tag:blogger.com,1999:blog-6841352.post-1107138053745429552005-01-06T18:20:00.000-08:002005-01-30T18:20:53.746-08:00Call me crazy, but the idea that society is willing to impose liability on one party for the acts of another is fascinating to me. Of course, it isn't just that we are willing to do this, but rather trying to figure out when we are willing to do this. Today, while I was substitute teaching for a colleague in Business Organizations, I discussed a recent New Jersey case in which a "rogue" law firm partner committed malpractice and stole client funds. In addition, this partner lied on a malpractice insurance application, and the insurance provider was attempting to rescind the policy. The case is complex, but it boiled down to a question of whether the malpractice insurance provider should be bound to a policy that was issued based on a misrepresentation by the rogue partner. On the one hand, this seems like a simple question of agency law. Every partner is an agent of the partnership; therefore, the agent's actions are the partnership's actions; therefore, the partnership cannot be protected by the policy because it was obtained under false pretenses. <br /> <br />But the trial court in this case had an interesting take on this issue, concluding that we should not punish all of the partners by rescinding the policy when only one of the partners lied. This reasoning would result in the insurance company -- rather than the law firm partnership -- bearing the burden of the partner's wrongdoing. The possible responses to this are many. We might say that the "innocent" partners should be more careful in selecting their fellow partners. Or that they are not really so innocent because they should have been monitoring the rogue partner more closely. We might also argue that they received the benefit of the agency relationship and now they must bear the burden. <br /> <br />All of these are perfectly acceptable responses, and the appellate court seemed to embrace this line of reasoning, ruling that the policy should be rescinded. But then add this fact: the law firm partnership was a limited liability partnership. As a result of this decision, the insurance company is off the hook. And the innocent partner is exposed only to the extent that he had money invested in the partnership. If the obligation exceeds the partnerships assets -- which appears to have been true in this case -- the big loser will be the third party, who suffered a loss, but now has no possibility of full compensation. <br /> <br />All of this makes me wonder again about the interplay of vicarious liability and limited liability. Does our current allocation of burdens make sense? Something tells me it doesn't, but I need to do more work on this before I can be sure. <br />popuptoasterhttp://www.blogger.com/profile/14178782569125416684noreply@blogger.com