Vicarious Liability and NZMII Policies

17 May 2023

In this fact sheet:


    In response to a recent decision of the Supreme Court concerning the “vicarious” liability of medical practitioners under section 72 of the Health and Disability Commissioner Act (HDCA), NZMII has added a new coverage clause to its policy.

    Vicarious Liability under s. 72 arises where one practitioner (Practitioner A) has been found by the HDC to have breached the Code of Patient Rights, and Practitioner A is an employee, agent, or member of a health care provider. If the healthcare provider is a company, under s. 72 it may be vicariously liable for A’s breach. If the healthcare provider is structured as a partnership or something akin to a partnership, then each practitioner withing the partnership or organisation may be vicariously liable for A’s breach under s. 72.

    To the extent that s. 72 imposes vicarious liability on an employer for the wrongful acts or omissions of an employee, the section is uncontroversial. The somewhat novel feature of the section is that it extends the concept to wrongful acts or omissions of the health care provider’s agents or “members”.

    Where a health care provider is a corporate entity, the application of s 72 is relatively straightforward. That is because those individuals who provide health care services will almost invariably be either employees, or agents (as may be the case for example, with contracted locums).

    What complicates the application of s 72 are the varying ways in which health care providers in the private sector are structured. (The same difficulty may apply to clinics in the public-private sector, for example clinics operated by iwi, Māori incorporations and the like). While many are structured as corporate entities, others are structured as partnerships, or have something of a hybrid structure, loosely described by one of the expert witnesses in the Ryan case as “associateships”.

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    The Ryan Case

    Ryan v Health and Disability Commissioner concerned the vicarious liability under s. 72 of Dr Ryan for a breach of the Code of Patient Rights by his colleague, Dr Sparks. There was no issue that Dr Sparks had breached the Code by prescribing a medication for which the patient had a documented allergy, nor that Dr Ryan had no involvement in those breaches. Nevertheless, upholding the decisions of the Health and Disability Commissioner and of the lower courts, the Supreme Court held Dr Ryan to be liable under section 72 of the HDCA.

    The structure of the Moore Street Medical Centre operated by Drs Ryan and Sparks fell somewhere between partnership and associateship. They did not have a partnership agreement. Patients were registered with either Dr Ryan or Dr Sparks, not with the Medical Centre, and patient fees were paid into the separate bank account of the consulting doctor. They each had different IRD and GST numbers and filed their own tax returns. Although operating out of the Medical Centre premises, they each considered themselves to be practising separately from the other. However, they did share common expenses (rent, wages, general overhead), and represented themselves to their patients as members of the same Medical Centre, (for example, on Medical Centre letterhead).

    This practice structure is not uncommon in the private sector. The Court concluded that while Drs Ryan and Sparks had not necessarily intended it to be, at law it was indeed a partnership. Furthermore, the Court found that in providing care to their respective patients, the two doctors were acting within the ordinary course of business of the partnership, and with its actual or apparent authority.

    As was conceded by Dr Ryan, the Medical Centre was a health care provider, and in terms of s 72 the “employing authority”. As one of the two doctors in the partnership which comprised the employing authority, Dr Ryan had a potential liability for the wrongful acts or omissions of others under s 72. Plainly enough that potential liability could arise if the wrongful act or omission was that of an employee of the partnership. The question for the Supreme Court was whether Dr Ryan’s s 72 liability could arise from the wrongful conduct of his partner, Dr Sparks.

    The Supreme Court concluded that in prescribing medications to his patient, Dr Sparks had been acting as the agent of the Medical Centre. It followed that under s 72 Dr Ryan could be held liable for Dr Sparks’ misconduct.

    The Court left open the question of whether Dr Ryan could be held liable under s 72 on the alternative ground that Dr Sparks was not an agent, but instead a “member” of the Medical Centre. It simply noted, without comment, the conclusion of the Court of Appeal that the term “member” is a broad, general term intended to include wrongdoers who do not fit within the “agent” or “employee” categories. The Court of Appeal had held that “member” should be interpreted as any “person whose status in relation to the [health care provider] is such that it justifies the presumption that what they do or omit to do is done with the authority of the [health care provider]”.

