United States: Vicarious Liability Of A Corporate Employer For Punitive Damages

All too often, a corporate employer is sued for negligence for the actions of its employee on the theory of vicarious liability. The rationale behind such a suit is the employee was acting in the course and scope of his employment when the alleged negligent act occurred and that act is binding on the employer due to its responsibility to supervise and control the actions of its employee.¹ Typically, the employee has little or no assets, so the plaintiff brings suit against the employer and its deeper pockets. Thus, the responsibility of the employer becomes the paramount issue.

Vicarious liability suits are commonly seen when an employee is involved in a motor vehicle accident while in the course and scope of employment. On occasion, a plaintiff may argue that the conduct of the employee was so egregious as to warrant additional damages, and thus a punitive damages claim is brought on the theory of vicarious liability even with no evidence of direct liability on the part of the employer.

Punitive damages in civil actions are awarded not to compensate an injured individual, but rather to punish a person or corporation for their outrageous conduct and to deter them, and others like them, from engaging in similar conduct in the future.²Because of their extreme nature, most states have a stringent standard for even alleging a claim for punitive damages against any defendant.That standard becomes even more stringent when a plaintiff attempts to add a claim for punitive damages against a corporate employer for the actions of its employee.In the event a corporation is faced with such a claim for punitive damages, it should be aware of the answers to the following questions: (1) Are punitive damages even allowed or warranted against them on the theory of vicarious liability; (2) Are punitive damages based on the theory of vicarious liability insurable; and (3) If they are insurable, are punitive damages covered by its insurance policy? Answers to these questions differ from state to state but will enable corporations to prepare for such a suit and to possibly prevent an award of punitive damages against them.

Are punitive damages even allowed or warranted against a corporation on the theory of vicarious liability?

There are two main positions regarding the vicarious liability of an employer leading to punitive damages.³First, some jurisdictions hold an employer liable under the doctrine of respondeat superior simply as long as the employee was acting within the course and scope of his employment.⁴No fault on the part of the employer is required; it is liable for punitive damages merely because of the relationship between the two parties. On the other hand, some jurisdictions will not impose vicarious liability on an employer for punitive damages unless there has been some fault, or an independent finding of negligent conduct, on the part of the employer.Some states take this latter position even further and require a specific type of fault.Florida is one of these states and will be the focus of this examination.

In 1999, Fla. Stat. § 768.72 was amended to provide criteria for the imposition of punitive damages with respect to employers, principals, corporations, or other legal entities for the conduct of an employee or agent. Accordingly, an employer cannot be held vicariously liable for punitive damages caused by an employee unless the plaintiff clearly and convincingly proves the two prong test set out in §768.72(3).⁵ The first prong requires the employee was "personally guilty of intentional misconduct or gross negligence."⁶Despite the language of "gross negligence" in the statute, Florida courts have consistently held the degree of negligence necessary for punitive damages to be willful and wanton misconduct equivalent to criminal manslaughter, suggesting the required misconduct goes beyond gross negligence,⁷and be proven by clear and convincing evidence. It is therefore difficult for a plaintiff to meet the requirements of the first prong to show an employee acted willfully and wantonly and if that threshold prong is not satisfied, no claim can be made against the employer.

Should a plaintiff overcome this high standard relating to the conduct of the employee tortfeasor, he still has one more hurdle before making a valid claim against an employer for punitive damages under a theory of vicarious liability. A plaintiff must show (1) the employer "actively and knowingly participated in such conduct," (2) the employer "knowingly condoned, ratified, or consented to such conduct," or (3) the employer "engaged in conduct that constituted gross negligence and that contributed to the loss, damages, or injury suffered by the claimant."⁸ It should be noted that under the vicarious liability theory, the independent negligent conduct of the employer does not need to be attributed to a managing agent. The independent negligence necessary to meet any of these three requirements can be shown through any employee of the corporation.¹⁰Despite the degree of culpability required by the corporation, the changes to Florida's statute made it exceedingly more difficult to hold an employer vicariously liable for punitive damages. This second prong requires a plaintiff to allege andprove some specific fault on the part of the. However, the conduct of the corporate employer is not subject to the same heightened culpability as that of its employee. (i.e. willful and wanton disregard for life). Ordinary negligence is usually enough to meet the test.⁹

Other states have taken a similar approach to Florida requiring a specific type of fault by the employer by adopting Section 909 of the Restatement (Second) of Torts, which explicitly addresses the issue of when a principal may be liable for punitive damages because of the acts of an employee or agent.¹¹Section 909 provides: "Punitive Damages can properly be awarded against a master or other principal because of an act by an agent if, but only if: (a) the principal authorized the doing and the manner of the act, or (b) the agent was unfit and the principal was reckless in employing him, or (c) the agent was employed in a managerial capacity and was acting in the scope of employment, or (d) the principal or a managerial agent of the principal ratified or approved the act."

Regardless of which theory a state adopts (vicarious liability based solely on respondeat superior or vicarious liability based on some fault on the part of the employer), both require the employee engage in the wrongful conduct with the requisite degree of culpability - reckless indifference, gross negligence, wantonness or willfulness, depending on the jurisdiction. When some fault is required on the part of the employer to hold it vicariously liable for punitive damages, it will be left to a jury to determine if that independent negligence facilitated or contributed to the employee's conduct. Examples of this type of fault on the part of an employer include, but are not limited to, negligent hiring, negligent training, negligent supervision, negligent entrustment, and actual or constructive knowledge an employee would engage in wrongful conduct likely to injure another (i.e. allowing a knowingly intoxicated employee to drive away from a company meeting). In establishing an employer's liability, the issue that usually arises is employee competence and what that employer did to verify its employee's qualification. This is easily addressed by an employer having a solid policy regarding background checks and driver history checks. Corporations should also have written policies in place regarding safety and expectations of their employees and require all of their employees to undergo periodic training and seminars related to safety. In the same vein, prohibited conduct should be made clear by an employer so it does not appear that the corporation is "condoning" or "ratifying" actions that are not identified.

