The Victor and CNA professional liability insurance program does not recommend specific language on “moonlighting.” That is because the situations vary so greatly. The key is for a professional service firm to have a workable provision in an employee handbook.
There are very few instances where an employer is held liable for the actions of a design professional conducting a practice outside of normal employment. Still, it makes sense for professional service firms to address the issue from both practice management and professional liability perspectives. While a firm’s simple statement prohibiting moonlighting is probably sufficient, firm management may want to look at what moonlighting does to an employee’s status with the firm. The firm also may want to suggest that it will pursue legal action if the firm is harmed by either a moonlighting employee depriving the firm of a business opportunity, or a claim against the firm stemming from the outside project.
It is very important for professional service firms to have clear policies on the outside professional activities of its employees. The possibility exists that a firm can be held liable for the actions of its employees even though it did not specifically know of or authorize those actions. A firm with no clear policy against moonlighting, and no clear prohibition against using company equipment or premises for outside employment, can find itself with imputed liability and no insurance coverage.
A firm’s exposure to the possibility of loss is decreased if clients of moonlighting employees—whether the professional services are being provided for a fee or otherwise—acknowledge that the services are being performed solely by the individual, not by the individual’s employer, and that the firm assumes no responsibility for the actions of the individual providing such services. A firm is also at risk for being held liable for the moonlighting of its employees if it does not clarify rules regarding the use of company equipment or premises for outside employment activities. An absolute prohibition is not unreasonable.
A firm could protect itself and assist employees in understanding their responsibilities by having policies that address the two significant types of moonlighting situations:
Outside Employment for a Fee
Most firms simply prohibit this activity. Absolute prohibition may not stop moonlighting, but if the firm becomes aware of such activity it needs to go on record as not supporting or condoning it. Other firms condone outside professional projects, but limit the use of company facilities for such projects. Some firms actually encourage moonlighting as a way for a professional employee to gain experience.
Firms that prohibit outside professional projects usually include a provision in the employee manual stating that any outside projects that interfere with the business of the employer or any claims against the employer because of the outside projects will result in the immediate dismissal of the employee for cause and may result in legal action against the employee for the indemnification of any cost, loss, or damage to the employer arising from the outside project.
Firms that condone moonlighting often state that the employee must obtain from any outside client a signed statement recognizing that the services are being provided by the professional as an individual and not as an employee or agent of the firm, and that no claims will be made against the firm. Firms usually prohibit any contact with the outside client or any work on the outside project during normal working hours. They also usually prohibit using the employer’s offices or supplies. Some firms require employees who are contemplating moonlighting to obtain prior approval from a principal in the firm. That way, the firm can assess the scope of work, the potential risk, and the amount of the employee’s time it might involve. Principals reserve the right to prohibit their employees from taking on specific projects. Although the use and effectiveness of a hold harmless agreement between the employee and the firm to protect the firm from claims arising out of the project is probably unrealistic, many firms that allow moonlighting require such a commitment from the employee as an indication of the significance of the independent services.
Firms that look at moonlighting projects as a source of professional or personal gain usually still require the individual to make it known that the services are individual services for which the firm assumes no responsibility. They also often require the project to be identified to the firm management so that it is clear that there is no conflict of interest or interference with the business opportunity of the firm. Sometimes the firm may provide a peer review or “mentoring” of the design. These firms recognize that they could be held legally liable for the negligence of the employee, but usually find that risk tolerable.
Outside Employment as a Contribution of Services
Some firms may want to encourage voluntary projects (pro bono activities) from a good will perspective, or to allow employees to gain more experience by providing services directly to a client.
A firm could develop a special provision for authorized contributed services. The firm’s professional liability insurance would cover such services regardless of whether or not they were for a fee if they were provided by the firm or the firm’s employees with the recognition and permission of the firm. Claims from such projects, of course, would jeopardize professional liability coverage or rates just as any other adverse experience might.
The firms that condone or encourage moonlighting for the experience it provides and try to protect themselves through indemnification obligations stemming from their moonlighting employees are usually realistic about the limitations of that indemnity. A firm would probably not benefit from an indemnification provision meant to protect it from damage or expenses caused by a moonlighting employee because most individuals providing outside services have few assets from which to indemnify their lawful employer.
The insurance coverage of any claims tracks with the law of agency. A firm’s employees are covered for all activities done within their scope of employment. If a problem occurs on a project for which employees are providing services, but for which their employer is not getting a fee, any determination of coverage would be based on whether the firm or an agent of the firm is providing the services. Although the insurer would argue that moonlighting is outside of the scope of services (and therefore, the coverage), the law may attach liability to the firm if there is any nexus between the firm and the moonlighting employee’s activities. The firm could be held liable for the actions of its employee even though it did not authorize nor know specifically of such actions. This could create a situation where the firm is held liable, and yet have no insurance coverage for the harm the employee caused.
It is also clear, from a risk management perspective, that if the firm’s name was not apparent on the documents, the likelihood of the initial claim being brought against the individual rather than the firm is much higher. This does not mean that the firm would not be subsequently involved, as it would still likely be brought into the action. While the “invisibility” of the firm may have an immediate chilling effect on litigation, the firm cannot easily escape responsibility for the actions of its licensed design professional. In most states, such risk to the firm exists even if the employee is providing services for no fee, as long as the firm authorized or condoned such services. The question is whether the actions of the employee can be attributed to the firm. The specifics in determining that attribution are based on state rulings within the general framework of agency law.
If an employee is providing design services outside of the employee’s normal scope of responsibility, that employee is able to obtain professional liability insurance for those outside activities. Victor and CNA can provide coverage to individuals and firms for their professional services whether or not the individual or members of the firm are also employees of another service provider. The coverage only applies to the specific outside services and not to the services provided through the employer. If a firm approves of its employees providing services outside of their scope of employment opportunities, or condones such activity without an acknowledgment of them, it would be prudent for the firm to make the availability of professional liability insurance known to the moonlighting employees. The risk to the employer of meritless claims would probably be reduced, while the protection for the moonlighter would be clear.
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