Author: Chris Boggs
Workers' compensation (WC) is the employee's sole remedy to recover medical costs, lost wages and death benefits resulting from bodily injury arising out of the course of employment. However, there are bodily and financial injuries that fall outside workers' compensation protection and which are excluded by the commercial general liability (CGL) policy – meaning there is a gap in protection.
Part Two – Employers' Liability Insurance dovetails to fill specific employee-related gaps between WC and the CGL.
Although included as part of the workers' compensation policy, employers' liability (EL) is similar to and contains components of both the CGL and the WC policies. Part II shares slightly more similarities with the CGL than with WC. Let's review the similarities between employers' liability and the CGL and WC policies.
Comparing Employers' Liability with Commercial General Liability
Employers' liability and commercial general liability coverage both:
- Require negligence. Workers' compensation is a "no-fault," exclusive remedy system requiring only that the injury arise out of the course and scope of employment. Whereas employers' liability requires the injured party prove that: 1) the employer owed a duty, 2) the employer breached the duty, 3) an injury occurred, and 4) the employer's breach of duty was the proximate cause of the injury. If negligence cannot be proven, the insured/employer has no legal liability, and nothing is owed.
- Apply a specific limit. WC limits are mandated by state statute, regardless of the amount. Employers' liability coverage is generally subject to a specific limit of liability, except in one (N.Y.) or possibly two states (Mass. - but very rarely) where EL is unlimited. Unchanged, employers' liability limits begin at $100,000 per occurrence for bodily injury; $100,000 per employee for bodily injury by disease; and $500,000 aggregate for bodily injury by disease (100/500/100). These limits can be increased by endorsement and the payment of additional premium.
- Provide coverage on a per occurrence basis with an aggregate limit (for injury by disease).
- Have available additional limits from an umbrella/excess policy. Employers' liability is subject to the limits shown on the declarations page. If additional limits are desired, the underlying limits are adequate and the insurance company is willing to provide the additional protection, an umbrella or excess policy can sit over the employers' liability coverage to increase the available limits.
- Pay defense is in excess of the coverage limits.
Employers' Liability and Workers' Compensation
Employers' liability dovetails and correlates with workers' compensation by requiring:
- Bodily injury or financial injury for which the insured is held legally liable arise out of and in the course and scope of employment. Employers' liability coverage is payable only when the employee or a different outside party suffers bodily injury or financial injury as a direct result of the work-related injury suffered by the employee.
- The employment leading to injury occur in or be attributable to a 3.A. listed (primary) state. Subject to the extraterritorial jurisdiction requirements of each state, EL coverage part extends protection only if the employee is injured in a state or is eligible for benefits from a state specifically scheduled under 3.A. But unlike WC, there is no “other states" option in the EL coverage part.
- Bodily injury must occur during the policy period and the last day of any exposure causing or aggravating a bodily injury by disease must occur during the policy period.
Before moving any further into the discussion of employers' liability, the term “outside party," used several times already and which is used several more times in the remainder of this discussion, must be understood in relation to the WC and CGL policies. For this discussion, "outside party" has two definitions based on whether the WC or CGL s being discussed. This difference must be clearly evident before moving forward.
Workers' compensation is a "three-known-party" policy: 1) the employer/insured, 2) the employee (the injured), and 3) the insurance carrier. All three are known from the beginning. Any individual or entity not qualifying as one of these known parties is considered an "outside party."
Commercial general liability coverage also involves three parties, but only two parties are known up front: 1) the insured (as defined in the policy); and 2) the insurer. The third party, the injured party is unknown, making them the "outside party" in a commercial general liability policy.
Work Compensation and CGL Gaps Necessitate Employers' Liability Insurance
Employers' liability protection is often mistakenly viewed as a throw-away coverage that is simply “tacked onto the workers' compensation policy." One reason may be that few agents have ever been a part of an employers' liability claim. Understanding and focusing attention on workers' compensation and commercial general liability is seen as a better use of the agent's time.
But the importance of this gap-filling coverage cannot and should not be overlooked. This is the tie that binds two major coverages together. The following paragraphs explore the exclusions that necessitate this coverage.
Workers' Compensation and CGL Provisions
While the WC policy has no specific exclusion, per se, the protection provided is rather narrowly defined. Additionally, the commercial general liability policy contains two specific exclusions for employee injury. Employers' Liability insurance fills the gaps between the narrowness of the workers' compensation policy and the exclusions in the CGL.
