Employers' liability insurance (Part Two)

Employers' liability insurance is Part Two of the standard workers' comp policy. It pays defense and damages when an employee's injury leads to a lawsuit that falls outside the comp system, up to stated limits. The standard limits are $100,000 for each accident, $100,000 per employee for disease and $500,000 for disease overall, and they can be raised. Many contracts and umbrella policies require more.

Where Part Two sits in the policy

The NCCI Workers Compensation and Employers Liability Insurance Policy (WC 00 00 00) has two coverages that people lump together. Part One promises the statutory benefits under the comp law, with no dollar limit. Part Two, Employers Liability, covers the suits that exclusive remedy does not bar. Part Three adds other-states coverage, and the later parts set duties, premium and conditions (workers' compensation insurance: how it works). The policy's information page lists the Part Two limits in Item 3.B.

Employers liability exists because the comp bargain has gaps. Workers' comp generally makes the comp claim the employee's exclusive remedy against the employer, but lawsuits still arrive in situations the system does not shut off. Part Two responds to those, and it is a liability coverage with a defense obligation and a limit, unlike Part One.

What kinds of suits Part Two answers

Descriptions of the form's coverage commonly list four categories. Check the policy wording and state endorsements for the exact text, since manuscript and carrier-specific forms differ.

• Third-party-over actions. An injured employee sues another company, such as an equipment maker or a property owner, and that party then sues the employer for contribution or indemnity. Many such claims are blocked by exclusive remedy in some states, and permitted in others. This is the most common reason contractors and manufacturers care about Part Two.
• Consequential bodily injury. A family member sues for injury that follows from the employee's injury, such as a spouse's loss of services or a child's claim.
• Dual capacity. The employer also acts in a second role toward the employee, such as manufacturer of the product that hurt the worker, and the employee sues in that second capacity. Many states reject the doctrine, and some accept it in limited forms.
• Consortium and similar claims. Spousal claims for loss of companionship connected to the injury.

Part Two covers bodily injury by accident or by disease arising out of and in the course of employment. It also pays the defense cost of covered suits. Whether defense costs erode the limit depends on the policy; the standard form pays them in addition, but ask.

Standard limits and how they work

The Pennsylvania Compensation Rating Bureau's published rule shows the structure used under the NCCI-style forms: $100,000 for bodily injury by accident each accident, $100,000 for bodily injury by disease each employee, and $500,000 for bodily injury by disease policy limit (PCRB, Rule VIII). The rule also says the limits may be increased and must be the same for all the states listed in Item 3.A of the information page.

The "each accident" limit is the one that matters in a serious event: a single accident with several injured workers shares one limit. Raising limits is common. Many contracts and umbrella insurers ask for $1,000,000 for each limit, though requirements vary, and carriers often sell the increase for a modest charge.

Common exclusions

Exclusions in the standard form include, in substance:

• Liability assumed under a contract, with exceptions that vary by form, so hold harmless agreements you signed may not be covered under Part Two (indemnification and hold harmless clauses and your insurance).
• Punitive or exemplary damages because of employing a person in violation of law.
• Injury intentionally caused or aggravated by you.
• Statutory benefits and obligations under workers' comp, occupational disease, unemployment or disability laws, which Part One handles.
• Fines and penalties, and damages for wage, discrimination or retaliation claims (employment practices coverage addresses some of these; see Employment practices liability insurance (EPLI): what it covers).
• Employees covered under federal acts such as the Longshore and Harbor Workers' Compensation Act, the Federal Employers' Liability Act and the Jones Act, unless endorsed (USL&H, the Jones Act and maritime employers liability explained, Jones Act).

Do not read the above as complete. Part Two's exclusions and conditions are specific, and state variations change them. Read the exclusions before relying on the coverage grant.

The umbrella connection

Employers liability is one of the underlying policies that a commercial umbrella sits over, alongside general liability and auto. Umbrella carriers typically require a minimum amount of underlying employers liability, and many contracts require the same level in the certificate. If your Part Two limit is below the umbrella's requirement, you can have a gap between the two policies that leaves you responsible for the difference. See commercial umbrella insurance for how the umbrella follows form and where it does not.

For contract compliance, ask your broker to check whether the contract wants:

1. Statutory workers' comp in all states of operation.
2. Employers liability at a stated limit, often $500,000 or $1,000,000 for each of the three limits.
3. A waiver of subrogation endorsement (waiver of subrogation: what it is and when contracts require it).
4. Other-states coverage on Item 3.C.

The contract insurance requirements checker and certificates of insurance: what they prove and what they do not cover the paperwork side.

Monopolistic states and stop gap

Because North Dakota, Ohio, Washington and Wyoming require comp coverage from the state fund, the state fund policy does not include the employers liability that private policies carry in Part Two. Employers there buy it separately as stop gap coverage, usually by endorsement to a general liability policy or as a standalone policy, so that a third-party-over or similar suit has a source of defense and indemnity. Washington's Department of Enterprise Services, for example, explains that employers there must buy industrial insurance through the state's L&I system, and that other employers' liability must be arranged separately. Details are in stop gap coverage in monopolistic states and Monopolistic state funds: workers' comp in ND, OH, WA and WY. Employers with workers in these states should check the rules of Ohio, North Dakota, Washington and Wyoming.

Texas is different, and so is South Dakota: most Texas private employers can choose not to carry comp (South Dakota's labor department says no law requires it, see South Dakota), and those that do not (non-subscribers) lose some common-law defenses if sued. A non-subscriber has no Part Two. It is a separate decision with its own risk analysis (texas nonsubscribers: opting out of workers' comp, Texas).

A hypothetical example

Say a mechanical contractor's employee is hurt when a rented scissor lift fails. The employee collects comp benefits from the contractor's carrier under Part One. He then sues the lift rental company for the defective equipment. The rental company's contract with the contractor included an indemnity clause, and it files a claim against the contractor for contribution. Whether Part Two defends and pays depends on the state's law on third-party-over claims, how the contract language reads, and the contractual liability exclusion. The contractor's general liability policy may also be involved through the insured contract definition. This shows why contractors read contract indemnity language with their broker before signing (contractual risk transfer: shifting liability by contract and insurance).

Practical steps

1. Find Item 3.B on your information page and write down your three limits.
2. Compare them with every customer contract and your umbrella's underlying requirements.
3. Ask the price of raising limits to $1,000,000, which is often small relative to the comp premium.
4. If you have employees in a monopolistic state, add stop gap coverage.
5. Report suits that mention an employee's injury to both the comp carrier and the liability carrier at once, since the correct policy may be unclear (tendering a claim to another party's insurer).

Key takeaways

• Employers liability is Part Two of the standard comp policy and covers suits that exclusive remedy does not bar, such as third-party-over and consequential injury claims.
• Standard limits are $100,000 per accident, $100,000 per employee for disease and $500,000 disease policy limit; higher limits are available and often contractually required.
• Exclusions include contractually assumed liability, punitive damages for employing someone illegally, intentional injury and workers covered by federal maritime or railroad acts unless endorsed.
• Umbrella and excess policies usually require specified underlying employers liability limits.
• In monopolistic states, employers liability is bought separately as stop gap coverage.