If you own a small business that employs workers, you’ve probably purchased a workers’ compensation policy. You know that workers’ comp insurance pays the benefits required by law to workers injured on the job. One thing you might not know is that a workers’ comp policy includes a second coverage called employers’ liability.
Employers’ liability insurance covers claims by injured workers who aren’t covered by workers’ comp laws. It also covers claims filed by other parties, such as an injured worker’s spouse or family member. What’s more—employers’ liability covers the legal costs the insurer incurs in defending you against a covered claim. For example, if your employee contracts an occupational disease that isn’t covered by your workers’ comp policy and they sue you for bodily injury, your employers' liability insurance should pay for any damages and legal fees from the suit.
To understand why you need employers’ liability insurance, you need to know a little about workers’ compensation laws and what they do and don’t cover.
Workers’ Comp Insurance: The Grand Bargain
Workers’ comp insurance is compulsory in most states. This means that employers are obligated by state law to purchase a workers’ comp policy. Virtually all states have enacted “exclusive remedy” laws that make workers’ comp insurance the sole source of compensation for work-related injuries. An exclusive remedy law creates a “grand bargain” between employers and their employees. Employers that fulfill their end of the bargain by purchasing workers’ comp insurance are protected from employee lawsuits for workplace injuries. If any workers are injured on the job, the employer’s workers’ comp policy will be their sole source of compensation. Workers are barred from suing their employer for on-the-job injuries as long as the employer has fulfilled its legal requirement to provide benefits.
Gaps in Workers’ Comp Laws
While state workers’ comp laws cover a majority of workers, they don’t cover every employee. All laws contain exclusions and exemptions, which vary from state to state. Many states exclude independent contractors, unpaid volunteer workers, and sole proprietors. Some states exclude casual workers, real estate agents, migrant agricultural workers and/or domestic workers.
Some workers’ comp laws require businesses to purchase workers’ comp insurance only if they employ a specified number of workers. The number varies but is often between two and five. Businesses that employ fewer than the threshold number of workers needn’t buy insurance. In California, employers must buy workers’ comp insurance if they employ even one worker.
Workers’ Comp Insurance Incorporates State Law
State workers’ comp laws determine which workers are covered in a policy, and most states use the National Council on Compensation’s Standards or the NCCI (California uses the WCIRB's standards). Only workers who are covered by the state law are eligible for benefits under the policy. The policy won’t pay benefits to injured workers who aren’t covered by the state law. For example, suppose that Susan volunteers at a soup kitchen operated by a non-profit organization located in California. One day, Susan is helping to prepare food when she falls on a slippery floor, breaking her leg. If Susan files a workers’ comp claim, the organization’s workers’ comp policy won’t pay any benefits. Volunteer workers aren’t covered by California’s workers’ comp law.
What's Covered by Employers' Liability Insurance
While exclusive remedy laws bar most employee claims related to workplace injuries, they don’t apply to suits filed by workers who aren’t covered by the state workers’ comp law. They also don’t apply to lawsuits filed by parties other than employees. Fortunately, employers’ liability insurance fills many of the gaps created by workers' comp laws. Here are some types of claims that it’s intended to cover:
Claims by Workers Not Covered by State Workers’ Comp Law
Employers' liability insurance covers claims by workers who are injured on the job and aren’t covered by the state workers’ comp law. For example, suppose your business employs two workers. The workers’ comp law in your state doesn’t require businesses to purchase workers’ comp insurance unless they employ three or more workers. If one of your employees sustains a work-related injury and sues your business for compensation, your employers’ liability insurance should cover the loss. If you employ workers who are excluded by the state workers' comp law, you can provide them workers' comp benefits voluntarily by purchasing voluntary compensation coverage. This coverage can be added to a workers’ comp policy via an endorsement.
Claims for Diseases Not Covered by State Occupational Disease Laws
Workers’ comp insurance covers bodily injury by disease (occupational disease) that’s caused or aggravated by the conditions of the worker’s employment. State laws determine what diseases are compensable under workers’ comp insurance. Because the insurance policy incorporates the state workers’ comp law, workers’ comp insurance will pay benefits only for occupational diseases that are covered by state law. Workers may contract illnesses on the job that aren’t covered under workers’ comp insurance. If a worker is denied workers’ comp benefits for an occupational disease and sues the employer for damages, employers’ liability insurance should respond to the loss.
Third Party Over Actions
While state workers’ comp laws bar injured workers from suing their employer, most don’t prevent workers from suing third parties. In many states, a worker who’s been injured on the job may collect workers’ comp benefits and then file a lawsuit against the third party who caused his injury. The defendant in that suit may then sue the employer back, claiming that the employer is partially or totally responsible for the worker’s injury. The claim against the employer is called a third party over action or action over suit. The following scenario demonstrates how a third party over action might arise.
Bill is employed by Primo Painting, a painting contractor. Primo Painting has been hired by Busy Builders, a general contractor, to paint a new office complex. One day, Bill is standing on scaffolding at the job site when the scaffolding suddenly collapses. Bill is seriously injured and files a workers’ compensation claim with his employer's insurer. He receives benefits for medical treatment and loss of wages, and then sues Busy Builders for pain and suffering. His claim alleges that Busy Builders is responsible for his injury because the scaffolding it provided was unsafe. Busy settles the claim and then sues Primo Painting, alleging that the painting contractor, not Busy Builders, is responsible for Bill’s injury. It contends that Busy’s employees erected the scaffolding properly but that Primo employees made alterations to it that made it unsafe. In this scenario, Busy’s lawsuit against Primo would be the third party over action.
