Employers Watch Out! The Developing Law On Vicarious Liability

In May 2001, the House of Lords decision in Lister & Others v Hesley Hall Limited ¹ overruled the Court of Appeal’s previous decision in Trotman v North Yorkshire County Council ² that sexual assault fell outside a deputy headmaster’s course of employment. Insurers will no doubt wish to consider the potential implications of this and other recent court decisions extending the concept of an employer’s liability for the actions or omissions of its employees.

The House of Lords in Lister held that a boarding house was liable for claims where there had been sexual abuse on young pupils by a warden who was one of their employees entrusted with the care of the boys. The Lister decision has since been followed in a recent case concerning sexual abuse in a children’s home, in which damages totalling more than £300,000 were awarded in favour of 13 victims ³ . It remains to be seen how Lister will be applied in other instances of sexual or physical abuse within an employment context and where the dividing line will be drawn.

Clearly policy issues are at work when the court considers a childhood victim’s ability to recover compensation for the damage to their lives in cases involving sexual abuse. Nevertheless, the way in which the House of Lords approached the issue and came to its conclusion is significant. Its analysis appears to apply not only to cases of sexual abuse but also to other scenarios. Indeed, Lord Clyde in his judgment in Lister, stated that cases which concern sexual harassment or sexual abuse committed by an employee should be approached in the same way as any other case where questions of vicarious liability arise. In recent weeks the Lister decision has been cited and relied upon in a case involving the vicarious liability of a solicitors’ firm for the acts of one of its employees in a breach of trust claim ⁴ .

In Lister, the court, at first instance had already rejected an argument that the employers were negligent in their care, selection and control of the warden, leaving only the claim based on vicarious liability to be considered. On the issue of vicarious liability, Walker J at first instance, felt bound to follow the decision in Trotman but circumvented it by holding that the employer was vicariously liable for the warden’s failure to report to his employer his intentions (before the acts of abuse) and the harmful consequences to the children (after acts of abuse). His reasoning was that the employer had admitted a duty of care towards the pupils. To carry out that duty it appointed the warden to care for the boys. The warden’s failure to report the risk of harm, or that harm had occurred, was a failure of his duty to the boys in his care, for which the employer was vicariously liable. Walker J’s finding of vicarious liability on this ground was reversed by the Court of Appeal, which, applying the Trotman case, concluded that the claim against the employer should be dismissed.

The House of Lords took a different approach. It overturned the Trotman decision and held the employer liable for the warden’s intentional assaults, not merely for his failure to perform his duty to take care of the boys. The court considered the law "mature enough to hold an employer vicariously liable for deliberate, criminal wrongdoing on the part of the employee"⁵ . The test to be applied is firstly to determine whether there is a duty of care assumed by the employer to the claimant. If so, the court then assesses the nature of those duties, broadly defined, which the employer entrusted to the employee and whether the torts or actions of the employee are so closely connected with their employment that it would be fair and just to hold the employer vicariously liable.

The question which remains following this judgment concerns the employer with entity cover under its D&O insurance. Is the vicarious liability in instances of criminal acts by employees excluded, on the basis that it constitutes a loss in connection with a claim made against the insured company, or its directors or officers, within the criminal act or omission exclusion commonly found in such policies? To determine this, the nature of an employer’s vicarious liability needs to be addressed.

The problem is that no-one now knows exactly where the concept of vicarious liability originally came from or its legal basis. It has developed as an instrument of policy aimed at delivering practical justice. It is likely that a closer analysis of its nature may be required by the courts when considering the insurance implications.

If liability arises essentially from a breach of the employer’s duty to the claimant, then is the event in question merely a negligent act, error, omission, neglect or breach of duty within the scope of the Wrongful Acts covered under the standard policy? The court’s decision in Lister appears to make such a conclusion difficult. There are comments by some of the judges in the Lister case, notably Lord Hobhouse, which emphasise the importance of there being a duty on the part of the employer to the claimant before vicarious liability can be established.

However, Lord Millett clearly stated disapproval for the approach adopted by the judge at first instance, namely to find a duty which the employer owed to the claimant and which had been breached because of conduct by the employee falling short of a deliberate criminal act (the warden’s failure to warn or advise). Lord Millett’s interpretation suggests that the nature of the vicarious liability may be more closely connected to the act of the employee than to the duty owed by the employer to the claimant. Attempts to separate the two to avoid the application of the criminal act exclusion clause in a standard D&O wording may therefore encounter some difficulty. The court’s application of Lister in the Bryn Alyn case appears to accept that the vicarious liability may not necessarily be based in negligence in the case of deliberate sexual assault, but the employer may nevertheless be vicariously liable for that conduct if it is sufficiently connected with their employment. This view is borne out by earlier decisions holding the employer vicariously liable for criminal acts of its employees such as theft and fraud connected with their employment.

One can foresee that in some instances there may be considerable pressure, for pragmatic and policy reasons, to favour an interpretation affording coverage for the benefit of an employer and thus ultimately the claimant. Judicial ingenuity therefore may yet find a way around the exclusion clause. In the meantime, insurers would do well to review their policy wordings. They may wish to consider the nature and type of claim they are prepared to provide cover for in the context of vicarious liability claims and to ensure that their position is clearly reflected in the wording.

1) Lister and others v Hesley Hall Limited [2001]UKHL22; (2001) 2 WLR 1311, HL.

2) Trotman v North Yorkshire County Council [1999] IRLR 98 and the Times 10.09.98

3) Various Claimants v (1) Bryn Alyn Community Homes Limited and (2) Royal & Sun Alliance plc. (QBD - Connell J - 26/06/2001, unreported)

4) Balfron Trustees Ltd v Peterson & Ors (Chancery Division - Laddie J -09/07/2001, unreported)

5) Lord Millett in Lister and others v Hesley Hall Limited (2001) 2 WLR 1311, at p1343