Is an employer
required to indemnify an employee who knowingly engages in wrongdoing in
performing his or her job? The Colorado
Court of Appeals says no.
In Premier Members
Federal Credit Union v. Henry Block and South Broadway Automotive Group,
Case No. 12CCA0906 (announced August 29, 2013), the Court of Appeals decided
that an employee who knowingly engages in wrongdoing is not entitled to be
indemnified by his or her employer under common law principles. The case involved “power booking” a practice
of inflating the value of a car so as to make the car loan more attractive to a
lender. When the lender sued the
dealership and its employee claiming fraud, the employee cross-claimed against
the employer for indemnity. The trial
court found that the employee knowingly engaged in the practice of power
booking on behalf of its car dealership employer and dismissed the cross claim
against the employer. The employee
appealed.
Prior Colorado cases
on indemnification did not address an employee’s knowing or willful wrongdoing
The Colorado Supreme Court previously held that joint
tortfeasors (two or more persons who are both responsible for causing an
accident or other event which injures a third person) are not entitled to
indemnification from each other, abolishing the common law doctrine of
indemnity as between joint tortfeasors. Brochner v. Western Ins. Co., 724 P.2d
1293, 1299 (Colo. 1986).
Later, the Colorado
Court of Appeals held that an employee could seek indemnification from her
employer where the employer was not jointly liable, but rather was only vicariously
liable for the employee’s tortious actions.1 Serna
v. Kinston Enterprises, 72 P.3d 376, 380 (Colo.App. 2002).
These opinions did not directly address the question of what
happens when the employee knows that his or her actions are wrongful. Although the employer will be liable under
the doctrine of respondeat superior to third-parties who are injured by the
conduct, does the employer also have to indemnify the employee (that is, pay the
employee for any losses he or she incurs)?
The Colorado Court of
Appeals turned to the Restatement of Agency for guidance
To answer this question, the Court turned to the Restatement
(Second) of Agency, noting that Colorado courts have relied on the restatement
in addressing the duty of indemnification in the past. The
Court zeroed in on a comment from the Restatement which states: “[a]n agent
knowingly committing an illegal act ordinarily has no right to indemnity from
the principal, although the principal has directed him to commit it. . . . “ to
support its conclusion that an employee’s knowledge of the illegality of the
act prevents him or her from compelling indemnity from the employer. Restatement (Second) of Agency § 439, cmt.
g.
The Court of Appeals concluded that under Colorado law: “an
employee-tortfeasor is barred from seeking indemnification from his vicariously
liable employer when, as here, that employee knew he was engaging in wrongful
conduct.” Opinion, ¶30. The Court described this limitation as being consistent
with Colorado public policy which prohibits indemnifying a party for damages
resulting from intentional or willful conduct.
Fn. 1 - Colorado has adopted the doctrine of respondeat
superior which makes an employer vicariously liable for torts committed by an
employee who is acting in the course and scope of his or her employment. Raleigh
v. Performance Plumbing and Heating, 130 P.3d 1011, 1019 (Colo. 2006). Under this doctrine, the employer itself need
not have committed any wrongful act.
You can read the Court’s opinion here: http://www.courts.state.co.us/Courts/Court_of_Appeals/Opinion/2013/12CA0906-PD.pdf
Lee Katherine
Goldstein is an appellate lawyer with the Denver law firm of Fairfield and
Woods, PC.
