What Is Employer’s Liability Insurance?

22. May 2014 09:03

Work injury form closeup

Employer's Liability Insurance is one part of a Workers’ Compensation Insurance policy. The first part of fulfills statutory obligations under Workers’ Compensation laws. In other words, as an employer, you are liable for your employees’ occupational injuries.

To shield you from this liability, the first part of your Workers’ Comp coverage picks up the cost of work-injured employees’ medical expenses and lost wages in exchange for the policy’s premium. (You can learn more about these benefits in What Do Workers’ Comp Benefits Cover?)

The second part of your policy, known as “Employer’s Liability Insurance,” covers liability arising out of employees’ work-related injuries that aren’t covered by the first part. Specifically, we’re talking about lawsuits.

Let’s take a more in-depth look at how Employer’s Liability Insurance can protect your small business.

How Employer’s Liability Coverage Works

Employer’s Liability Insurance usually covers all types of employer’s liability claims unless the policy specifically excludes them. However, some claims are more common than others. Employer’s Liability lawsuits typically involve one or more of the following four claims:

  • Third party over actions. Another party that was held liable for your employee’s injury files this kind of lawsuit against your business. So say, for example, you own a small construction business. One of your employees was injured using a piece of machinery that you had not properly maintained. The employee sues the manufacturer of the equipment, and the manufacturer turns around and sues you for contributory negligence. (Note: in these cases, the employee can still collect Workers’ Comp benefits and file a lawsuit against the third party.)
  • Loss of consortium. An injured employee’s spouse files this type of lawsuit. They sue your business because their spouse is no longer able to “engage” in marital relations after their work injury.
  • Dual-capacity suits. An employee can file this type of lawsuit against their employer when a product the employer manufactures is the cause of their injury. That means you would be liable as both an employer and as a manufacturer.
  • Consequential bodily injury. If your employee’s family members suffer bodily injuries as a consequence of the employee’s injury, they could sue your business. For example, say your roofer’s wife suffered an aneurysm from high blood pressure / stress after he fell off a roof and became paralyzed. She could sue you for medical damages.

When these claims happen, Employer’s Liability Insurance can cover your business’s…

  • Legal defense fees.
  • Settlements.
  • Damages or judgments.
  • Other court costs.

Usually, you don’t pay extra for Employer’s Liability coverage – unless you live in a state where you have to purchase Workers’ Comp through the state’s fund. In those states (known as “monopolistic fund states”), you’ll need to add Employer’s Liability coverage to your plan. We’ll discuss that in more detail below.

Employer’s Liability Insurance and Monopolistic Workers’ Comp States

When you live in a state that only allows you to purchase Workers’ Comp Insurance through the state fund, your policy may not include Employer’s Liability Insurance. That’s because these policies aren’t subject to any of the procedures or programs of the National Council on Compensation Insurance (NCCI).

You can learn more about your state’s stipulations in our guide Workers' Compensation Insurance Laws by State, but for reference, here are the states that run monopolistic Workers’ Comp funds:

  • North Dakota.
  • Ohio.
  • Washington.
  • Wyoming.

Employers with operations in these states may have to purchase Stop-Gap Insurance to account for their Employer’s Liability exposures.

What Is Stop-Gap Coverage?

Stop-Gap coverage is essentially an Employer’s Liability Insurance endorsement. If you purchase Workers’ Comp from a monopolistic state fund, this endorsement can fill the gap in your coverage for work-injury lawsuits. Usually, the endorsement is attached to your General Liability policy rather than your Workers’ Comp policy.

Employer’s Liability Insurance Takeaways

In summary, here are some final notes about Employer’s Liability Insurance:

  • Be sure your limits are adequate.
  • If you need extra Employer’s Liability coverage, consider purchasing Umbrella Liability Insurance. This cost-effective policy allows you to draw on more coverage when your Employer's Liability policy limits have been reached.
  • Unless you have operations in a monopolistic fund state, your Workers’ Comp policy may already include Employer’s Liability coverage.
  • If you do live in a monopolistic fund state, Stop-Gap coverage may offer you protection from Employer’s Liability exposures.

This post is part of an ongoing series on Workers’ Compensation Insurance and the high cost of occupational injuries. Stay tuned for more on how to handle work injury claims, adhere to state Workers’ Comp laws, and find affordable coverage!

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