker is also considered “on the job” if the employer requires the worker to drive to and from the workplace so their vehicle can be used in the employer’s business.

For example, if Jill’s employer requires her to drive her personal car to work so she can use it to visit clients, Jill is “on the clock” while traveling to and from her workplace. If during her commute she inadvertently causes a car accident that injures another driver, Jill’s employer will be vicariously liable for the injury.

Social Events

Are workers “on the job” when attending a company-sponsored social event like an office Christmas party? The answer generally depends on whether the worker’s attendance at the event is mandatory or voluntary and whether the employer benefits from the employee’s presence.

As the following example demonstrates, social events create a risk of vicarious liability for employers, especially when alcohol is involved.

For example, Divine Designs, an architectural firm, is hosting a holiday party for employees and clients. Employees are expected but not required to attend. The firm has provided both alcoholic and non-alcoholic beverages at a self-service bar. It’s now 11 p.m. and Bill, a Divine Designs employee, has been drinking rum-spiked punch for hours. He decides it’s time to leave and toddles to his car. 

Bill is driving home in his personal vehicle when he runs a red light and broadsides another car. If the other driver is injured in an accident, will Divine Designs be liable for his injuries? The answer may be yes. Because the party involved clients, Divine Designs likely benefited from Bill’s attendance.

Also, while the company didn’t require workers to attend the party, Bill may have believed his career there would suffer if he failed to appear. Thirdly, if Bill was legally drunk when the accident occurred, his employer may be liable for his intoxication since it made liquor readily available. 

Frolic or Detour

Employees often multi-task, running a personal errand while completing a job assigned by their employer. If a worker combines a personal errand with a work-related task and is subsequently involved in an accident, was the worker “on the clock” when the accident occurred? To answer that question, courts have devised a legal concept called “frolic and detour.”

A frolic is a major departure (either in terms of the time spent or the distance traveled) from the worker’s normal work responsibilities, while a detour is a minor departure. Generally, a worker is considered “off the clock” when engaging in a frolic and “on the clock” when making a detour. Here’s an example.

Alan is employed by Ace Accounting. One day, Alan’s boss asks him to drive to a nearby supermarket and buy supplies for an upcoming event. Alan complies and drives to the store in his personal vehicle. After finishing his shopping, Alan gets a haircut at a barbershop located next door to the store.

He is driving back to his workplace when he accidentally rear-ends another vehicle, injuring the driver. Was Alan in the course of employment when the accident occurred? 

Alan combined a work-related task (the trip to the store) with a personal task (the haircut).  Because the barbershop was situated next to the grocery store, a court might consider the haircut a detour. If so, Alan was “in the course of employment” when the accident occurred and his employer is vicariously liable for the accident.

Suppose now that Alan finishes his shopping and, instead of getting a haircut, drives five miles to a dry cleaner to pick up his laundry. The accident occurred while he was returning to his workplace.

Because of the distance between the store and the dry cleaners, Alan’s trip to the cleaners might qualify as a “frolic.” In that case, Alan was “off the clock” when the accident occurred, and Alan (not his employer) would be liable for the accident.

Independent Contractors

The doctrine of respondeat superior doesn’t generally apply to independent contractors. This is because a business that hires a contractor doesn’t normally control the contractor’s work. Typically, the contractor provides the materials, tools, and workers it needs and directs the work.

Consequently, the contractor (not the hiring company) is liable for negligent acts committed by its employees. 

While businesses are generally exempt from tort liability for the actions of their independent contractors, there are some exceptions. A business may be vicariously liable for a contractor’s negligence if:

  • The business chose an incompetent contractor. A business may be sued for negligent hiring if it hires an unqualified contractor who injures a third party. 
  • The work it hired the contractor to perform was inherently dangerous. For instance, a general contractor might be held liable for a subcontractor’s mishandling of explosives since explosives are inherently dangerous.
  • The business failed to fulfill a duty it couldn’t legally delegate to the contractor. For instance, businesses have a legal duty to maintain a safe workplace and they can’t delegate that duty to an independent contractor.

Vicarious Liability for Drivers of Business-Owned Cars

The laws in some states (including California) hold vehicle owners vicariously liable if they allow another person to drive their auto and the driver causes an accident that injures a third party.

As noted previously, businesses are liable under respondeat superior for accidents caused by negligent employee drivers. Because of vicarious liability laws, businesses may be held responsible for accidents caused by drivers who aren’t employees.

For example, suppose you own a flower shop. Your company owns two vehicles: a delivery van and a small pickup. Your delivery van has broken down, and a customer urgently needs the flowers he ordered.

Your friend Susan stops by your store and offers to deliver the flowers using the company pickup. You gratefully accept and Susan drives off in the pickup. Susan has made the delivery and is heading back to your store when she accidentally rear-ends another vehicle.

The other driver is injured and their vehicle is damaged. Susan was using your company vehicle on your behalf with your permission when the accident occurred. Consequently, your company will be vicariously liable for the other driver’s injuries and the damage to their vehicle.

Business Insurance for Vicarious Liability Claims

Businesses can protect themselves against vicarious liability claims by buying liability insurance. Most commercial liability policies cover claims against businesses that result from negligent acts committed by employees and other individuals who act on the company’s behalf.

Some insurance coverages often purchased by small business owners include general liability, commercial auto, professional liability, and workers’ compensation.

General Liability Insurance

The standard commercial general liability policy covers damages the insured is legally obligated to pay because of bodily injury, property damage, or personal and advertising injury.

