Stop gap coverage in monopolistic states

Stop gap coverage is employers' liability insurance for employers whose workers' comp comes from an exclusive state fund. In North Dakota, Ohio, Washington and Wyoming the fund pays statutory benefits and does not defend or indemnify you in a lawsuit by an injured worker's family, a third party seeking indemnity, or anyone else outside the comp bargain. A stop gap endorsement, usually added to the general liability policy, fills that hole.

The gap it fills

On a standard NCCI policy (WC 00 00 00) Part One pays the statutory comp benefits and Part Two is employers' liability. Part Two is what responds when an injured employee, or someone connected to the injury, sues you outside the comp system. A state fund policy has no Part Two. The four states are covered in Monopolistic state funds: workers' comp in ND, OH, WA and WY. If your entire workers' comp program is in one of them, you have no Part Two anywhere unless you buy it.

Your commercial general liability policy does not close the gap on its own. The ISO CGL excludes bodily injury to an employee arising out of employment, and the exclusion also reaches obligations to share damages with, or repay, someone else who must pay because of that injury. The exclusion has an exception for liability assumed in an "insured contract." A stop gap endorsement modifies the exclusion so employers' liability exposures become covered, subject to its own terms.

What claims it is meant to answer

Exclusive remedy normally bars an employee from suing a covered employer. Suits still arrive through a few doors:

• Third-party-over actions. A subcontractor's employee is hurt on a site, sues the general contractor or the owner, and that party tenders the claim back to your company under a contract or a common-law indemnity theory. Your fund policy does not pay it. See indemnification and hold harmless clauses and your insurance and contractual liability coverage and insured contracts.
• Loss of consortium and derivative claims. A spouse or family member sues for the harm to the relationship or for lost services.
• Dual capacity. You are both employer and, say, the manufacturer of the product that hurt the worker. Some states let the employee sue you in the second capacity.
• Intentional or "deliberate intent" claims that survive an exclusive-remedy defense, to the extent the form's wording allows.
• Claims for an injury the fund rejects (for instance, an unusual employee classification) where the worker then tries a lawsuit.

PropertyCasualty360's explanation of stop gap (Feb. 2, 2011) lists third-party-over, loss of consortium and dual capacity as the typical exposures, and notes that defense costs are usually paid even if the suit is groundless.

State exclusive-remedy exceptions

The statutes that let a worker sue differ, and so does the coverage fit.

We verified the Ohio and Washington provisions against the statutes. For North Dakota and Wyoming, the citation level above is general and your attorney should confirm. In practice, many stop gap forms exclude injuries the employer intended, and your broker should show you exactly how the form treats an Ohio intentional tort claim.

What the policy looks like

Stop gap has no single standard form. It is generally an endorsement, not a separate policy. IRMI's definition says that if you also have operations in non-monopolistic states, the endorsement attaches to the workers' comp policy covering those states. If all your operations are in a monopolistic fund state, it usually attaches to the general liability policy. Some carriers also sell a stand-alone employers' liability policy. NCCI and some carriers publish state-specific versions, so confirm the form your carrier will use.

When you read a stop gap endorsement, check these items:

1. The named states. The endorsement should list each fund state where you have employees. Employees hired in a new state are only covered if the state appears.
2. Insuring agreement. Does it follow Part Two's wording (bodily injury by accident or disease, arising out of and in the course of employment) or something narrower?
3. Limits. NCCI Part Two basic limits are $100,000 each accident, $100,000 each employee for disease, and $500,000 policy limit for disease. Stop gap carriers offer higher limits, often matching a $1 million umbrella schedule. Make sure the umbrella lists the stop gap as scheduled underlying insurance.
4. Exclusions. Look for intentional injury, fines and penalties, obligations under any workers' comp law, punitive damages where not insurable, and injuries to employees in states not listed.
5. Defense costs. Are they outside limits (the usual employers' liability treatment) or inside?
6. Premium basis. Usually a rate per $100 of payroll or a percentage of the comp premium, subject to audit under the same rules as the premium audits: how they work and how to prepare process.

Hypothetical example

Say a 25-employee Ohio masonry contractor buys fund coverage from BWC. A bricklayer on its own crew is hurt when a rented scaffold fails. He collects BWC benefits, then sues the scaffold company, which turns to the masonry contractor under an indemnity clause. BWC pays the worker's comp benefits but not this third-party-over claim, and the CGL's employer's liability exclusion may point the defense costs away from the CGL. A stop gap endorsement does not fix every contract problem, but it gives the contractor an employers' liability insurer to look at. The facts are hypothetical, and a broker should confirm how the endorsement and the CGL interact.

Where buyers go wrong

• Assuming "it is in the general liability policy." Most CGL forms exclude employers' liability. Look for the endorsement.
• Buying the endorsement in one state only. A contractor that moves a crew from Ohio into Washington or Wyoming needs the second state on the form.
• Overlooking the umbrella. If the umbrella follows form only over scheduled underlying policies, stop gap that is not scheduled leaves a hole above the basic limit.
• Ignoring PEOs and staffing arrangements. Co-employment can move or share the employer role, so ask who provides stop gap. See PEOs and workers' comp: co-employment explained.
• Treating fund claim handling as protection from lawsuits. The fund pays benefits. It does not hire defense counsel for you.

For employers with operations in many states, see employees in several states: other-states coverage and multistate workers' comp. The general mechanics of Part Two are in employers' liability insurance.

Key takeaways

• State fund policies in ND, OH, WA and WY pay statutory benefits only, with no employers' liability, so stop gap coverage is a separate purchase.
• Stop gap is usually an endorsement to the general liability policy (or to the comp policy in other states) and has no standard form, so read the wording.
• Typical exposures are third-party-over, loss of consortium, dual capacity and certain intentional-tort claims that escape the exclusive-remedy bar.
• Check named states, limits against Part Two basic limits and your umbrella, exclusions for intentional injury and fines, and whether defense costs erode limits.
• Confirm the form with your broker and, for contract indemnity or intentional-tort exposure, with an attorney.