Loss of Consortium
The spouse or domestic partner of an injured employee may sue the employer for loss of consortium, which includes loss of affection, companionship, and marital relations. Essentially, the spouse or partner claims that the worker’s injury has deprived them of the benefits normally derived from a marital or domestic relationship.
Consequential Bodily Injury
An injured worker’s family member may sue the employer for a physical or mental injury they allegedly sustained as a consequence of the worker’s injury. For example, Bill (in the previous example) sustains a back injury from his fall from the scaffolding and is confined to a wheelchair. Mary, Bill’s wife, sues Primo Painting. She claims that Primo Painting’s negligence caused Bill’s injury, and as a consequence of his injury, Mary has developed severe headaches and stomach problems.
Some injured workers may sue their employer on the basis that they have a relationship with the business that’s separate from their employee/employer relationship. This type of suit is called a dual capacity suit.
Dual capacity suits may be filed against manufacturers. For example, Paul is employed as a warehouse worker by Magic Machinery, a company that manufactures forklifts. Magic Machinery sells most of its products to the public but also uses some at its manufacturing facility. Paul is driving a forklift when the brakes on the device fail and the forklift crashes into a wall. Paul is injured and files a product liability suit against Magic Machinery. He sues the company in the capacity of a product manufacturer, not as his employer.
Healthcare providers may also be vulnerable to dual capacity suits. For example, Susan is employed by Marvelous Manipulations, a chiropractic business. Susan suffers a back strain on the job and is treated for the injury by a Marvelous chiropractor. The treatment causes a herniated disk and Susan sues Marvelous Manipulations for malpractice. She sues the business in the capacity of a medical provider, not as her employer.
Requirements for Coverage
To be covered under employers’ liability insurance, a claim for a work-related injury must meet certain criteria. First, the injury must arise out of the worker’s employment by you (the insured employer). The employment must relate to your work in a state covered by the policy. If the claim involves an accident, the injury must occur during the policy period.
If the claim relates to an occupational disease, the disease must be caused or aggravated by the conditions of your employment. Also, the worker’s last day of the last exposure to the conditions that caused the disease must occur during the policy period. For example, suppose a worker who’s excluded by the state workers’ comp law sues your business for lung damage caused by silicosis. The claim will be covered under your employers’ liability insurance only if the worker’s last exposure to silica occurred during the policy period.
Because workers’ comp benefits are governed by state laws, a workers’ comp policy doesn’t specify any limits for workers’ comp insurance. However, the policy includes three separate limits for employers’ liability insurance:
- Bodily injury by accident. This is the most your insurer will pay for all damages because of bodily injury to one or more employees from a single accident.
- Bodily injury by disease - multiple employees. This is the most your insurer will pay for all damages arising from bodily injury by disease regardless of the number of employees involved.
- Bodily injury by disease - each employee. This is the most your insurer will pay for all damages because of bodily injury by disease to any one employee.
Employers' Liability Exclusions
Employers’ liability insurance excludes certain types of claims. Here are the key exclusions:
- Liability you agree to take on in a contract.
- Punitive damages.
- Bodily injury to a worker employed in violation of the law, if you or your executive officers were aware of the violation. For example, you employ a 12-year-old child to work at your bakery business.
- Any obligation imposed under a workers’ comp, occupational disease, or similar law. No coverage will apply if, say, a worker sues you for failing to provide workers’ comp benefits he’s eligible to receive by law.
- Bodily injury you caused intentionally.
- Employee injuries covered by federal workers’ compensation or employers’ liability laws, such as the Longshore and Harbor Workers Compensation Act (which covers land-based maritime workers) and the Federal Employees Liability Act (which applies to railroad workers).
- Damages arising from employment-related practices such as coercion, discrimination, sexual harassment, and wrongful termination. You can protect your business from claims arising from acts like these by purchasing employment-related practices liability insurance (EPLI).
- Bodily injury that occurs outside the U.S. or Canada except for injuries sustained by U.S. or Canadian citizens or residents while temporarily outside their home countries (e.g., while on an overseas business trip).
- Fines or penalties imposed for violating a state or federal law.
Stop Gap Insurance
While employers' liability insurance is included in the standard NCCI policy form, it's not provided by policies used in the four monopolistic states: Ohio, North Dakota, Washington, and Wyoming. These states prohibit employers from purchasing workers' comp from a private insurance company. Instead, businesses must buy a workers' comp policy from the state-operated insurance fund. Policies sold by the state funds provide workers' compensation insurance only. Employers' liability insurance is available separately via an endorsement attached to a general liability policy. When provided as a separate coverage, employers' liability is called stop gap coverage.
Employers' Liability vs. General Liability
It’s important to note that employers’ liability insurance is not the same thing as general liability insurance. Employers’ liability insurance covers liability claims filed against employers for injuries sustained by workers on the job. General liability insurance (also called business liability insurance) covers claims against a business for bodily injury, property damage, or personal and advertising injury. General liability policies exclude claims that arise from injuries to employees.
Employers’ Liability Gives Businesses Valuable Protection
Employers’ liability insurance may not get much attention, but it affords valuable protection from third-party claims resulting from workplace injuries. It’s automatically included in the standard workers’ comp policy as Part Two. It covers claims by injured workers that aren't covered by workers’ comp laws and from other parties, like an injured worker's family member.