If an insured business becomes legally obligated to pay damages because of negligent acts committed by employees or other parties acting on the business’ behalf, those damages will be covered.  

The standard general liability policy doesn’t exclude acts committed by independent contractors. This means a business that hires an independent contractor is automatically covered for its vicarious liability for the contractor’s negligence.

For example, suppose that Happy Hardware hires Paradise Painting to paint the exterior of Happy’s hardware store. A Paradise Painting employee is on a ladder painting the eaves near the doorway when he accidentally drops a bucket of paint on a customer.

The customer is injured and sues Happy Hardware, claiming the store negligently hired an incompetent contractor. If Happy Hardware forwards the suit to its insurance company, the claim should be covered by Happy Hardware’s general liability policy.

Commercial Auto Insurance

The standard business auto policy covers damages an insured must legally pay because of bodily injury or property damage resulting from the ownership, maintenance, or use of a covered auto.

The business named in the declarations is covered for its vicarious liability for accidents involving any covered auto. Which vehicles are “covered autos” depends on the scope of coverage the business has purchased.

Many businesses choose the broadest level of coverage, which includes company-owned autos, hired autos, and non-owned autos. An example of a non-owned auto is a vehicle owned by an employee and used in their employer’s business.

Professional Liability

Professional liability insurance (also called errors and omissions insurance) covers a business’s vicarious liability for negligence, errors, or omissions committed by employees and other individuals acting on the business’s behalf.

Examples of professional liability insurance are malpractice insurance, employment practices liability insurance (EPLI), and directors and officer insurance.

Workers’ Compensation Insurance

Vicarious liability isn’t relevant to workers’ compensation insurance since workers’ comp isn’t a third-party coverage and workers’ comp benefits aren’t based on fault.

Workers injured on the job receive benefits whether the accident that caused their injury resulted from negligence committed by the worker, the employer, or someone else. 

Vicarious liability is relevant to employers’ liability insurance, which is included in most workers’ compensation policies. Employers’ liability insurance covers (among other things) suits against employers by workers who are injured on the job but aren’t eligible for workers’ comp benefits.

Examples are casual workers and some domestic and agricultural workers. The insurance covers damages for which the employer is legally liable (directly or vicariously) because of a work-related injury to an employee.

Who Is at Risk of Vicarious Liability Claims?

Any business that has employees, uses contractors, or even has volunteers is potentially at risk. As long as you have someone else representing you in an official capacity, you can be held liable for their purposeful actions or their omissions.

While that may sound unfair, in the eyes of the law, it means that your business didn’t do enough to prevent potential incidents, i.e., didn’t have the right policies and protocols in place to prevent potential harm to third parties.

When Could Your Business Be Considered Vicariously Liable?

Your business can be held liable for the actions of:

Employees

For liability to pass from an employee to you, he or she must be acting within the scope of their professional duties. Even if an employee acts against your directions, but is performing tasks connected to their duties, you could be held liable for the damage their actions cause.

Contractors

Many business owners think that working with independent contractors absolves them of any vicarious liability. While this generally holds true, there are a few situations in which vicarious liability can be passed on from the contractor to the business.

These would include potential instances of negligence on your part when hiring a contractor; (e.g. you hire a contractor that doesn’t have the necessary qualifications or permits for the work they are doing for you).

Additionally, you can be held liable if you hire a contractor to complete tasks that you are required by law to do yourself, or you know are inherently dangerous to others.

Partners

Partners act with a considerably higher degree of autonomy compared to employees. However, if the partners are held liable for injury or damages while acting for the benefit of the partnership they serve, the partnership may be held vicariously liable as well.

Directors and Officers

Directors and officers act on behalf of the corporation and carry out their duties to benefit it. Consequently, a corporation they are serving can be held vicariously liable for the wrongdoings of its directors and officers.

Highly-Publicized Examples of Vicarious Liability Claims in Practice

  • An Oklahoma federal court judged in favor of a Telephone Consumer Protection Act (TCPA) plaintiff on vicarious liability issues, ruling that NorthStar Alarm Services and Yodel Technologies were liable for calls carried out by a phone lead generator on their behalf. 
  • A former publicist for Chicago’s largest restaurant company, Lettuce Entertain You Enterprises (LEYE), alleged she was sexually assaulted by the corporation’s wine director and then retaliated against after she reported it. 
  • Parents of two children killed by the Pan-O-Gold Baking Company sued the company, despite the company having already been cleared of any wrongdoing. Accusations included two counts of negligence and one count of vicarious liability.

Protecting Your Business with Vicarious Liability Insurance

Vicarious liability is a potential risk that business owners have to face daily. However, like most business risks, they can be mitigated and managed with the right insurance policies. Policies that will protect your business include:

  • A General Liability Insurance Policy: A general liability policy will protect you if you are sued for personal injuries or property damage that arise from your business operations. It will cover legal costs, associated medical costs, and even potential settlements. Also called professional liability insurance, it will protect you from vicarious liability in claims related to malpractice, errors, omissions, and negligence caused by parties acting on your behalf.
  • Directors & Officers (D&O) Insurance: D&O coverage will protect the company from claims that its management may have breached fiduciary duties, mismanaged company assets, or was at fault for misrepresentation.
  • Employment Practices Liability Insurance (EPLI): An EPLI policy will cover the company for legal costs and settlements for vicarious liability claims related to employment issues such as improper supervision, harassment, and discrimination. If you need more help or information about protecting your business, you can reach out to our team of expert brokers to learn more.

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