Workers' compensation insurance benefits are statutorily mandated and restricted to costs directly assignable to a specific employee injured in the course and scope of employment. Coverage is not designed to compensate any outside party, only the injured employee or the employee's dependents if the worker dies as a result of the work related injury or illness (death benefits are considered payments directly attributable to and solely for the "benefit" of the deceased employee not for the injury suffered by any outside party).
Commercial general liability is different. Two exclusions found in ISO's CGL policy preclude the extension of coverage to any party suffering bodily injury or financial loss as a result of an injury to an employee. These exclusions are:
- Exclusion “d." Workers' Compensation and Similar Laws excludes any obligation of the insured under a workers' compensation, disability benefits or unemployment compensation law or any similar law; and
- Exclusion "e." Employers' Liability excludes bodily injury to: 1.) An employee of the insured arising out of and in the course of employment by the insured; or while performing duties related to the conduct of the insured's business; or 2.) The spouse, child, parent, brother or sister of that "employee" as a consequence of an employee injured in the course and scope of employment. Exclusion "e." applies whether the insured may be liable as an employer or in any other capacity and to any obligation to share damages with or repay someone else who must pay damages because of the injury. Exclusion "e." does not apply to liability assumed by the insured under an "insured contract."
Exclusion “e." is designed to exclude bodily injury arising out of and in the course and scope of employment to any person qualifying as an “employee" and not already excluded by the workers' compensation exclusion (exclusion “d."). This is the “catch-all" employee exclusion.
Employers' Liability Coverages
Employers' liability responds to four types of claims:
- Third-party-over actions;
- Loss of consortium (loss of family service);
- Consequential bodily injury; and
- Dual Capacity actions.
Let's review these for types.
Do not confuse this with the third-party-over actions seen in contractual risk transfer situations where the injured worker sues the general contractor and the general contractor turns the claim over to the direct employer due to the contract in place. This “brand" of third-party-over has some of the same facets, but there is no contractual transfer back down to the direct employer. This is a fact-based issue.
A quick story may allow for a better understanding.
Between college semesters I worked for an assembly/manufacturing operation. During my tenure I witnessed a workers' compensation claim in the form of a 15-year-old getting his hand caught in a large crimping machine.
The kid (I graduated with his brother) developed a rhythm of putting in the blank, activating the machine and removing the completed piece. Finished parts were coming out very quickly; but somewhere along the way his timing was thrown off and he put the blank in at the precise moment he activated the machine.
Thousands of pounds of pressure per square inch landed on this 15-year old's hand; but because the machine was unable to make a full resolution it did not release, holding him tightly. The machine was not equipped with an emergency release mechanism and would not “let go."
As he frantically screams and cries, I'm standing there with no idea what to do. I don't want to try to pull him out, the machine is far stronger than I am and I might case more injury. Everyone is frozen. Finally, the kid musters enough clarity to reach up and turn off the machine, at which point he is released. I catch him as he falls. He gets to his feet and takes off running with no clear destination. An older, more experienced worker grabs him and puts a tourniquet around his wrist to stop the bleeding.
At the end of this ordeal, a 15-year-old kid had two of his middle fingers removed because they were crushed beyond repair.
If there were sufficient grounds to prove negligence, he could have filed a products liability claim against the machine's manufacturer claiming, among other things, insufficient safety in the machine's design and lack of adequate guards.
Although a suit never materialized, had it occurred, the equipment manufacturer would have discovered that the guards designed to protect the worker had been removed to speed up production (a fact I learned later). With this information, the manufacturer could have sued the employer for acting improperly.
This is an example of a third-party-over suit where an employer is sued by an "other party" as a direct result of an injury to an employee. Any liability to the "other party" would be excluded from the workers' compensation coverage discussed previously; and coverage would also be excluded by the two CGL exclusions.
Protection and payment can only be found in the employers' liability policy.
Loss of Consortium
Depending on the seriousness of the employee's injury, the family may suffer in ways that aren't compensated or even compensable by WC. These include additional costs to hire outside help to provide the services that were provided by the injured employee, the loss of companionship (which does include sexual relations) and, in some jurisdictions, claims for emotional injury.
For example, additional expenses are incurred because a lawn service has to be hired to care for the injured employee's yard since he can no longer perform that task. Remember, a percentage of the lost wages are paid by the workers' compensation policy, but additional expenses that didn't exist prior to the injury are not contemplated by the workers' compensation policy and must be paid by the employers' liability section.
Consequential Bodily Injury
A work-related disease is the most common example of consequential bodily injury. If the employee contracts a work-related infectious disease that is subsequently spread to another member of the immediate family, this would be a prime example of consequential bodily injury covered by the employers' liability policy.
To qualify for coverage, the consequential bodily injury must be the direct result of a work-related injury suffered by the employee.
