Starting and growing a small business is hard work. The last thing you need is for an accident caused by a contractor or employee to put all of your efforts at risk.
Unfortunately, that is exactly what can happen if you are not properly protected. Contingency liabilities can leave you and your business financially liable for actions that were not under your direct control.
Contingency liability issues are something that every business owner should understand, because even if you play by the rules and have stringent safety polices in place, you could find yourself in court due to the actions of an agent, employee or contractor.
Luckily, there are a few contingent liability insurance products that can help mitigate these risks.
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Contingent liability goes by different names. It is also referred to as indirect liability and vicarious liability, which is probably the most common term used to refer to this particular risk.
Vicarious liability simply means that you can be held legally responsible for another person’s wrongdoing or poor work because of the way legal relationships work.
Say you hire a contractor to paint your building and while doing the job, they drop a paint can that hits a customer walking into your business. You could be held liable for both the medical bills and the cost of a lawsuit if they decide to sue.
Medical bills can be a huge expense, and a lawsuit takes those costs to a whole new level. A 2010 study conducted by the Institute for Legal Reform of the U.S. Chamber of Commerce found that small businesses paid $105.4 billion in expenses related to lawsuits in 2008, which is roughly $118 billion in today's dollars.
While the painting company should technically be liable, if they are uninsured, underinsured, or not properly licensed, your company could be held liable for the damage.
It’s not just direct contractors that come with vicarious or indirect liability. If they hire a subcontractor that causes an injury on your business premises, the liability may make its way back to you and your business.
Employees are a common source of contingent liability, and your business will absolutely be held liable for their actions.
Say you own a convenience store and an employee cleans up a spill but forgets to put out a wet floor sign, even though you reminded them about the sign, and a customer slips on the wet spot and falls. Your business will be on the hook for your employee's actions.
Basically, although your employee is directly responsible for the fall and not providing a safe environment for your customers, they were acting on behalf of your company. Your company is legally responsible for making sure employees follow safety rules.
If the customer is injured and decides to sue, your business (and you personally) can be held liable for legal costs, as well as any settlements or judgments resulting from the lawsuit.
A Few Common Sources of Contingent Liability
It’s important to know just where your indirect liability lies. Here are some of the most common sources of vicarious liability:
- Employees: This is a big one. Legally, your employees must be acting within the scope of their job duties for liability to transfer to you or your business. It makes no difference if they fail to follow your directions or an accident happens due to actions they perform doing their job, your business is liable.
- Independent Contractors: While hiring an independent contractor should shield you from liability issues, that is not always the case; they do come with some indirect liability. You should always verify that any independent contractors you hire are fully insured and bonded. If they lack insurance or are carrying low coverage levels, you can end up on the wrong end of a lawsuit.
If you are considered negligent for hiring a contractor who is not qualified to do the work you hired them to do, liability will fall to you.
- Agents: Legally, an agent is considered to be anyone who works on behalf of someone else. Agents have the authority to create or alter legal relationships between businesses and third parties, such as suppliers, customers, and even wholesalers. An agent is typically an independent contractor or employee.
In most cases, liability would be shared between the agent and you, as the principal of the business. This means that anyone injured by the actions of the agent could come after both of you for damages.
Contingent Liability Insurance Can Protect Your Business
The truth is, there is no way to escape vicarious liability unless you are the only employee and never use outside contractors or agents. Fortunately, there are insurance products that will protect you and your business from mistakes made by employees and contractors.
Here is a quick rundown of the types of insurance that offer contingent liability protection:
- General Liability: This offers a variety of protections, and one is indirect liability. A general liability policy for a business offers the following coverages:
- Bodily Injury: This coverage protects you if a customer or client is injured on your property. It covers injuries and legal bills up to your policy limits, and protects you if the injury is caused by the actions or inaction (didn’t put up that wet floor sign) of your employees or even contractors working for your business.
- Property Damage: This covers damage you may do to a client’s property. If you or one of your employees spills a cup of coffee on a client’s server, which not only damages the server but also causes data loss, this portion of your general liability policy will cover the damages.
- Personal Injury: This covers issues such as slander and libel. If one of your employees is overheard making false and slanderous statements about one of your clients and the client sues, the personal injury section of the policy will pay for the damages.
- Errors and Omissions Insurance: This is also called professional liability coverage and it protects you from mistakes or negligence that results in financial loss for your client. It will cover the cost of legal defense and any judgments or settlements.
Malpractice insurance is an excellent example of errors and omissions coverage, but many types of professionals can benefit from these policies. Lawyers, real estate agents, IT professionals, insurance agents, and architects are all at risk of lawsuits due to mistakes or negligence commited by them or their employees.
Lawsuits can easily run into the hundreds of thousands of dollars, so errors and omissions coverage can be a real financial lifesaver for your business.
- Workers' Compensation Insurance: This will help cover the cost of injuries or accidents that happen to your employees while they are on the job, regardless of whether you are responsible for causing the accident or injury.
- Commercial Auto Insurance: Your business also faces contingent auto liability issues. If your employees, contractors or agents drive company vehicles on a regular basis, you should consider a commercial auto insurance policy. Personal car insurance policies do not offer protection if the vehicle is being used for commercial purposes.
A commercial policy will protect both the driver and your business if one of your employees is driving a company car. However, if your employee is driving their own vehicle on a company errand and is in an accident, a commercial policy will protect your business from lawsuits, but it will not cover your employee’s car. When on company business, employees and agents should be in company cars to be fully protected.
This can also be an issue for companies such as truck brokers who do not own the equipment being used because they use independent agents.
If an independent agent (such as a truck driver who owns their own truck) is working for your company and lets their truck insurance lapse or their policy is cancelled, you can be held liable if they are in an accident that causes damage to others.
Althhough the driver is responsible for providing their own insurance, and they provided proof of coverage before the job started, if their policy lapses while working on a job for your company, it's possible you can be held liable.
Contingent auto liability insurance will help protect your business in these situations.
Where Can I Get Contingent Liability Protection?
Accidents, mistakes and lawsuits happen every day in the world of small businesses. You need to make sure you protect what you have built. Contingency insurance will make sure you are covered when something happens.
An independent agent can help you determine what risks your business faces, as well as the best policy options to protect you and your business. Even better, they will do all of the legwork of shopping for a policy and present you with the best option for your needs.
There are a couple of things to consider when shopping for insurance that will protect you against contingent liability:
- Claim Limit: The amount of coverage needed will vary depending on the industry you are in and your location. Check with other industry leaders regarding coverage levels. An agent who specializes in your industry can also help you determine proper coverage levels.
- Defense Costs: When shopping for a general liability or errors and omissions policy, look to see if defense costs are subtracted from your claim limit. If they are, this leaves less money on the table to pay off any resulting judgments or settlements.
Start shopping today for a contingent liability insurance policy to make sure your business is fully protected.