By Kenneth Tuch and Laurence Cohen
As we all know, the use of affiliates is a common practice in the luxury ground transportation industry. Forming affiliations with other local companies and, increasingly, independent operators (IOs) gives you the back-up capacity necessary to “farm out” your overflow work, while having working relationships with providers outside your service area lets you offer your customers one-stop shopping wherever they travel. On the flip side, “farming in” work from affiliates helps to keep your chauffeurs on the road when business may be slow and provides an additional source of revenue for your company. And affiliations that work may ultimately lead to a merger or other type of formal business arrangement; something that many of us have been exploring given today’s challenging business environment.
Working with affiliates is for the most part a good thing; until of course something goes wrong. What if the passenger is overcharged by the affiliate? What if the passenger misses her flight because the affiliate driver was late or got lost? What if an incident occurs between the affiliate’s chauffeur and the passenger? What if there is an accident in which a passenger is seriously injured or worse while traveling with your affiliate? Any of a number of things can go wrong on any transportation job, even with the best chauffeurs and best affiliates. Unfortunately, we live in a highly litigious society, and the first step many customers will take when things go south is to pick up the phone and call their lawyer.
If there is a claim to be had, chances are that it will be asserted against everyone involved, including the referring and receiving transportation companies, the chauffeur, and any third parties (such as other chauffeurs if the claim arises out of a collision). “But all we did is take the reservation” you might say in your defense. “The chauffeur was not our employee; he is an independent operator.” While all that might be true, those factors may not be enough to get your company off the hook. There is a misconception among many that liability for the acts of an IO may be avoided by labeling them as such, and/or by entering into a written agreement with lots of boilerplate indemnification clauses holding that the contractor will pay for anything and everything if something goes wrong. Unfortunately, neither of these approaches are failsafe.
“...indemnification clauses are not a magic bullet. Should you choose to rely upon them, it is important that the provisions comport with the laws of your state.”With respect to the practice of labeling the affiliate an IO, courts typically disregard this and look to the nature of the relationship between the parties. The general rule in most jurisdictions is that a party who hires an IO is not liable for the negligent acts of the IO and/or its employees—the rationale being that where the hiring party has no right to control the manner in which the work is to be done, the risk of loss is more properly placed on the contractor. However, if a court finds that this is not the case, and that the hiring party exercised “direction and control” over the worker by specifying how the work is to be done or monitoring how the work is performed, the worker will be deemed to be the hiring party’s employee for liability purposes. Direction and control need not be extensive for liability to stick. Something as simple as providing route instructions for the affiliate chauffeur to follow could be held sufficient to make the affiliate chauffeur your employee for liability purposes, such that your company will be held responsible in whole or in part for anything they did wrong.
How about indemnification clauses? Will they protect you in the event of a future legal claim for something the contractor did? Maybe and maybe not. If the affiliate is a large well-capitalized company, you may be able to successfully seek indemnification. If, on the other hand, your affiliate is an IO who works out of his apartment, chances are he lacks the resources and/or insurance necessary to indemnify you for the full value of the claim. Even if you do have a deep pocket in which to reach if a claim is filed, there is no guarantee that an indemnification clause will be held enforceable by a court if the indemnifying party resists paying.
In some states, for example, clauses that require a party to indemnify another party for any claim regardless of fault have been found to violate public policy. Similarly, the courts of certain states refuse to uphold indemnity clauses that require the indemnifying party to pay damages caused by the party being indemnified. In other words, if a passenger misses her flight because the affiliate and its chauffeur were instructed by the referring company to take her to the wrong airport, the referring company cannot expect to enforce an indemnification clause stating that the affiliate will pay if there is a claim.
Thus, indemnification clauses are not a magic bullet. Should you choose to rely upon them, it is important that the provisions comport with the laws of your state (which may differ from those of an out-of-state affiliate). For this reason, any affiliate agreement you elect to enter into should be reviewed, if not drafted, by your attorneys and not those of the affiliate, and they should be drafted clearly as ambiguities are more often than not resolved by courts in favor of the indemnifying party.
Lastly, before embarking upon an affiliation arrangement, it might be a good idea to touch base with your insurance broker to see if your current general liability insurance policy offers protection against potential claims, to discuss increasing coverage if same is advisable, and to explore adding affiliates to your policy as additional insureds.
In summary, while most would agree that the plusses of working with affiliates far outweigh the minuses, it is important to keep in mind that affiliations are not without risk, and blindly relying upon IO designations is certainly not the answer to reducing those risks. Instead, your focus should be on partnering with properly licensed, experienced, and reputable affiliates; double-checking and refining your insurance coverage; and utilizing properly drafted affiliate agreements with effective indemnification provisions. Taking a hands-off approach to farmed-out jobs and informing your customer that an affiliate will be providing the services will further reduce the risk of being pulled into a claim if something should go wrong. If you take these steps and put appropriate safeguards in place, chances are your affiliations will for the most part be successful and trouble-free. [CD0621]
Disclaimer: The foregoing is provided solely as general information, is not intended as legal advice, and may not be applicable within your jurisdiction or to your specific situation. You are advised to consult with your attorneys for guidance before relying upon any of the information presented herein.
Kenneth Tuch, Esq. and Laurence Cohen, Esq. are partners with Tuch & Cohen LLP. They may be reached at email@example.com, firstname.lastname@example.org.