Employers may have business-related contact with their employees outside the employee-employer relationship. These additional relationships can be in the form of a product supplier, service provider or as the owner of a premises. Such dual persona creating this increased contact may subject the employer to liability for injury to an employee that may occur at work but which does not necessarily arise out of and in the course and scope of employment.
Dual persona relationships create employer obligations to the worker independent of those imposed on them strictly as the employer. In essence, the exclusivity of workers' compensation protection is waived in situations where the employer could be liable to the general public for the same injury.
Two examples often used to demonstrate dual capacity are that of a ladder manufacturer and a tire manufacturer. In both examples, the manufactured product fails and causes injury to the employee:
- Ladder manufacturer: The employee is a maintenance worker responsible for upkeep of the building and machinery. Such work requires him to use a ladder. Obviously, the ladder is manufactured by the employer. While standing on the ladder rewiring a light, the ladder collapses because of a defect in its manufacture, severely injuring the worker.
- Tire manufacturer: The employee is a delivery driver for the tire manufacturing operation. The truck tires are manufactured by his employer. While filling the tire with air, a week spot in the rubber causes the tire to explode, severely injuring the employee.
In both situations, the injured workers, or their heirs, could sue under the dual capacity doctrine to recover amounts outside the benefits payable under the workers' compensation coverage. In instances such as these, the employer ceases being the employer and steps into a second role (a second persona) as a product supplier. The logic is, since the general public could have been exposed to the same injury, the injured employee can access the same redress for injuries suffered as any member of the general public.
Health care workers can also be subject to dual capacity relationships. Doctors and nurses injured in the course of employment may be cared for at the medical facility in which they work. Once the hospital or medical facility undertakes to provide care to an employee that is also available to the general public, it has taken on a second persona (that of service provider) and potentially subjected themselves to the dual capacity doctrine.
Employers' Liability – Exclusions, Monopolistic States and Limits
Twelve employers' liability exclusions are found in the National Council on Compensation Insurance's (NCCI's) workers' compensation and employers' liability policy. These exclusions are (contains material copyrighted by NCCI):
- Liability assumed under a contract. Contractually assumed liability is covered under the CGL – in most circumstances. The transfer must be by way of an “insured contract" and the definition of “insured contract" cannot be altered by attachment of the CG 21 39.
- Punitive or exemplary damages arising from an employee employed in violation of law. Neither Workers' Compensation Insurance nor Employers' Liability Insurance will cover the cost of any court-prescribed penalties or punishment arising out of an employee injured while illegally employed.
- Any bodily injury to an employee while knowingly employed by the insured in violation of the law. Part One - Workers' compensation coverage will pay the statutorily required benefits (but no more) to any "employee" injured, even if such person is working in direct violation of the law with the full knowledge of the insured. However, the employers' liability part specifically excludes any coverage for illegal employees.
- Any obligation imposed by a workers' compensation, occupational disease, unemployment compensation, or disability benefits law, or any similar law. If the injury or loss is covered or is intended to be compensable under the workers' compensation policy, unemployment compensation policy or other such law it is not covered under employers' liability part.
- Bodily injury intentionally caused or aggravated by the insured. Covered, up to statutory limits, under the workers' compensation part but excluded from EL coverage.
- Bodily injury occurring outside the United States of America, its territories or possessions, and Canada unless the injured employee is a citizen or resident of the United States of America or Canada who is temporarily outside these countries. Coverage is excluded for foreign nationals working outside of the coverage territory. Domestic employees working outside the coverage territory on a temporary basis are covered.
- Damages arising out of coercion, criticism, demotion, evaluation, reassignment, discipline, defamation, harassment, humiliation, discrimination against or termination of any employee, or any personnel practices, policies, acts or omissions. This is an Employment Practices Liability exposure covered under another policy type.
- Bodily injury to any person in work subject to the Longshore and Harbor Workers' Compensation Act (33 USC Sections 901-950), the Non-appropriated Fund Instrumentalities Act (5 USC Sections 8171-8173), the Outer Continental Shelf Lands Act (43 USC Sections 1331-1356), the Defense Base Act (42 USC Sections 1651-1654), the Federal Coal Mine Health and Safety Act of 1969 (30 USC Sections 901-942), any other federal workers' or workmen's compensation law or other federal occupational disease law, or any amendments to these laws. The policy can be endorsed as necessary to remove any or all five of these Federal Compensation Act exclusions if such exposure exists. The available endorsements are:
- Longshoremen's and Harbor Workers' Compensation Act Coverage Endorsement – WC 00 01 06A
- Nonappropriated Fund Instrumentalities Act Coverage Endorsements – WC 00 01 08A
- Outer Continental Shelf lands Act Coverage Endorsement – WC 00 01 09A
- Defense Base Act Coverage Endorsement – WC 00 01 01A
- Federal Code Mine Health and Safety Act Coverage Endorsement – WC 00 01 02
- Bodily injury to any person subject to the Federal Employers' Liability Act (45 USC Sections 51-60), any other federal laws obligating an employer to pay damages to an employee due to bodily injury arising out of or in the course of employment, or any amendments to those laws. The Federal Employers' Liability Act Coverage Endorsement (WC 00 01 04A) can be attached giving back employers' liability coverage for employees qualifying for protection under Federal liability laws.
