Maximize Protection: Risky Business, Exposed Assets and Insurance Coverage
October 15, 2021 – In 2020, more than four million new businesses were started in the United States – a 24% increase from 2019. A new business faces countless challenges in its early days – hiring, inventory, advertising, pay – to name a few. a few.
Thinking ahead of time about unforeseen (and admittedly unlikely) incidents that could create liabilities that lead to the downfall or failure of the new business is probably not on the list. But a little awareness, coupled with the right protections, such as sound risk management and the right insurance policies, could save a business when the unexpected happens.
Consider the following scenario:
Three partners from an established accounting firm decide it’s time to open their own small accounting firm, CapitalGains, LLP. As tax season approaches, their business is growing. The partners decide to hire a young college graduate, Max, to help him in the office.
One day, a potential client from out of town comes for a meeting. At the end of the day, the client and Max come out of the office together and the client mentions that he is going to call an Uber to get to the airport. Hoping to impress the partners, Max offers to drive the customer in Max’s car.
When an SMS confirms a flight delay, the customer offers to treat Max with a drink. Max accepts and makes an illegal U-turn to head to a nearby bar. Tragically, as he negotiated the bend, Max collided with another car head on. Max, the customer and the other driver are seriously injured.
The partners find out about the accident. They are shocked. Momentary panic sets in.
Neither of them remember asking Max, whose shift was over, to drive the customer.
Max was in his own car and the airport is on its way to Max’s house. Max must have his own insurance. So other than losing the potential client, CapitalGains has nothing to worry about, right?
Making the illegal U-turn would likely put Max at fault for the crash and responsible for any resulting injuries.
But would CapitalGains also be responsible? Under the vicarious liability doctrine, an employer can be held liable for the tortious acts of its employees committed in the course of and in the course of their employment.
Generally, an employee is within the scope and scope of their employment when they take action to further the business of their employer or provide a benefit to the employer. However, an employer will generally not be liable if the employee deviates substantially from his duties for purely personal reasons.
For example, in an unreported Arizona case, Montoya v. Banner Health System (Ariz.Ct.App.Unpub. 2008), two doctors allegedly raced between two hospitals where they both worked. Focusing on the specific alleged wrongdoing, rather than the overall trip, the employer argued that the doctors’ alleged reckless conduct was a substantial departure from the job that made the employer immune from liability.
The Montoya court noted that “liability is the rule, immunity the exception”. Then he ruled that the doctors’ employer could be vicariously liable for their allegedly negligent (or even reckless) conduct, as it occurred while the doctors were driving for reasons related to the job ( going from hospital to hospital) which normally benefited their employer.
The bad news for the accountants is that stopping Max for a drink with the potential client on the way to the airport is unlikely to be considered a substantial departure from his duties. By volunteering to take the potential client to the airport, Max was giving CapitalGains a benefit. He was still helping and interacting with the potential customer when he decided to turn around for a drink.
Therefore, CapitalGains could be vicariously liable for Max’s negligent conduct.
Insurance policies that compensate for damage can prevent company assets from being used to satisfy a judgment when a company is responsible for personal injury or property damage.
As an accounting firm, CapitalGains probably has a Commercial Liability Policy (CGL) and with Max as an employee he likely has a Workers Compensation policy.
CGL policies cover many commercial risks. But CGL policies generally exclude injuries resulting from the use of a motor vehicle. Workers’ compensation benefits would only apply to Max.
This always leaves CapitalGains exposed to the liability of the potential client and the other driver.
On the bright side, while CapitalGains may be responsible for Max’s misbehavior, Max’s own auto policy likely applies. Max’s auto policy could even cover CapitalGains as the organization legally responsible for Max’s driving.
However, Max, as a recent graduate trying to save money on insurance premiums, likely had a personal auto insurance policy with the state’s minimum personal injury liability limits. The limit of liability for “bodily injury” is the maximum that the driver’s insurance policy will pay to an injured person when the driver is involved in an accident.
For example, California requires that most drivers have minimum personal injury liability limits of $ 15,000 for each person and up to $ 30,000 for all those injured in an accident. In Texas, the minimum liability limit for bodily injury is $ 30,000 for each person and up to $ 60,000 for each accident. In other states, $ 25,000 for each person, up to $ 50,000 for each accident is common, but not universal.
Depending on the state and policy, CapitalGains may have access to Max’s policy limits. Some states, such as Illinois, require coverage for persons or entities that may be vicariously liable for the driver’s conduct, while other states, such as California, do not require policies for insure persons or entities vicariously liable.
Unfortunately, given that this hypothetical accident resulted in two serious injuries, Max’s policy with the state’s minimum liability limits is unlikely to be sufficient to cover the injured driver and the customer. The client and the injured party can try to recover more money directly from CapitalGains. Because Max was within the scope and scope of his job, and because Max’s insurance is not sufficient to cover these responsibilities, CapitalGains may have to pay out of pocket – a possible major financial blow to a new business. .
CapitalGains could have done more to manage its risks. The owners, who are established and may have high limit auto policies and umbrella policies, could have taken the customer to the airport (or allowed Max to take one of their cars). They could have told Max that he was not allowed to work after hours and insisted that the potential client take a cab or an Uber.
Another risk mitigation strategy would be to purchase additional insurance policies, such as a commercial auto policy or an umbrella policy.
Unlike a pizza business or a business that owns and operates its own vehicles, an accounting firm is unlikely to perceive the need for a commercial auto insurance policy. But depending on the terms, a commercial auto policy could cover capital gains against liabilities that arise when employees use their own cars for business purposes.
An umbrella policy is a supplemental insurance policy that provides additional liability limits in addition to other insurance policies. An umbrella policy could provide an additional layer of coverage that protects CapitalGains against exposure when the damage exceeds the limits of its underlying policies that provide coverage, or for certain claims that do not fall under the underlying coverages, but in umbrella police covers.
This simple example illustrates how easily a business can become legally responsible for an employee’s conduct and the importance of having the right kind of insurance in the event of an unexpected disaster.
A good insurance broker can help businesses minimize these risks, helping them better understand and insure the risks they face.
Always refer to your policy and your state’s rules and regulations when considering available coverage.
The opinions expressed are those of the author. They do not reflect the views of Reuters News, which, under the principles of trust, is committed to respecting integrity, independence and freedom from bias. Westlaw Today is owned by Thomson Reuters and operates independently of Reuters News.