The most frequent claim resulting from shared space is that of vicarious liability for implied partnerships. For example, your insured may refer to its space sharers as "partners" or "associates" in order to look like a bigger business. Since such puffery is designed to lead third parties to believe your insured and the space sharers are partners, it is inevitable that your insured may face exposure for the wrongs allegedly committed by a space sharer. If your insured is the established business and the space sharer a fledgling, then the likelihood of a bigger asset pool--including more insurance--may motivate a claimant to bring your client into the action.

Typical risk scenarios

Let's evaluate some common examples of increased risk stemming from space sharing. One might involve a dry-cleaning customer. Enticed by the one stop-shopping opportunity, the customer decides to drop off some pants with the space-sharing tailor. While entering the tailor's space--which is not nearly as well maintained as the dry cleaner's--he slips and falls. What results is a suit against both entities.

Another example could involve two lawyers who share space in a suburban office. One lawyer does real estate work, while the other focuses on criminal defense. One lawyer tells her criminal defendant client that he may be facing a substantial prison term. Upset, the defendant storms out of the office, throwing and breaking things in a fury. Flying glass injures another client, who came to the office to refinance her mortgage. The injured client sues the criminal defendant, but also the lawyer she was visiting-- the real estate lawyer--for failure to maintain a safe environment.

Finally, a struggling sandwich shop owner allows a new ice cream store to open in a portion of his space. The ice cream store, seeking an easily recognized identity, calls itself "McFlurrie," name that happens to resemble a soft-serve ice cream product from a well-known national fast food chain. The chain then sues both the ice cream business and the sandwich shop owner for trademark infringement.

Likely resolutions

These examples may seem far-fetched, and the likelihood of a large indemnity payout is low. The near certainty of substantial defense costs, however, is what should concern you and your insured. In the drycleaners/tailor shop example, the key issue at trial will to determine who owed the visitor a duty to keep the location reasonably safe for visitors.

Control of the location of the alleged incident becomes a paramount issue. If the dry cleaner and the tailor reduced their space-sharing arrangement to writing (delineating who held responsibility for what areas), then the claim may be resolved for one of them without a trial, and at minimal expense. However, if no such documentation exists--and the testimony of the dry cleaner and tailor conflict as to who was responsible for the premises--then significant disputes (and costs) will result.

Similarly, in the office-sharing lawyers' example, the criminal defendant is, of course, liable for the assault. If that party has few assets, however, the lawyers (and any insurance policy) end up squarely in the sights of the claimant. The real estate and criminal lawyers might find themselves in an argument over what was said to whom about the tendencies of clients, not an attractive outcome. Intellectual property disputes frequently end up as claims under P&C or general liability policies, and with mixed results.

A review with your sandwich shop client of the advertising activities occurring at his place of business (and the trademark infringement) might well save him from an expensive lesson in civics at the courthouse.

Review the risks

How can you assist the insured to minimize the risk of third parties holding him responsible for his space-sharer's actions? We suggest the following themes:

1. Establish separate entities between the space-sharers. To avoid partnership liability for a space sharer, a first step is for all businesses in the space to respect each other's autonomy. If the space-sharers think of themselves as a single business, and act that way, then their customers are likely to think so, too, along with any court considering the question. Each business sharing space should be its own separate legal entity. Ideally, the lease should separately list each entity. Some leases may not allow unilateral assignment or amendments. In that case, seek property owner permission before sharing space. In most jurisdictions, liability flows along with control of the location of the alleged incident. The property owner may own the location, but in the lease, the property owner will require the tenant to maintain the location. The likelihood of your insured ending up liable to a slip and fall victim significantly increases if the space-sharer is not on the lease, with terms that require your insured to maintain the space in good condition.
2. Separate the insured's identity from those with whom he shares space. Beyond just maintaining separate entities, your insured and its space-sharer should maintain separate physical space. Keep common areas to a minimum. Separate the clients of each business, and segregate the client's property and belongings. Keep and respect separate offices. Nobody should casually enter closed doors without knocking. Your insured should create and use its own letterhead. Many offices share staff, but the insured needs to maintain an identity separately from any space-sharers. For example, use individual telephone numbers, and then make sure the receptionist answers the telephone with each business's name. Signage, both inside and outside the office, should use individual names for each business. The signs should not substantially differ in size or appearance; else, customers infer that the space sharer is part of your insured's business.
3. Document and maintain the separateness of the entities. Keeping the businesses structurally separate is a good start. Showing the public separate faces is a good follow-up. Proving the businesses separate, in the face of a claim, is the most important. Make sure the business entities are separate, as discussed above, and aware of each other's separate existence. Each entity should supply the other with copies of their incorporation papers or partnership agreement. Each business should be on the lease and each should have their own copy of the lease.

Ideally, list both entities on the same insurance policy as insureds to minimize any conflict over coverage. As a desirable alternative, obtain separate insurance policies from the same carrier with similar policy terms.

Reduce to writing how the entities will perform other aspects of the space-sharing arrangement. Determine and document responsibility for various types of needs and actions. At the same time, make clear the arrangement is between separate businesses, to avoid characterization as a partnership agreement.

Your insured may need to consider potential ethical violations in space-sharing arrangements. Some businesses will have difficulty sharing space. Pet groomers are unlikely to share space with a pizzeria, perhaps for regulatory reasons. Other professions have more subtle restrictions that need to be considered, as well.

Lawyers' ethical rules, for instance, outline specific issues created by sharing space. Lawyers need to keep in mind these issues when addressing topics such as firm names, client confidentiality, and conflicts of interest. Consider these profession-specific risk management concerns if your insured is sharing space.

In conclusion, businesses should find ways to save money, but not at the cost of increased risk. If your insured contemplates sharing space, then consult your risk management team. Relatively simple planning and discipline will enable your insured to avoid many of the predictable risks inherent in this ever-popular business arrangement.

Article originally published 10/26/2009, Claims magazine.

A version of this article appeared in Massachusetts Lawyers Weekly on July 13, 2009, and in Rhode Island Lawyers Weekly on July 16, 2009.