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Does Settling with a Negligent Employee (Agent) Prohibit You From Pursuing His Employer (Principal)?

Does Settling with a Negligent Employee (Agent) Prohibit You From Pursuing His Employer (Principal)?

Admittedly, this post veers a bit into nerdy legal speak.  But it discusses an important evolving issue in the law that affects many people.  In legal speak, it is principal/agent liability. Here is a plain-English example of how it arises:  a truck driver is an employer of a major corporation.  The employee runs a red light and t-bones a car, injuring a passenger. The passenger’s medical bills total $250,000.00.  The passenger sues the employee (referred to as the agent) and the major corporation/employer (referred to as the principal) for negligence.  The agent only has $25,000.00 in insurance and wants to resolve the claim by paying the $25,000.00 policy.  But the principal refuses to pay anything and wants to go to trial.  Shouldn’t the injured passenger be allowed to settle with the agent (allowing the injured passenger to obtain some compensation while allowing the agent to buy his peace) and still be able to pursue the principal?

Traditionally, the law has prohibited this, and most jurisdictions still prohibit it.  Based on English common law (where our justice system comes from), if you settle with the agent, you automatically release the principal as well.

This puts both the injured passenger and the agent in a difficult situation.  In our example, the injured passenger is unlikely to give up his entire $250,000.00 claim in exchange for the agent’s $25,000.00 policy.  Meanwhile, the agent — who is trying to do the right thing by paying his full insurance policy — is prevented from doing so, and is forced to go to court where he may be held personally liable for the difference.  Finally, the principal gets off scot-free.

Our firm challenged this antiquated rule in the District of Columbia in 2009, and won.  In a case called Convit v. Wilson, 980 A.2d 1104 (D.C. 2009), D.C.’s highest court found that this old tenet could no longer withstand scrutiny.  In doing so, the Court conducted a near-50-State survey to determine the positions of the States on this issue.  The Court found that more and more States are adopting the modern rule, recognizing that it fosters the important goal of settlement.

My prediction is that more States will continue to adopt the modern rule as they confront this difficult issue.