I remember receiving a phone call from a guy named Dave; he is an owner of a very small manufacturing company and one of his employees had sustained a repetitive strain injury on the job. The employee’s workers compensation insurance paid for all of the medical expenses for the injury but the employee’s spouse also filed a lawsuit against Dave. Dave was shocked to hear this because he believed that workers’ compensation was going to cover the employee’s medical bills.
It is for this very reason I created this guide.
Table of Contents
Quick Answer:
When an employee or their family’s claim for work injury or illness isn’t finished after a workers’ compensation claim, then employers liability insurance kicks in and protects your business from additional liability as long as there is no foul play involved.
Why Employers Need Employers Liability Insurance
The no-fault basis of workers compensation means that you, the employee, get paid for medical bills and lost wages regardless of who caused your injury. So typically you won’t be able to bring a lawsuit against your employer for that injury.
You might think that the no-fault rule closes any loopholes for lawsuits against your employer; however lawsuits are often filed after the employee has received their workers compensation payments.
Employer liability insurance is designed to fill in those gaps that workers compensation leaves open:
What Does Employers Liability Insurance Cover?
Skip this coverage, and your business absorbs those costs directly. They add up fast, often faster than the original injury claim itself. What does it mean in real life for an employer to have liability insurance? Liability insurance is essentially coverage for four basic areas:
Coverage for third-party-over claims:
If an employee has an injury and sues a third party, such as a tool manufacturer and then that tool manufacturer sues the employer claiming that their unsafe work conditions contributed to the cause of the injury.
Coverage for loss of consortium claims:
In this case, the spouse or family member of an injured worker sues for loss of companionship, etc. due to their loved one being injured.
Coverage for dual capacity suits:
An employer can be held liable in two different capacities/roles. If the employer is also the manufacturer or property owner of the equipment then an employee may be able to successfully sue for injury due to the employer’s dual role.
Coverage for negligence:
Claims of negligence against the employer can stem from the employer allowing safety hazards/unsafe working conditions that cause injury or illness to the employee.
In addition to providing coverage for these types of claims, liability insurance also provides payment to cover the cost of legal defense, payment of judgments, settlement and the expenses associated with defending against a claim even if it was ultimately dismissed, should be a primary value of an employer’s liability insurance policy due to the high cost associated with legal fees to prepare for a defense of a claim (usually tens of thousands of dollars) which can be incurred even if the claim is later dismissed.
What Employers Liability Insurance Doesn’t Cover
This trips up a lot of business owners, so let’s tackle it directly. The policy excludes:
Employment Practices Exclusion
One gets often enough that I like to remind people of two important things. The first thing to remember is what is EPLI coverage?
It is a separate policy from your employer liability insurance that provides coverage for claims such as wrongful termination, discrimination, harassment, etc… Many people group EPLI with your employer’s liability coverage because both types of insurance deal with employees suing their employer for various reasons.
However, the two types of insurance actually cover two very different types of situations. To remember this, think of it this way:
Employers Liability vs. Workers’ Compensation
This comparison matters most, since the two get confused constantly.
| Workers’ Compensation | Employers Liability Insurance |
| Pays employee medical bills | Covers employer lawsuits |
| Required in most states | Often bundled with workers’ comp, but not always required separately |
| Pays no-fault benefits | Provides legal liability protection |
| Covers lost wages | Covers legal defense, settlements, and judgments |
Workers’ compensation acts as a carpenter in providing immediate support to an employee injured at work. Employers liability insurance can also act as a carpenter in preventing claims made on behalf of an injured employee against the employer.
Therefore, most employers already have Part 2 of the insurer’s workers’ compensation policy without being aware of it because it is included in the standard policy issued by an insurance company.
The following four states have a state-sponsored workers’ compensation fund that is considered a monopolistic state (i.e., state workers’ compensation funds; Ohio, North Dakota, Washington, and Wyoming). Employers in the monopolistic states must buy a separate employers liability policy, usually through stop gap coverage, to cover their potential liability to an employee injured on the job.
Real-Life Examples Of Employers Liability Claims
Dave’s story perfectly illustrates the point. An employee of Dave has developed a repetitive stress injury at work and qualified for a workers’ compensation claim. His claim involved payment of medical expenses, wage loss replacement, and as long as his claim was made within a time frame allowed by workers’ compensation laws, it was considered closed.
