April 20, 2015

Asset Protection for Employees

A common misimpression is that an employee cannot be liable for work performed on behalf of his or her employer. It is certainly true that an employer does not have any claim against an employee for defects in the employee’s work, however, what about claims made by third parties for defects in work performed by an employee?

Case Study

The best way to answer this question is by way of an example encountered in our practice.

An employee worked as a quantity surveyor for a medium size surveying firm.  A couple of years previously, the employee had performed some work in relation to a proposed high-rise building. Notwithstanding the integrity of the employee, there were some defects in the work that caused damage to the building owner in an amount exceeding $7 million.

The building owner commenced action for the damage suffered. The employer was covered by insurance for these kinds of claims and therefore referred the claim to the insurer.

It is not uncommon when large claims are made for insurers to look for a basis of avoiding the claim. Claims may not be covered on a number of bases including:

  • The claim is caught by a policy exclusion;
  • Lack of full and true disclosure (insurance is an area where there is obvious motivation for an insured to hide the truth. Insurance contracts are therefore different to ordinary contracts and are governed by a principle of utmost good faith which requires the insured to disclose all material facts relating to the matter to be insured prior to entering into the policy. Failure by the insured to provide full disclosure gives a basis for the insurer to avoid a claim);
  • The insurer lacks the capacity to pay (recall the HIH saga).

In this case, the insurer claimed the employer failed to make full and true disclosure and therefore avoided the claim.

The employer was unable to meet the claim for $7 million and the building owner then made a claim against the employee.  The employee was liable for the full amount of the claim ($7 million) and, as one would expect, was unable to meet that claim and was subsequently made bankrupt.

Legal Position

A common belief is that the third party does not have a claim against the employee, and that any third party claim is only against the employer.

The legal position is in fact a little different. The reason for this is a principle referred to as vicarious liability. Under this principle, the employer is liable for any claims made against an employee. In the usual case, if a claim is made against the employee, the employer is liable to indemnify the employee.

However, an issue arises where the employer is unable to meet the claim. The Example above provides an illustration of the consequences.

Key points

  • Employees can be liable for claims made in respect of work they have performed where their employer is unable to meet the claim.
  • Professional indemnity policies include various exclusions which deny cover (for example, most policies covering accountants exclude claims based on Part IVA).
  • Employees should consider appropriate structuring of asset acquisitions and other arrangements to protect the value of assets held.
  • A suitable form of structuring should be considered as a form of insurance, with the lowest insurance premium.