When you operate a business, vicarious liability is one of the most common types of liability that arises. Vicarious liability is present in any incident where your company is considered legally responsible for the actions of someone working on your behalf.

What is vicarious liability?

Vicarious liability is a term for situations in which you are held liable for harm caused by the actions of others. This concept commonly arises when companies are sued due to mistakes or intentional actions made by their employees and can occur in many business relationships. 

As an employer, you are responsible for actions your employees take while they are working. If an employee makes a mistake or takes an intentional action that causes financial losses, property damage, bodily injury, or other harm, your company could be held liable, even though the company did not directly cause the incident. The company could be held liable even if the employee acted against company regulations. 

Vicarious liability could arise whenever someone who works on behalf of a company causes harm. This is not limited to employees, but employees are a particularly common source of vicarious liability. A large portion of lawsuits against businesses involve vicarious liability, so it’s important to understand this concept. 

Example: 

• An employee of your accounting firm makes a data error that causes a client to lose significant amounts of money. Your company would be held liable for the employee’s error if the client sues. 

When could your business be held vicariously liable?

Your business could be held vicariously liable for the actions of your employees, partners, directors and officers, volunteers, and other agents you work with. This applies even if the employee is no longer working at the company when a lawsuit is filed. You could be held liable for your employees’ intentional wrongful acts, such as discrimination against job candidates, harassment, or theft, or unintentional acts, such as if an employee accidentally makes a data error that loses a client money or leaves out equipment that a customer trips over, leading to an injury. 

Example: 

• An electrician with your electrical contracting business makes a mistake when installing new wiring, causing a short that starts a fire. Your company could be held liable for the damage that the fire causes. 

Although companies are typically not liable for the actions of independent contractors, there are some situations where you could be held vicariously liable for the work of contractors. If you hire a contractor to do work that they are not qualified to perform, that you are legally required to do, or that is considered inherently hazardous to others, you could be held liable for any harm to third parties that results.

In addition, there can be blurriness about the definition of a contractor. If a contractor works under your supervision and you control their work hours and other aspects of employment, it could be legally argued that they are acting as your employee, which would affect your liability for their behavior. 

What is the difference between direct liability and vicarious liability?

Direct liability applies in cases where an employer directly causes an incident. This could include cases where an employer was negligent in hiring, failed to supervise employees, or acted in a discriminatory manner. It could also apply in some workers’ compensation claims. In some cases, an employer could become directly liable for intentional actions of employees if it approved of the employee’s actions, failed to investigate complaints, or was aware of an issue and took no disciplinary action. 

Example: 

• A law firm hires a new lawyer. After the lawyer commits malpractice, it is discovered that the lawyer had been disbarred several years previously, and the law firm failed to perform adequate background checks when hiring the lawyer. The law firm could be held directly liable in this case. 

Vicarious liability applies in cases where anyone acting on behalf of a company acts negligently in the course of conducting company business. Even though the employer may have been unaware of the person’s actions and did not directly cause an incident, companies are considered responsible for the conduct of their workers on the job. You could still be held liable even if an employee disobeyed instructions. This is a very common type of liability that appears in many lawsuits against companies. 

Example: 

• While cleaning a customer’s gutters, your employee leaves a ladder blocking a sidewalk. A passerby trips on the ladder and falls, sustaining an injury. Your company could be held liable for the passerby’s injuries.

How do you determine vicarious liability?

Typically, your company could be held liable in situations where anyone performing duties for your company harms another person or company through their actions. This concept commonly comes into play when employees make mistakes or unintentional omissions, but intentional acts can also lead to vicarious liability if they occur during the course of an employee’s duties. Even if they act against your directions or fail to follow safety procedures, you could still be held liable for your employees’ actions because it is your responsibility as a company to ensure that employees act safely and follow regulations. 

Your company would not be held vicariously liable for an employee’s actions if the actions were clearly outside the employee’s professional duties and the employee was acting for his or her own benefit. Legally called a “frolic,” this situation can occur if an employee causes harm in a situation where they are not acting for your company. For example, if, during downtime on a work trip, an employee drives to another location to do some sightseeing and causes a car accident, they may be considered to be on a frolic, and your company may not be considered vicariously liable.

How can you prevent vicarious liability claims?

It’s important to take steps to prevent claims from arising in the first place. By providing a safe workplace and managing employees well, you can reduce the likelihood that incidents will occur. It can be helpful for your company to: 

• Enforce safety regulations
• Provide a comprehensive employee handbook
• Conduct training for employees on harassment, discrimination, and other common issues
• Keep documentation of all issues that arise
• Perform thorough background checks and reference checks for all employees

What insurance policies can protect your company from vicarious liability?

No matter how careful you are, it’s impossible to completely avoid the possibility of employees or other agents of your company taking actions that your business could be held liable for. This is why it’s a good idea to consider purchasing insurance policies that will protect your company if an employee causes an incident. There are a number of insurance policies that can provide financial assistance to help you cope with vicarious liability claims. These include:

• General liability insurance provides coverage if you or your employees cause accidental harm to a third party, including bodily injury, property damage, personal injury, or advertising injury. 
• Professional liability insurance (also known as errors and omissions insurance) protects your company if you are sued because of mistakes or omissions in your professional work. 
• Workers’ compensation insurance covers you and your employees if they are injured, fall ill, or die during the course of their work.
• Employment practices liability insurance (EPLI) protects your company against lawsuits brought by current, former, or prospective employees who accuse you of wrongful treatment. 
• Directors and officers insurance protects your company’s executives from lawsuits in which they might be held personally liable.
• Commercial auto insurance covers you and your employees if they are at fault in an accident that causes property damage or bodily injury while driving a company-owned vehicle.

If your company works with independent contractors or third-party companies, it is wise to ensure that they have appropriate insurance coverage as well. This can decrease the chance of becoming involved in a lawsuit.

Final Word

Vicarious liability is a common insurance concept that applies in many situations where companies could be sued. It’s important to understand how your company could be held liable for the actions of others, including employees, volunteers, contractors, partners, and others. There are many precautions companies can take to diminish the chance of a lawsuit occurring, but since it’s impossible to control every aspect of your employees’ actions, insurance policies can add valuable protection that will financially support you if a lawsuit involving vicarious liability affects your company.