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Maximizing protection: risky business, exposed assets and insurance coverage

7 minute read

REUTERS/John Schults

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October 15, 2021 - In 2020, over four million new businesses were formed in the United States — a 24% increase from 2019. A new venture faces countless challenges in its early stages — hiring, inventory, advertising, making payroll — just to name a few.

Thinking ahead to unplanned (and admittedly unlikely) incidents that could create liabilities that cause the new business to plummet or fail probably does not make the list. But a little awareness, coupled with proper 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. With tax season approaching, their business is growing. The partners decide to hire a recent college graduate, Max, to help around the office.

One day, a potential client from out-of-town visits for a meeting. At the end of the day, the client and Max walk out of the office together and the client mentions he is going to call an Uber to go 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 client offers to treat Max for a drink. Max agrees and makes an illegal U-turn to head to a nearby bar. Tragically, while negotiating the turn, Max hits another car head-on. Max, the client, and the other driver are seriously injured.

The partners find out about the accident. They are shocked. Momentary panic sets in.

None of them remember asking Max, whose shift had ended, to drive the client.

Max was in his own car and the airport is on the way to Max's house. Max must have his own insurance. So, except for losing the prospective client, CapitalGains has nothing to worry about — right?

Making the illegal U-turn would probably put Max at fault for the accident and liable for all resulting injuries.

But would CapitalGains also face liability? Under the doctrine of vicarious liability, an employer can be liable for its employees' tortious actions taken within the course and scope of their employment.

Generally, an employee is within the course and scope of their employment when they take actions to further their employer's business or provide a benefit to the employer. However, an employer generally will not be liable if the employee substantially departs from their duties for purely personal reasons.

For example, in an unpublished Arizona case Montoya v. Banner Health System, (Ariz.Ct.App.Unpub. 2008), two doctors were allegedly racing between two hospitals where they both worked. Concentrating on the specific alleged wrongdoing, rather than the overall travel, the employer argued the doctors' alleged reckless driving was a substantial deviation from employment that immunizes the employer against liability.

The court in Montoya noted that, "liability is the rule, immunity the exception." Then it ruled that the doctors' employer could be vicariously liable for their allegedly negligent (or even reckless) driving, because it occurred while the doctors were driving for an employment-related purpose (going from hospital to hospital) that normally benefitted their employer.

The bad news for the accountants is that Max's stop for drinks with the prospective client on the way to the airport probably will not be treated as a substantial departure from his duties. In volunteering to take the prospective client to the airport, Max was providing a benefit to CapitalGains. He was still assisting and interacting with the prospective client when he decided to make the U-turn to get drinks.

Therefore, CapitalGains might be vicariously liable for Max's negligent driving.

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

As an accounting firm, CapitalGains, probably has a commercial general liability (CGL) policy and with Max as an employee, it probably has a workers' compensation policy.

CGL policies cover many business risks. But CGL policies usually exclude injuries arising out of motor vehicle use. Workers' compensation benefits would apply only to Max.

This still leaves CapitalGains exposed to liability for the prospective client and the other driver.

On the bright side, although CapitalGains may be liable for Max's bad driving, Max's own auto policy probably applies. Max's auto policy might even cover CapitalGains as an organization legally responsible for Max's driving.

However, Max, as a recent graduate trying to save money on insurance premiums, likely carried a personal auto policy with the state's minimum bodily injury liability limits. The "bodily injury" liability limit is the most 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 carry minimum bodily injury liability limits of $15,000 for each person and up to $30,000 for all persons injured in an accident. In Texas, the minimum bodily injury liability limit 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 the policy, CapitalGains may have access to Max's policy limits. Some states, such as Illinois, make it mandatory to cover persons or entities that may be vicariously liable for the driver's conduct, whereas other states, such as California, do not require policies to insure vicariously liable persons or entities.

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 client. Both the client and injured party may try to recover more money directly from CapitalGains. Because Max was in the course and scope of his employment, and because Max's insurance isn't enough to cover these liabilities, CapitalGains may have to pay out of its own pocket — a possible major financial hit 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 client to the airport (or allowed Max to take one of their cars). They could have told Max he isn't allowed to work after hours and insisted that the prospective client take a cab or an Uber.

Another risk mitigation strategy would be to buy additional insurance policies, such as a commercial auto or umbrella policy.

Unlike a pizza business or a company that owns and uses its own vehicles, it is unlikely that an accounting firm would perceive a need for a commercial auto policy. But depending on the terms, a commercial auto policy could cover CapitalGains 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 coverage that protects CapitalGains from being exposed when damages exceed the limits of its underlying policies that afford coverage, or for certain claims that fall outside the underlying coverages, but within the umbrella policy coverages.

This simple example illustrates how easily a business can become legally responsible for an employee's conduct, and the importance of having the right type of insurance when unexpected calamity strikes.

A good insurance broker can help businesses minimize these risks, helping them better understand and insure the risks it faces.

Always refer to your policy and your state's rules and regulations when considering available coverage.

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Opinions expressed are those of the author. They do not reflect the views of Reuters News, which, under the Trust Principles, is committed to integrity, independence, and freedom from bias. Westlaw Today is owned by Thomson Reuters and operates independently of Reuters News.

Erin Mindoro Ezra is a partner with the Berger Kahn law firm in Irvine, Calif., focusing on Insurance Coverage and Labor and Employment. She has represented and advised clients in insurance coverage matters, particularly liability insurance, and counsels clients in connection with wage and hour disputes, investigations, discrimination, retaliation, and other employment matters. She can be reached at eezra@bergerkahn.com.

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