You likely carry E&O insurance to cover mistakes made by your agency employees. While you hope no one makes errors or omissions while administering insurance policies, those are expensive incidents, and it is better to have coverage–just in case.
But what about independent contractors? Can you be liable for their errors in the same way? While there are limited circumstances for respondeat superior liability for independent contractors, this possibility exists if you are not careful. Here is how to recognize liability possibilities and prevent them.
The Doctrine of Respondeat Superior
The respondeat superior doctrine (also called vicarious liability) refers to any employer’s liability for an employee’s actions or misactions. It translates directly as “let the master answer” and applies to employees who act negligently while in the course of their employment.
Professional negligent acts unique to insurance agencies may include:
- Failure to recommend appropriate coverage for a client
- Failure to explain coverage correctly
- Administrative errors
- Poor risk analysis
- Failure to inform clients of policy changes, including impending cancellation
- Failure to communicate accurate information
Besides professional risks, respondeat superior also applies to any incidents happening in the scope of employment. One example is car accidents.
Let’s say one day your agent decides to visit a client at their office and deliver a policy. Your agent texts another client and runs a stop sign on the way there. They t-bone another car, causing injuries to the driver and passengers. Your agency, and its small business insurance, is likely responsible for those injuries.
However, if that same agent drives home and runs the stop sign, you are not liable. Why? Because the agent clocked out and was not on agency business during the accident.
Fortunately, respondeat superior does not apply to an employee’s intentional misconduct unless you are directly linked. So, if the same insurance agent attends a business lunch and starts a bar fight with agents from a competing business, you are likely not liable. But if you (as the owner) also participated in the bar fight, you may face respondeat superior and personal liability.
Can Respondeat Superior Apply to Independent Contractors?
As the pandemic encouraged hiring more independent contractors, it naturally led to a new question. Can you face respondeat superior liability for your independent contractors’ negligent acts? No one likes to think their employees can get them in legal trouble, so respondeat superior and vicarious liability are alarming legal theories.
Generally, the answer to this question is no. Independent contractors should carry their own small business and E&O insurance to cover their negligent acts. You should have a statement in your independent contractor agreement that spells that out specifically.
If you face liability for an independent contractor, it happens for two reasons. First, your work falls under one of the general exceptions in the respondeat superior doctrine. Second, you misclassified your independent contractors.
General Exceptions
Case law recognizes three exceptions to liability for independent contractors:
- Negligent selecting, instructing, or supervising: This exception goes to whether you adequately vetted and instructed an independent contractor. It can apply if you hire an insurance agent who is unlicensed or has a lengthy disciplinary history. If that individual later commits an error or omission, you may face liability due to failure to select someone competent.
- Obligation to the public: This exception is unlikely to apply to insurance agencies. It handles matters where a contractor must safely perform work. For example, if a trucking company fails to maintain its vehicles and assigns a malfunctioning vehicle to a driver, anyone injured by a malfunction may pursue the company for damages.
- Inherently dangerous activities: This exception does not apply to insurance agencies. It applies to independent contractors who handle heavy machinery or perform hazardous work. In one example, a company faced liability after an independent contractor it hired fell a tree and crushed another person’s leg.
So, the exception most likely to apply to your agency is negligent selection, instructing, or supervising. If you do not have a process for vetting potential independent agents, now is an excellent time to create one.
Misclassified Independent Contractors
As mentioned above, respondeat superior usually only applies to employee-employer relationships. Even if you do not meet any of the exceptions listed above, you can still face liability if your independent contractor is technically an employee.
This issue arises unintentionally in most cases. Some unscrupulous employers use independent contractors to get out of paying benefits and overtime, but most misclassify employees out of ignorance or habit. So, it is essential to know how to avoid confusing independent contractors and employees.
When determining an insurance agent’s status as an independent contractor, a court may consider:
- Who sets the agent’s schedule
- Who hires employees to work for the agent
- Whether the agent uses office space in your office or rents separate space
- Who handles payroll taxes
- Who directs the work–the agent or your agency
- Who pays for the agent’s continuing education and licensing fees
If you are the one who handles these elements for an independent agent, you may have a respondeat superior issue. You may need to delegate tasks back to the agent to keep them as independent contractors.
However, courts determined insurance agencies can retain some control over independent insurance agents. You can enforce these restrictions without risking respondeat superior liability:
- Compliance with company policy, guidelines, and instructions
- Authorization before discharging any insurance contract
- Noncompete, nonsolicitation, and confidentiality agreements
There are cases where you may need to make an independent contractor an employee. While this does not decrease your respondeat superior liability, it prevents other legal trouble. Misclassification also leads to wage and hour violations, workers’ compensation coverage, and other employment law issues.
Avoid Respondeat Superior Liability
There are two ways to avoid respondeat superior liability with your independent contractors.
First, thoroughly assess any insurance agents you consider becoming independent contractors for your agency. Check their licensing and E&O history. Consider running through court records to see if their name is on any bad faith lawsuits. If they do not seem upfront about their work history or do not have their own clients, definitely beware of them.
Second, clearly define each of your independent contractor relationships. Your agreement should establish that the independent agent is responsible for their license, office space, equipment, and support staff. Once you sign that agreement, stay out of the agent’s staffing, scheduling, and financial issues. When you start meddling, you appear more like an employer than a party to a contract. Focus on the end product rather than the process of getting to it.
Also, know that it is easy to slip into bad habits concerning independent contractors. Monitor how the relationships with your independent contractors evolve. If you find they start working exclusively for your agency or your agency depends heavily on them, you may wish to change their status. Most importantly, make sure you are not crossing the line and treat them as employees. Listen to feedback and adjust when needed.
You can avoid respondeat superior liability with good agency management skills. Gaining this knowledge helps you better assess which relationship is more appropriate for your needs–independent contractors or employees. Also, carry reliable E&O insurance covering you, your employees, and any independent contractors who may be misclassified.
The American Agents Alliance provides E&O insurance and connects you with consultants who help with agency management. Become a member to learn more and build your agency better. You will gain trusted partners and resources that assist you with informed decisions.
