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Business Liability Risk
As I’ve been posting lately, small business owners face a lot of liability exposure. Much of the liability actually is based on the conduct of another person or is transferred from one person to you, the business owner. This is known as Vicarious(that's fun to say) Liability or Imputed Negligence.

What is Vicarious Liability?

It’s the imposition of liability on one person for the actionable conduct of another, based solely on a relationship between two persons.

Professional insurance agents ask a lot of questions around this subject. We want to know what kind of relationships you have in your business. Do you have employees? Do you hire sub-contractors? How about Independent Contractors? Are you involved in a Partnership or Joint Venture?

These are all very important questions because your exposure to liability risk is increased by these relationships. Let’s review the four types of relationships.

  1. Agency
    • One who is authorized by another (principal) to act for or in the place of the principal; one entrusted with another’s business.
    • Authority to act is expressed or implied
    • Relationship implies some type of control by the principal
  2. Employee - Employer
    • Employee- a person in the service of another under a contract of hire, express or implied, oral or written, where the employer has the power or right to control and direct the employee in the material details of how the work is to be performed.
    • Employee must be in the course and scope of employment
    • Deviation from employment duties
  3. Independent Contractor
    • An Independent contractor is one who contracts to do work according to his/her own methods and is subject to another's control only as to the end product of the final result of the work.
    • The principal owner generally is not held vicariously liable for the acts of independent contractors.
    • There are exceptions to this:
      • Unless responsible by statute
      • The performance of independent contractor involves inherently dangerous activities
      • You chose negligently the independent contractor.
  4. Partnerships and Joint Ventures
    • A partnership is a business owned by two or more people that is not organized as a corporation.
    • A joint venture is a legal entity in the nature of a partnership engaged in the joint undertaking of a particular transaction for mutual profit.
    • Partners and members are generally held vicariously liable for acts of other partners/members.
    • Joint and several liability - each partner, individually has the duty of fully performing the obligation, and the obligee can sue all or any of them upon breach of performance.

The above information is from the 2013 CGL Policy, Copyright Tilden and Associates, 1989 -2012 Commercial Casualty Institute for which I'm studying for my Certified Insurance Counselors designation.

So, how do you reduce your exposure to vicarious liability and Imputed Negligence?

Most small business will be dealing primarily with #2 and #3 on the list which will be the focus of my suggestions here.

  1. Hire well. - When you're hiring employees, do all the proper employment checks. Don't cut corners here. Pay the extra money for proper background checks, call references, and complete a proper training schedule. Have a plan.
  2. Train well. - Institute a documented training program for all employees. Don't skimp in this area. You may desperately need the help and can use someone right away. Resist the urge to shorten the training curve just because you need them working as fast as possible. Remember, your business is in the hands of an employee that doesn't have the financial stake that you do so train well.
  3. Choose well. - Independent Contractors can reduce your liability exposure only if you choose wisely. If you're slack with whom you let work on your projects then the liability could come back to you. Also, request and verify that the Independent Contractor has liability insurance. Ask for a Certificate of Insurance then call the agent and verify the policy is active. If they can't provide this to you then find another Independent Contractor to do the work; no exceptions.
  4. Develop Policies and Procedures well. - Written policies and procedures are vital to every business. Don't leave anything out. This should be provided to every employee (signed off that it was read) and to every Independent Contractor (signed off as part of the contract) so everyone is on the same page as to the expectations and operations of the business.

Follow these steps and it'll go a long way to reducing your liability exposure which is vicariously transferred to you. 

Author Richard Morris

Richard Morris, an independent insurance agent in Chandler, Arizona, has been serving and helping Arizona families and businesses with all their insurance needs for over 23 years. Visit his website at to see all the ways he can help you with your insurance needs or call the office at (480) 336-2707 or toll free at (888) 907-9349. Connect with Rich on Google+ and Twitter.

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