Building Your Business Business Insurance How Vicarious Liability Applies To Business Relationships By Marianne Bonner Marianne Bonner Facebook Twitter Marianne Bonner, a certified CPCU and ARM, has covered small business insurance topics for The Balance since 2013. She worked in the insurance industry for 30 years as an analyst and underwriter among other roles and holds multiple professional designations. Along with The Balance, Marianne has written many articles for International Risk Management Institute's Risk Report. learn about our editorial policies Updated on September 1, 2022 In This Article View All In This Article A Matter of Control Business Relationships General Liability Policies Commercial Auto Policies Frequently Asked Questions (FAQs) Photo: Westend61 / Getty Images Vicarious liability arises from the relationship between parties rather than from fault. It means responsibility is imposed on one party because of actions committed by another. Another name for vicarious liability is imputed liability. Key Takeaways Vicarious liability can apply to businesses when employees commit crimes, damage property, or otherwise create a liability.Vicarious liability can also apply to businesses when a non-employee uses company property, such as when an employee lets a friend borrow a company car.General liability and commercial auto insurance policies can help prevent financial loss from vicarious liability. A Matter of Control Vicarious liability may exist when one party directs the actions of someone else. Typically, the party in control benefits from the acts committed by the other person. Vicarious Liability Example For instance, suppose that Bob is voluntarily helping Ralph, his neighbor, construct a fence on Ralph's property. Ralph is much more knowledgeable about construction than Bob, so Bob is working under Ralph's direction. Ralph asks Bob to drive Ralph's truck to a local hardware store and buy some lumber. Bob is on his way to the store when he inadvertently causes an auto accident that injures Susan. Ralph might be liable for Susan's injuries because he owns the truck Bob was driving. Also, Bob was using the truck on Ralph's behalf when the accident occurred. Note Even though Ralph wasn't in the truck when the accident occurred, he can still be liable. His liability derives from his power to direct Bob's actions. Business Relationships Common business relationships can create vicarious liability. These situations may arise from employer and employee relationships, a business partnership relationship, corporate and chief executive officer (CEO) associations, as well as other interactions. Employer and Employee Employers may be held vicariously liable for torts committed by their employees. The employer's liability derives from a legal theory called respondeat superior, which is Latin for "let the master answer." When an employment relationship exists, the employer (master) has control over their employees (the servants). As a result, the employer may be sued by third parties who have been injured as a result of torts committed by employees. Most suits against employers that result from acts of employees involve allegations of negligence. Typically, the employer has a suit filed by a third party for an injury allegedly caused by an employee's negligent act. Employers may also be held vicariously liable for injuries caused by employees' intentional torts. For the employer to be liable, the intentional act must fall within the scope of the worker's employment. For instance, a bar owner could be sued by a patron who claims he was injured by a bouncer who assaulted him while ejecting him from the bar. Ejecting unruly patrons is part of a bouncer's job. Thus, the bar owner may be vicariously liable for the patron's injury. Partnership and Partner Partners act on behalf of the partnership they serve. If a partner commits a tort, the partnership may be held vicariously liable for any resulting injury to a third party. For example, Steve, Jill, and Beth are partners in a law firm. One day, Steve is in his office with a client when he accidentally knocks a heavy statue off his desk. The statue falls onto the client's foot, breaking several toes. The accident occurred when Steve was performing his duties as a lawyer for the benefit of the partnership. Thus, the partnership may be vicariously liable for the client's injury. Corporation and Director or Executive Officer Corporate directors and executive officers perform their duties to benefit the corporation. Consequently, a corporation can be held vicariously liable for torts committed by its directors and officers. Vehicle Owner and Permissive User A vehicle owner that allows another person (called a permissive user) to drive their auto may be vicariously liable for injuries a third party sustains in an accident caused by the driver. For example, Carl owns Classic Construction, a commercial building company. Bart, a friend of Carl's, stops by to visit a job site when Carl is working. Carl needs a new extension cord, so Bart volunteers to drive to a nearby hardware store to buy one. Carl accepts the offer, and he hands Bart the keys to his company-owned truck. Bart is on his way to the store in the truck when he inadvertently hits a pedestrian named Lisa. Because Classic Construction owns the vehicle Bart was driving when the accident occurred, the company may be vicariously liable for Lisa's injury. General Liability Policies Except for sole proprietorships, businesses aren't humans and cannot commit torts on their own. They are legal entities that act through their employees and other key individuals. Businesses can protect themselves against many types of claims arising from their vicarious liability by purchasing a general liability policy. The policy covers sums an insured party is legally obligated to pay as damages because of bodily injury, property damage, or personal and advertising injury. An insured business is covered for torts committed by employees, executive officers, or anyone else for whose acts the business is legally liable. Commercial Auto Policies Any business that uses autos should purchase a commercial auto policy. Assuming the business is listed as the named insured in the declarations, it is covered for its vicarious liability for accidents resulting from the use of any covered autos. The autos that qualify as covered autos depend on the symbols that appear in the declarations. The auto policy covers the named insured's legal obligation to pay damages for bodily injury or property damage caused by an accident that results from the use of a covered auto. The named insured is covered whether the accident results from their negligence (if the named insured is a sole proprietorship) or from the negligence of another driver. Frequently Asked Questions (FAQs) When is an employer not vicariously liable? An employer is only vicariously liable when the employee is acting within the course and scope of their employment. If the employee creates a liability on their own time, with their own property, and their actions had nothing to do with their employer, then the employer wouldn't be held vicariously liable. How can businesses protect from situations when they might be vicariously liable? Businesses can't avoid vicarious liability, but they can use business insurance policies to avoid financial loss from that liability. General liability and auto insurance policies are the two primary methods of protecting against financial loss from vicarious liability. Was this page helpful? Thanks for your feedback! Tell us why! Other Submit Sources The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy. Legal Information Institute. "Vicarious Liability." National Library of Medicine. "Responsibility for the Acts of Others."