Optimization of protection: risky activity, 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 stages – hiring, inventory, advertising, payroll – to name a few.

Anticipating unforeseen (and admittedly unlikely) incidents that could create liabilities leading 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:

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Three partners at an established accounting firm decide it’s time to open their own small accounting firm, CapitalGains, LLP. As tax season approaches, their business grows. The partners decide to hire a recent college graduate, Max, to help out in the office.

One day, a potential client from out of town goes to a meeting. At the end of the day, the client and Max walk 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 client in Max’s car.

When a text message confirms a flight delay, the customer offers to buy Max a drink. Max agrees and makes an illegal U-turn to head for a nearby bar. Tragically, while negotiating the bend, Max hits another car head-on. Max, the customer and the other driver are seriously injured.

The partners discover the accident. They are shocked. A momentary panic sets in.

None of them remember asking Max, whose shift was over, to drive the client.

Max was in his own car and the airport is on his way to Max’s house. Max must have his own insurance. So other than losing the potential customer, CapitalGains has nothing to worry about – right?

Doing the illegal U-turn would likely make Max responsible for the crash and liable for any resulting injuries.

But would CapitalGains also be responsible? Under the doctrine of vicarious liability, 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 of their employment when they take action to further their employer’s business 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 case in Arizona, Montoya v. Banner Health System, (Ariz.Ct.App.Unpub. 2008), two doctors reportedly raced between two hospitals where they both worked. Focusing on the specific alleged wrongdoing, rather than the entire trip, the employer argued that the doctors’ alleged reckless conduct was a substantial departure from duty that immunizes the employer from liability.

The Montoya court noted that “responsibility is the rule, immunity the exception”. Then it ruled that the doctors’ employer could be vicariously liable for their allegedly negligent (or even reckless) conduct, because it occurred while the doctors were driving for a job-related purpose ( going from one hospital to another) which normally benefited their employer.

The bad news for accountants is that Max’s stop for a drink with the potential client on the way to the airport is unlikely to be treated as a material breach of duty. By volunteering to take the potential client to the airport, Max was providing an advantage to CapitalGains. He was still helping out and interacting with the potential customer when he decided to turn around to get some drinks.

Accordingly, CapitalGains may be vicariously liable for Max’s negligent conduct.

Insurance policies that indemnify damages can prevent business assets from being used to satisfy a judgment when a business is liable for injury or property damage.

As an accounting firm, CapitalGains probably has a commercial general liability (CGL) insurance policy and with Max as an employee, it probably 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 still leaves CapitalGains exposed to the liability of the potential customer and the other driver.

On the bright side, while CapitalGains may be responsible for Max’s misbehavior, Max’s own car policy likely applies. Max’s car policy might even cover CapitalGains as the organization legally responsible for Max’s driving.

However, Max, as a recent grad trying to save money on insurance premiums, probably had a personal auto insurance policy with the state’s minimum bodily injury liability limits. The bodily injury liability limit is the maximum that a driver’s insurance policy will pay to an injured party when the driver is involved in an accident.

For example, California requires most drivers to have minimum bodily injury liability limits of $15,000 for each person and up to $30,000 for everyone 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 state and policy, CapitalGains may have access to Max’s policy limits. Some states, such as Illinois, mandate coverage for persons or entities who 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, since this hypothetical accident resulted in two serious injuries, Max’s policy with the state’s minimum liability limits is probably not enough to cover the injured driver and the customer. Both the customer and the injured party can try to recover more money directly from CapitalGains. Because Max was within the scope and scope of his employment, and because Max’s insurance is not sufficient to cover these liabilities, 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 car policies and umbrella policies, could have taken the client to the airport (or allowed Max to take one of their cars). They could have told Max he wasn’t allowed to work after hours and insisted the potential customer 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 restaurant or a business that owns and uses its own vehicles, an accounting firm is unlikely to see the need for a commercial automobile 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 an excess insurance policy that provides additional liability limits on top of other insurance policies. An umbrella policy could provide an additional layer of cover that protects CapitalGains from being exposed when damage exceeds the limits of its underlying policies which provide cover, or for certain claims which do not fall within the underlying covers, but within umbrella police covers.

This simple example illustrates how easily a business can become legally liable for an employee’s conduct and the importance of having the right kind of insurance in case of an unexpected disaster.

A good insurance broker can help businesses minimize these risks, by 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.

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The opinions expressed are those of the author. They do not reflect the views of Reuters News, which is committed to integrity, independence and non-partisanship by principles of trust. Westlaw Today is owned by Thomson Reuters and operates independently of Reuters News.


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