What Is Vicarious Liability?

You may think basic business insurance will protect your organization if something goes awry. However, your company may be held responsible if a third party 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 or negligence caused by the actions or inactions of anyone representing their company, namely a third party. 

That means an organization can be responsible for paying for damages caused by a third party even if the business owner didn’t authorize or perform the actions and isn’t at fault.

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How Can a Small Business Owner Be Vicariously Liable?

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

• The owner of a bookkeeping business hires temporary help during tax returns season on a contract basis. One of the contractors errs on an expense spreadsheet. The bookkeeper’s client gets audited and is fined by the CRA.

• A security guard contracted by a retail store wrongfully detains a customer, suspecting them of shoplifting, uses excessive force and injures the customer.

• A subcontractor working for a construction company fails to follow safety protocols, resulting in an accident that injures a pedestrian.

Essentially, business owners can be vicariously liable for a related third party’s wrongdoings, whether the third party’s actions were intentional or not.

The key elements of vicarious liability include:

• The Business Owner and Third-Party Relationship

Vicarious liability often arises in the context of an employer and third-party relationship. If a third party who’s temporarily representing the business owner commits a wrongful act, the business owner may be held vicariously liable.

• No Personal Fault of the Business Owner

Vicarious liability does not require direct involvement or personal fault on the part of the business owner. Instead, it is based on the legal relationship and the actions of a third party.

Vicarious liability is a legal principle designed to ensure that employers take responsibility for the actions of the third parties they hire temporarily. This legal principle is designed to promote accountability among all parties and provide an avenue for someone who suffers physical or financial harm or property damage to seek compensation because of the actions of a third party.

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.

Business owners may be vicariously liable for off-duty conduct depending on a third party’s contract. However, in most cases, your business is only responsible for actions when the third party is working.

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

It’s a good idea to ensure an experienced lawyer reviews 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 third party. That means your company won’t be held liable for their actions before or after you employ them.

Can Business Insurance Protect Your Company From Vicarious Liability?

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

• General Liability Insurance

General liability insurance 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, it usually takes care of compensatory damages awarded against your business and any legal costs.

• Errors and Omissions (E&O) Insurance

Also known as professional liability insurance, E&O insurance protects businesses against claims of mistakes, inaccuracies, professional negligence, misrepresentation, missing deadlines, or failing 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.

Protecting Your Business From Vicarious Liability

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.

– Updated June 21, 2024.