Some states are more liberal in allowing punitive damages against a corporation on the theory of respondeat superior while others, like Florida, are more strict and require some fault on the part of the corporation before they can be held liable. It is important for companies to know which view the particular state takes when involved in litigation.

Are punitive damages insurable?

In the event punitive damages are awarded, the pertinent issue becomes whether the damages are covered by a corporation's liability insurance policy since punitive damages are not insurable in all states. Insurance policy language plays a significant role in determining whether punitive damages are covered. Many policies may contain explicit language excluding such damages from coverage. However, in the event the policy is silent or ambiguous, public policy is usually the focus of a court's insurability analysis. Because the goal of punitive damages is to punish the wrongdoer and deter future conduct, many courts find these objectives would be frustrated by allowing the wrongdoer to extricate himself from liability by shifting responsibility to an insurance carrier. If protection was afforded by insurance, this might not deter such conduct and thus, the public policy driving the damages would be circumvented.

In making this insurability determination, many states distinguish between directly-assessed punitive damages and those that are vicariously assessed. Some states allow both to be paid by an insurance company; some states allow an insurer to pay one, but not the other; and some states do not allow either to be paid. For example, directly assessed punitive damages are not insurable in Florida based on the public policy reasoning described above, but vicariously assessed punitive damages are insurable.¹² The reasons for this exception are that punishment and deterrence are not achieved when the only liability of an employer is based on respondeat superior.In these cases, corporate employers would not be able to afford the risk of handing over duties and responsibilities to employees if they were not covered by liability insurance.¹³

Corporate employers should be aware of the law in their states as it could mean the difference between having an insurance carrier covering some or all of the award of punitive damages or being directly accountable.

Are punitive damages covered by the insurance policy?

Depending on whether punitive damages are allowed, and if so, if they are insurable, corporate employers will also need to know if their own liability insurance policy covers punitive damages. A company may reside in a state that allows the awarding of punitive damages for the vicarious liability of an employer, but that same state may also allow insurance to cover an award for vicariously-assessed punitive damages. On the other hand, the insurance policy may exclude coverage for punitive damages altogether, or in a specific scenario. In that case, the corporate employer will have to absorb the loss and pay the award out of its own pocket, regardless of the state's law. Thus, it is imperative that a corporation know when and how it is covered in the case of a punitive damages award.

Conclusion

It is clear that states differ on when a corporate employer may be vicariously liable for punitive damages based on the conduct of its employees. Some states will find an employer vicariously liable based solely on the employer-employee relationship. On the other hand, states such as Florida require some additional fault on the part of the employer (in addition to the conduct of the tortfeasor) to hold the employer vicariously liable for punitive damages. In the jurisdictions following the latter theory, the circumstances where an employer can be vicariously liable for punitive damages vary, but clear and convincing proof the employer knowingly and actively participated in the conduct of its employee or condoned, ratified or consented to such conduct by its employee is typically required. Employers should familiarize themselves with situations where this might occur and make their best attempt to avoid situations that might imply they either ratified or acted in a way that would bring them under the umbrella of a vicarious liability claim. Employers should also have strict safety policies and training programs in place for all of their employees, as the actions of any employee, not just management, can meet the requirements to hold an employer vicariously liable and potentially place them on the hook for punitive damages.

Footnotes

1. When an employee is acting within the course and scope of his employment is not addressed in this article.

2. See Section 908 of the Restatement (Second) of Torts.

3. A corporation can also be directly liable for punitive damages, but only if there is evidence of a willful and malicious act on the part of a managing agent of the corporation. That subject will not be addressed in this article.

4. See Stroud v. Denny's Restaurant, Inc., 532 P. 2d 790 (Or. 1975) and Thorne v. Contee, 565 A. 2d 102 (Md. 1989). Compare with Florida where courts have held that the owner of a motor vehicle is not liable for punitive damages solely by reason of its status as employer. See Alexander v. Alterman Transport Lines, Inc., 350 So. 2d 1128, 1130 (Fla. 1st DCA 1977). See also Palmisano v. Toth, 624 A. 2d 314 (RI 1993) (reaffirming that under Rhode Island law, punitive damages may not be awarded on a theory of respondeat superior.

5. See also Mercury Motors Express, Inc. v. Smith, 393 So. 2d 545 (Fla. 1981); Schropp v. Crown Eurocars, Inc., 654 So. 2d 1158 (Fla. 1995).

6. "Gross negligence means that the defendant's conduct was so reckless or wanton in care that it constituted a conscious disregard or indifference to the life, safety or rights of persons exposed to such conduct." Fla. Stat. § 768.72(2)(b).

7. See White Constr. Co., Inc. v. Dupont, 455 So. 2d 1026 (Fla. 1984).

8. Fla. Stat. § 768.72(3).

9. See Estate of Despain v. Avante Group, Inc., 900 So. 2d 637 (Fla. 5^th DCA 2005), reh'g denied, (May 4, 2005).

10. See Schropp v. Crown Eurocars, Inc., 654 So. 2d 1158, 1160-61 (Fla. 1995).

11. See Duncan v. Hennington, 835 P. 2d 816 (NM 1992).

12. See U.S. Concrete Pipe Co. v. Bould, 437 So. 2d 1061 (Fla. 1983).

13. See Id.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.