Then the employee’s spouse files a claim against the employer; the spouse claims that the continuing pain and reduced mobility of the employee has created a strain on the marriage. This is the type of liability that is covered by an employers’ liability insurance policy.
Common Example:
A warehouse employee develops a long-term respiratory illness due to the fumes he was exposed to over a period of time, and his workers’ compensation insurance covers his medical treatment. The employee has brought a lawsuit against the employer for failing to have proper ventilation in the warehouse. This is considered a claim of negligence. Without employers’ liability coverage in place, the legal defense cost to an employer may create a tremendous burden on the employer, especially for small employers.
Who Needs Employers Liability Insurance?
Nearly every business with employees benefits from this coverage. Even a strong safety culture can’t eliminate lawsuit risk entirely, accidents happen, and so do disputes.
It matters most for:
Higher-risk industries see more severe injuries and, unsurprisingly, more lawsuits. But no industry stays fully immune.
Is Employers Liability Insurance Required In The U.S.?
Unlike worker’s compensation, which is typically governed by law, most employers handle the expense of worker’s comp through combined policies. And if you work with an employer who carries worker’s comp (as almost all employers do in most states), you’re most likely carrying at least a minimum level of employer’s liability coverage.
Monopolistic states (i.e., Ohio, North Dakota, Washington and Wyoming) run their own state funds for worker’s compensation and do not allow the use of employer’s liability as part of that coverage, meaning that you will likely have to purchase a separate policy to fulfill your obligations under law.
Employers Liability Insurance Limits
An employers’ liability insurance policy will usually display three types of limits:
The above are considered standard limits for an employers’ liability insurance; however, businesses that are considered to be higher risk may require higher limits depending on their exposure and risk tolerance.
What Affects the Cost?
No insurer can hand you a fixed price without knowing your business. Anyone who promises one is guessing. Premiums depend on:
How to Choose the Right Policy
Clean claims history and lower-risk operations generally mean friendlier premiums. High-risk industries with larger payrolls should expect higher costs.
Before moving on to other items, take the time to actually evaluate the premium against your true risk exposure. Make sure to evaluate policy specific limits in relation to your true risk exposure.
Confirm whether the workers’ compensation policy is bundled in with a liability policy, or whether it has to be purchased separately, particularly in monopolistic states.Talk to your agent to determine if EPLI and/or Stop Gap coverage should go along with it.
A brief discussion with a licensed insurance professional who has experience in your type of business will help you avoid serious problems down the road.
Frequently Asked Questions
Q. Should a small business have Employers Liability Insurance?
Yes, generally speaking, small businesses are exposed to much more of the risk of being sued and, because of this, it is common for most insurers to bundle this coverage within their regular Workers’ Compensation policy.
Q. Is coverage for Employers Liability Insurance Mandatory?
Not generally, as an individual stand-alone coverage; however, it is common for insurers to include the coverage in their Workers’ Compensation coverage as a standard benefit; Monopolistic States (Ohio, Washington, North Dakota, and Wyoming) will require their special form of Employers Liability Insurance, although it will not be available through private insurers.
Q. What are the consequences if I do not have Employers Liability Insurance?
All legal costs associated with a lawsuit for an employee injury will come out of your business’ pocket which could put a tremendous financial burden on a small or medium-sized business.
Q. How much coverage should I have under Employers Liability Insurance?
The amount of employers liability coverage your business needs varies by both the risk to your business and the amount of payroll. Generally, the starting limits that businesses typically use are $100,000 per occurrence of accident, $100,000 for each employee, and a $500,000 aggregate policy limit. Most companies will carry higher limits of insurance based upon their exposure to risk
Final thoughts
Employer liability insurance continually does the work in the background until the day it does not and when that happens, you appreciate it being there. It helps fill in the gap of coverage left by workers’ compensation for lawsuits related to workplace injury or illness, which can protect your business from a lawsuit related to a workplace injury or illness.
Whether employer’s liability insurance is included with your existing workers’ compensation policy or purchased separately if you do business in a monopolistic state, you should evaluate your coverage limits and talk to an agent who understands your unique risks. Each year, Dave reviews his policy, and you should learn the lesson of reviewing your coverage now before you need to use it, rather than after you need to use it.
