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We know that choosing adequate insurance policies for your business sounds like a dreadful thing to do. You need to think about the most significant risks your company faces and the right policies to respond to them. There are also other risks that might not be your biggest but are still substantial, and related lawsuits could cripple your business.
Your liabilities and exposures grow as your business grows. You hire more employees, expand your market, your profits increase. All these accomplishments sound amazing for your growth, but they also bring additional risks and obligations.
Depending on the industry you’re in and the type of business you run, you will need different insurance policies. However, all companies that have employees have employment-related liabilities in common. Insurance policies that would best cover those liabilities are employment practices liability, workers compensation, and employer’s liability insurance.
We will focus on workers compensation and employer’s liability insurance here. Statistics indicate there were 2.7 workers compensation claims filed per 100 full-time-equivalent (FTE) workers in 2020 in the private sector. As employer’s liability lawsuits sometimes accompany these claims, both these coverages are relevant for all businesses, no matter the size or industry.
What Is Employer’s Liability Insurance?
To explain the employer’s liability insurance coverage, we should first cover the basics of workers compensation (or workers comp). First, you should know that workers comp coverage is mandatory for most employers in all states except Texas. That means that you need to purchase this coverage the moment you hire your first employees.
Workers compensation pays the medical costs, rehabilitation, and part of the lost wages in case of a workplace injury or a health issue. It provides financial relief for both the employer and the employee by covering all related expenses, no matter the gravity of the injury. In an unfortunate case of an employee’s death, the insurance would pay the death benefits to the deceased’s family.
Now that we’ve established what workers comp covers, let’s look into employer’s liability insurance. This coverage pays for the legal expenses when an employee blames their employer for a workplace injury and sues for negligence.
For example, if an employee hurts themselves when using a power drill and feels that workers comp hasn’t covered all their expenses, they can sue the employer for improper tool maintenance. Given that workers compensation reimburses all the medical bills and part of the employee’s wages, they are actually suing their employer for pain and suffering the incident caused.
It doesn’t matter if the employer is liable or not, they would still have to pay the legal costs of handling the claim.
That is where employer’s liability insurance kicks in to cover the legal expenses, such as hiring a lawyer to handle the claim for you. If the lawsuit goes to trial, it will also pay for any settlements or court-awarded damages.
Employers Liability Insurance vs. Workers Compensation: What Is the Difference?
Even though these policies have different coverages, they are complementary in practice. We can describe that relationship like this: employer’s liability insurance kicks in where workers comp stops. Both policies cover workplace injury, only the different aspects of it.
Workers compensation covers the costs related to the injury without alleging any liability on the employer’s side. Employer’s liability insurance covers expenses if the employer gets sued for punitive damages. That means that workers comp must cover the accident-related costs, whereas the employer’s liability covers the employer if they are somehow responsible for the incident.
The employer’s liability coverage is broader than the workers compensation coverage because it responds to a wide array of claims. Workers compensation kicks in whenever there is an injury in the workplace, and the employer’s liability is triggered when an employee sues the employer for negligence.
What Claims Does the Employer’s Liability Insurance Cover?
As we mentioned previously, employer’s liability insurance covers negligence claims over occupational illnesses or injuries. When employees receive compensation for their workplace injuries, they usually decide not to sue the employer. But that is not always the case.
One type of claims employer’s liability insurance covers is those direct claims from employees alleging negligence. However, there are other types of liability lawsuits your insurance policy would cover:
- Third-party-over action lawsuits: If your employee suffers an injury when using a tool at work, they can decide to sue the manufacturer for making a defective tool. But if the manufacturer thinks that your poor maintenance was the actual cause of the injury, they can sue your company to cover their losses.
- Loss of consortium: An employee’s family member usually files this type of lawsuit. If an employee dies or suffers a severe bodily injury (such as nerve damage) that prevents them from working or fulfilling their daily duties and obligations, their spouse or another family member can sue the employer for negligence.
- Dual-capacity lawsuits: For example, if the employer manufactures or supplies the product that causes the injury, the employee can sue the business both as a manufacturer/supplier and as an employer.
- Consequential (bodily) injury: Suppose that an employee suffers a severe, life-threatening injury, and their immediate family member suffers a heart attack as a consequence of a highly stressful event. The family member can sue the company for damages.
Your employer’s liability insurance policy would cover legal defense costs, potential settlements, judgments, or court-awarded damages.
How to Buy an Employer’s Liability Insurance Policy?
The most common way to obtain an employer’s liability insurance policy is in the package with workers compensation. Insurers sometimes even call it the Part Two coverage, with workers comp being the Part One. Some insurers sell those two coverages as a non-separable package, while others offer more flexibility.
When it comes to buying workers comp for your company, there are some things you need to know. Ohio, North Dakota, Wyoming, and Washington are the so-called “monopolistic states” that require businesses to buy their workers compensation through state funds. They don’t allow coverage purchase through private insurance companies.
In those states, companies should buy employer’s liability as a stop-gap coverage to protect their business from related lawsuits. By doing so, they bridge the gap between the state fund and their general liability insurance coverage. Employers’ liability is not mandatory coverage in many states, but insurers usually recommend it to companies as lawsuits can be very costly.
How Much Does Employer’s Liability Insurance Cost?
The cost of your employer’s liability insurance is related to your workers compensation insurance cost and your claims history. If your business filed workers compensation claims before, your premium would likely be higher.
If the work your employees do is dangerous, that will also affect your premium. For example, a job on a construction site carries significantly more risk than a convenience store job, not to mention one behind an office desk.
The salaries you give your employees also influence your premium, given that both these policies cover parts of employee salaries in claims. If your payroll exceeds the limits of these policies, consider extending your coverage with commercial umbrella insurance that increases your policy limits.
If you need an expert to look into your workers compensation and employer’s liability insurance policies, feel free to reach out to one of our experienced brokers. If you don’t have adequate coverages in place or need to renew your policies, you can sign up to Embroker’s digital platform and get your online quote.
Workers compensation insurance requirements are different for each state. Use this interactive map to learn more about requirements for the state in which you operate.
It’s important for business owners to understand how workers compensation premiums are calculated and what factors and characteristics of their businesses are most important to insurers.