    Broadly then, the effect of Ryan is to confirm the potential statutory liability of practitioners who structure their practices as partnerships or “associateships” analogous to the Moore Street Medical Centre, for the wrongful conduct of others who provide care under the auspices of the practice, whether the other person be an employee, agent, or “member”.

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    Effect of the Court’s Decision

    What is meant by “liability” in this context is the same liability a practitioner may have for that practitioner’s own breach of the Code of Patient Rights. Thus by virtue of s 72, for Dr Sparks’ breaches of the Code, Dr Ryan was exposed to the risk of investigation and adverse finding by the HDC, possible referral to the Director of Proceedings for the laying of disciplinary charges, and a claim for monetary compensation brought before the Human Rights Review Tribunal (with jurisdiction to award compensation of up to $350,000).

    That said, the implications of s 72 and the Ryan judgment ought not to be overstated. Although Dr Ryan was investigated and was the subject of a breach-finding by the HDC, the Commissioner did not refer Dr Ryan to the Director of Proceedings. That is unsurprising. Dr Ryan’s breach of the Code was derivative, in that it flowed from Dr Sparks’ misconduct. In a sense, Dr Ryan was “guilty but innocent”. It is hard to envisage a situation where a practitioner in Dr Ryan’s position would be referred for discipline to the Director of Proceedings. For the same reason, it is doubtful that a practitioner in Dr Ryan’s position would have a significant exposure to damages in a claim before the Human Rights Review Tribunal. No doubt this is why, although s 72 has been on the statute books for nearly 30 years, this appears to have been the first case of its kind to come before the courts.

    Section 72 Defences

    Section 72 does provide limited defences to such statutory liability. In the case of s 72 liability arising from the conduct of an employee, it is a defence for the health care provider “to prove that [the health care provider] took such steps as were reasonably practicable to prevent the employee from doing or omitting to do the thing”. The Supreme Court was not required to consider this defence in any depth.

    However the Court was required to consider the defence which is provided for s 72 cases arising from the wrongful conduct of an agent or member. The defence is available where the wrongful conduct “…is done or omitted without [the health care provider’s] express or implied authority, precedent or subsequent.”

    The question for the Court was whether, given that Dr Sparks’ conduct was wrongful, Dr Ryan could be said to have expressly or impliedly authorised it. It was held that in prescribing medication to a patient, essentially Dr Sparks had been acting in the ordinary course of business of the Medical Centre (irrespective of his conduct being wrongful). Consequently, his conduct was expressly or impliedly authorised by the Medical Centre. It followed that the statutory defence was not available to Dr Ryan.
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    Extension of NZMII Policy

    Although the Court emphasised that its conclusions were fact-specific – that is, that they turned upon the particular way in which Drs Ryan and Sparks had organised their practice – broadly speaking, the Court’s findings are likely to extend to almost every private practice, other than those structured as corporations. (In the case of corporations, s 72 will apply to the corporation itself, but not to the practitioners who are shareholders or directors of the corporation).

    The “take home” from the case is that practitioners in the private sector (and in the public-private sector) are at risk of liability under s 72 for the wrongful conduct of others.

    NZMII has reviewed the scope of cover provided by its insurance policy in light of the Court’s judgment. It has decided that the s 72 risk ought to be expressly covered by the policy. Accordingly the policy has been amended by incorporating a new coverage clause as follows:

    A.3 Subject to the General Exclusions and Limitations (Section B), the General Conditions (Section C) below and to the Limits of Indemnity and also subject to the Company’s prior receipt of the agreed premium, the Company shall indemnify the Insured for any liability or costs of defence for which coverage is provided under Section A hereof, arising out of section 72 of the Health and Disability Commissioner Act 1994 (or any statutory amendment or re-enactment of the section or Act).

    The amendment has immediate effect, at no additional cost to our Insureds. It extends to all of our Insureds, regardless of whether the practitioner whose misconduct gives rise to our Insured’s vicarious liability (or alleged vicarious liability) is an NZMII insured.

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