Tort Exceptions to Limited Liability

Every business owner should strive to limit liability for contracts and torts. As with the contract exceptions to limited liability, agency law is the key to understanding the exceptions to limited liability with respect to torts committed in the business.

As a brief definition, tort law is really personal injury law. The best example of a tort, perhaps, is negligence (i.e., carelessly causing injury to a person or damage to property).

When an individual commits a tort, he is legally liable to the aggrieved party. The aggrieved party can bring a lawsuit for monetary damages against the party who commits the tort. This is true even when the individual committing the tort is acting as an agent for a principal at the time he commits the tort. Simply put, the individual is always responsible for his or her actions, whether working or not.

Unfortunately, many individuals mistakenly believe that if they commit a tort while acting as an agent for a principal (e.g., while an employee is carrying out duties for the employer), they have no liability. This mistaken belief may arise for two reasons: insurance and the fact that the principal (the employer) also will be liable in this situation.

The employer, or more specifically the insurance policy carried by the employer, will pay off on the liability. However, the employee or agent has personal liability in this situation. The fact that the principal or employer has liability does not relieve the agent or employee from his or her personal liability. This is important to understand especially because there will not always be insurance that covers every situation or has sufficient face value to cover all of the damages involved. This is when the agent or employee is likely to be called on to pay the damages, discovering that the belief of no liability was mistaken.

Warning The small business owner must remember that he will be acting as an agent or employee of his business entity. Therefore, the owner is doubly exposed to liability when committing a tort, because the entity and the owner personally are responsible. This is potentially a very damaging exception to your efforts to limit liability inside and outside of your business.

If an agent commits a tort while carrying out the principal's business (or "acting within the scope of the business" as some courts put it), the principal is automatically also liable for the agent's torts under a doctrine called respondeat superior, or the master-servant rule. This type of automatic liability, which is termed vicarious liability, also applies in other areas of law. It means that no wrongdoing by the principal at all needs to be proven.

The principal could have acted carefully and reasonably, but it makes no difference when it comes to defending against a lawsuit. When an agent commits a tort, the only real defense that may be offered by the principal is the argument that the agent was, in fact, not carrying out the principal's business at the time he committed the tort.

John Jones, a purchasing agent for XYZ Materials, Inc., negligently hits a pedestrian while picking up a load of supplies in XYZ's truck. Both Jones and XYZ are liable. Jones is personally liable because he committed the tort. XYZ is liable because Jones was acting as its agent at the time he committed the tort.

For the owner of the entity, three exceptions exist to limited liability for torts committed in the business. The owner will have unlimited, personal liability for torts when the owner:

• personally commits a tort, which is especially possible in a personal service business
• is guilty of negligent hiring or supervision of employees
• hires agents or employees, or sells goods, in his personal capacity rather than as an agent of the LLC or corporation

Many times, all of these exceptions can be avoided. The last exception can be avoided in every case.

Work Smart An employer also may be able to avoid liability for its agents or employees through the use of independent contractors.