Employer’s liability insurance protects small business owners in lawsuits over work-related injuries that aren’t covered by workers’ compensation insurance. The coverage pays for the policyholder’s legal defense if an injured employee sues, covering costs like attorney’s bills and any judgments or settlements up to the policy limits.
How Employer’s Liability Insurance Works
In most states, employees who suffer bodily harm because of their jobs can file a claim for workers’ compensation insurance. This gets their medical bills paid and replaces some of their lost wages without the injured worker having to go to court and prove their employer was at fault. Essentially, it’s a win-win. The worker gets the compensation he needs, and the employer avoids a potentially costly lawsuit.
However, there are instances where workers can sue their employers for their injuries. For instance, an employee might sue if he believes his employer caused his injuries through willful misconduct. Situations like this are covered by employer’s liability insurance, which is found in most workers’ compensation policies. An injured employee’s lawsuit triggers employer’s liability to pay the employer’s legal costs.
Claims Covered By Employer’s Liability Insurance
Workers’ compensation coverage, and therefore employer’s liability insurance, is regulated by each state, so what your policy covers depends on where your business is located. That said, there are some claims that most employer’s liability coverage pays for, such as:
- Dual capacity claims: Dual capacity claims are the result of employers and employees having more than one relationship. For example, an employer may also be the manufacturer of a product that injures the employee. If an employee is injured by a product her employer manufactures, she may sue to get her medical bills paid.
- Employees not covered by workers’ comp: Employees not eligible for workers’ comp or who have opted out of workers’ compensation can sue their employers if they suffer a workplace injury. Common examples include domestic employees like nannies and seasonal workers.
- Illnesses not covered by workers’ comp: Workers’ comp typically does not cover diseases if the general public may contract them just as easily as an employee. Take, for example, COVID-19. Workers’ comp commissions may determine it to be an “ordinary disease of life,” but employees could still sue if they contracted the illness at work or their tasks exacerbated their symptoms.
- Third-party-over actions: An employee may opt for workers’ compensation benefits, but then sue another party, which then seeks damages from the employer. Say an employee loses her hand in a machine at work and receives workers’ comp. She can still sue the maker of the machine if she believes it was faulty, and the manufacturer may then claim the fault is with her employer for not maintaining the machinery properly.
- Employer negligence: Some states allow employees to forgo workers’ compensation if they believe their employers’ negligence is the root cause of their injuries. Typically, the employee needs to prove the employer had a responsibility to protect the employee, failed to do so, and that the employee’s injury was a direct result of that failure.
- Consequential injuries: Family members can sue employers if they suffer harm as a result of an employee’s injuries like a wife who strains her lower back lifting her injured spouse out of bed.
- Loss of consortium: These claims come from spouses who have lost the benefit of a marital relationship because their partner is either severely or permanently injured or has died.
Employer’s liability insurance covers these claims by paying for the associated costs, such as attorney’s fees, judgments and settlements, and court costs. Unlike workers’ compensation insurance, employer’s liability has coverage limits, so how much your insurer pays on a claim has a cap. Policies pay, however, even if the claim against you has no merit.
Claims Not Covered By Employer’s Liability Insurance
Employer’s liability doesn’t cover every claim brought by injured employers. Again, the specifics depend on state law, but most policies exclude:
- Injuries covered by other laws: If an injury is covered by unemployment, disability benefits, or other similar laws, then employer’s liability does not cover it. Additionally, employer’s liability doesn’t cover damages from discrimination, harassment, or wrongful termination. These and similar claims are covered by employment practices liability insurance.
- Intentional acts: Employer’s liability doesn’t cover injuries caused or aggravated by intentional acts. For instance, your employer’s liability won’t kick in if an employee sues you for punching him in the nose during a heated salary negotiation.
- Contractual liabilities: If you sign a contract that transfers an outside party’s liability for an employee’s injury to your business, then employer’s liability coverage does not pay for the injuries. This might happen when a contractor indemnifies a building owner from any responsibility for accidents in the building that result from the contractor’s work.
- Injuries to illegal employees: Employer’s liability specifically excludes coverage for anyone hired in direct violation of the law, including any court-imposed penalties. Workers’ compensation, however, often pays benefits to illegal employees if they’re injured on the job.
- Foreign nationals working outside of the United States or Canada: Employer’s liability excludes foreign nationals in other countries, even if they’re working for a US employer. However, coverage does extend to US citizens temporarily working abroad. Business owners with international locations should consider getting foreign workers’ compensation insurance.
Who Needs Employer’s Liability Insurance?
Employer’s liability insurance is an important coverage for any business owner with employees because it bridges gaps in workers’ compensation. Without employer’s liability, business owners would be on the hook for their employees’ work-related injuries that aren’t covered by workers’ comp. Luckily, employer’s liability is included in workers’ compensation policies in just about every state.
The four states that don’t include employer’s liability coverage in their workers’ compensation are Ohio, North Dakota, Washington, and Wyoming. These are the monopolistic states—meaning business owners have to purchase workers’ comp from the government, not their choice of private insurer. If they want coverage for their liability for employee injuries excluded from workers’ compensation, business owners in monopolistic states can purchase stop-gap coverage from private insurers.
Employer’s Liability Coverage Limits
While employer’s liability is a component of workers’ compensation, it differs from that coverage in one very important way: coverage limits. Workers’ compensation insurance has no set coverage limits because each state determines how much money injured employees receive and for how long. However, employer’s liability does have set limits, which are typically:
- $100,000 for each occurrence of bodily injury
- $100,000 for each occurrence of occupational disease
- $500,000 for all occupational disease claims
Business owners can increase their coverage limits on their employer’s liability insurance. Depending on your carrier, you can usually get up to $1 million for each coverage limit for an additional 2% to 3% in premium.
Another way to increase your employer’s liability coverage is to get a commercial umbrella policy. Essentially, an umbrella policy picks up costs when your other liability policies max out. So, if you have one claim for an occupational disease that costs $150,000, but your employer’s liability coverage amount is just $100,000, the umbrella policy typically pays the remaining $50,000.
Employer’s Liability Coverage vs Employment Practices Liability Insurance
Employer’s liability and employment practices liability insurance (EPLI) are two very different policies. The employer’s liability found in the workers’ compensation insurance used by most states, specifically excludes claims stemming from the perils EPLI covers, namely:
- Sexual harassment
- Breach of employment contract
- Mismanagement of employee benefits
- Wrongful termination
- Infliction of emotional distress
- Failure to employ
- Failure to promote
Additionally, the accusations that trigger EPLI can come from employees, but they also can come from job candidates and former employees. Employer’s liability claims generally come from employees, their spouses and family members, and third parties.
Employer’s liability is an essential coverage for business owners with employees. Luckily, most get it in their workers’ compensation insurance. Those that don’t can purchase stop gap coverage to protect their businesses better. Small business owners should work with an agent to determine if they have sufficient employer’s liability coverage.