- Bodily injury to a master or a member of the crew of any vessel. Two endorsements are available allowing the insured to provide coverage for employees subject to the provisions of maritime law:
- Maritime Coverage Endorsement (WC 00 02 01A) – This endorsement is used if the insured has no protection and indemnity (P&I) policy.
- Voluntary Compensation Maritime Coverage Endorsement (WC 00 02 03) – This endorsement is used to voluntarily extend coverage to employees not normally required to be protected by a workers' compensation policy.
- Fines or penalties imposed for violation of federal or state law. Neither the workers' compensation coverage part nor the employers' liability coverage section will pay any penalties assessed against the insured for violation of laws. Example violations include fines imposed by OSHA or other regulatory bodies for failure to provide a safe work environment or provide and/or require the use of personal protective equipment. These costs will be borne solely by the employer.
- Damages payable under the Migrant and Seasonal Agricultural Worker Protection Act (29 USC Sections 1801-1872) and under any other federal law awarding damages for violation of those laws or regulations issued thereunder, and any amendments to those laws. As above, there is no coverage for employment or employment conditions in violation of applicable laws.
Only four monopolistic states remain in operation: North Dakota, Ohio, Washington and Wyoming. Insureds with on-going operations in one of these states must purchase workers' compensation protection from the state and must find an alternate means to secure employers' liability coverage (remember, employers' liability applies only to 3.A. states).
Three methods available to fill this protection gap to which employers operating in monopolistic states are subject are:
- Stand-alone employers' liability coverage. Employers domiciled and operating nearly exclusively in a monopolistic state can purchase a stand-alone employers' liability policy from a private insurer. Monopolistic states do not offer this protection.
- Endorsement to the workers' compensation and employers' liability insurance policy. WC 00 03 03C can be attached to an employer's policy operating in a non-monopolistic state with employees working in a monopolistic state and subject to that state's laws. The employer buys a separate workers' compensation policy from the state covering just the employees in the monopolistic state, and then they attach this endorsement to their domicile-state policy, listing the monopolistic states in which employees are involved in on-going operations.
- Endorsed onto the commercial general liability policy. Employers domiciled in non-monopolistic states but with employees in monopolistic states may choose to endorse the CGL to extend employers' liability benefits to cover the monopolistic state employees. As above, the workers' compensation policy is purchased from the state and the commercial general liability policy is endorsed to extend employers' liability protection. Each monopolistic state requires a state-specific endorsement. Some underwriters are unwilling to extend this protection via the CGL (especially if they are unwilling to allow the umbrella to sit over the employers' liability section).
Regardless of which method is chosen, extending employers' liability coverage to employees in monopolistic states is of utmost importance. As has been discussed, employers' liability fills key gaps between the workers' compensation policy and the protection offered by the CGL.
A Word about Limits
Standard limits offered by the employers' liability policy ($100,000 Each Occurrence Bodily Injury, $100,000 Each Occurrence for Employee Disease with a $500,000 Employee Disease Aggregate) are just too low.
Increasing employers' liability coverage limits is relatively inexpensive. Five hundred thousand dollar across the board limits ($500,000 / $500,000 / $500,000) increases the entire policy premium about 2 percent (varies depending on the carrier), and increasing coverage to $1 million / $1 million / $1 million adds only around 3 percent to the standard premium. And anytime the umbrella carrier is willing to extend benefits over the employers' liability coverage that opportunity should be taken.
Redundancy is the rule in this article. Employers' liability coverage is a key gap filler between the CGL and the WC forms. Don't ignore it. Understand the coverage provided, the existing exclusions and the need to have appropriate limits.
Most agents have never experienced an employers' liability claim, but most agents have never experienced a total fire loss either. Having not experienced something doesn't mean it can't or won't occur. The lack of experience is no excuse for ignoring such an important coverage.
Last Updated: May 24, 2019