The Small-Business Owner's Guide to Workers' Compensation Insurance

Chapter 1: Workers' Compensation Insurance: The Basics
Part 2: What Do Workers' Comp Benefits Cover?

A. Employer's Liability Insurance: The Oft-Overlooked Perk of Workers' Comp Coverage

Workers' Compensation Insurance policies are (usually) two-part plans. The first part of your policy fulfills statutory obligations under Workers' Compensation laws. The second part of your policy, known as "Employer's Liability Insurance," can cover liability arising out of employees' work 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 protects your small business.

How Employer's Liability Coverage Works

Employer's Liability Insurance may cover 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 likely 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 may file this type of lawsuit against their employer when a product the employer manufactures is the cause of their injury. That means you could 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 caused by 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 may 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 may want to add Employer's Liability coverage to your plan.

(To learn more about monopolistic state funds, jump to Chapter 2.)

Employer's Liability Insurance Takeaways

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 may allow you to draw on more coverage when your policy limits have been reached.
  • Unless you have operations in a monopolistic fund state, your Workers' Comp policy should include Employer's Liability coverage.
  • If you do live in a monopolistic fund state, you may be able to add Employer's Liability Insurance to your plan.

Now that you know what to expect from your Workers' Comp policy, let's explore some of its nuances in more detail.

Next: Chapter 2: How Workers' Comp Insurance Works

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