Mark Pestronk
Mark Pestronk

Q: I am starting to read about some suppliers that are, or appear to be, in financial trouble. If, as some experts predict, a recession or major slowdown is coming, how can I protect my agency against suits by clients who lose their money when suppliers go out of business?

A: There are several steps you can take to protect your agency. If you take them, it is highly unlikely that any judge or jury will find you liable for supplier defaults.

Let's begin by understanding what your agency is and isn't liable for.

An individual travel advisor is liable for his or her own negligence and breach of contract. The advisor is also liable for his or her own intentional acts, such as intentional misrepresentation and fraud.

When an individual advisor is an employee, his or her employer is automatically liable for whatever the advisor is liable for if the advisor was authorized to do what he or she did. This is true for all employment relationships, not just those in the travel agency business.

In the context of supplier defaults, an example of negligence would be an advisor's failure to warn a client about buying a trip with a supplier that had been the subject of trade press articles about its apparent financial trouble.

Now let's cover what an agency is not liable for: a supplier's acts or omissions, including its default. So, if a supplier stops operating and doesn't make refunds, the agency is not liable for the refund (or the extra cost of a higher-priced trip) as long as it had no reason to know about the supplier's financial trouble.

My advice would not change even if the advisor strongly recommended using that supplier and touted its benefits. Also, it doesn't matter whether the advisor charges a fee for his or her advice. The principles of liability do not change depending on which party pays you.

Finally, having errors and omissions insurance does not affect your liability, either. Instead, it pays any judgment against your agency for negligence, and it also pays your legal fees in case you get sued.

To protect your advisors and your agency against suits, here are the steps to take:

First, advise with care by reading the trade press and being careful to warn clients about suppliers that you think might be in difficulty.

Second, encourage clients to pay with credit cards, as card issuers will almost always refund the entire price of the trip that the client does not get due to a supplier's default.

Third, have clients agree to disclaimers such as the free samples at www.pestronk.com/free.html. Disclaimers do not absolve you of your own negligence, but they tend to deter suits and help you win them if you are sued.

Fourth, offer travel insurance whenever you can, and document the offer. Even if the client declines and even if the insurance won't really cover what goes wrong, the mere offer will help deter suits.

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