Colorado Court of Appeals limits an employer’s duty to indemnify employees

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.