What Is Employers' Liability Insurance?
Employers' liability insurance protects employers from financial loss if a worker has a job-related injury or illness not covered by workers' compensation. Employers' liability insurance can be packaged with workers' compensation insurance to further protect companies against the costs associated with workplace injuries, illnesses, and deaths. Employers' liability insurance is also called “part 2” of a workers’ compensation policy.
- Employers' liability insurance protects the employer if a worker is not covered by workers' compensation or if they decide to sue the employer.
- A company purchases employers' liability insurance when it buys workers' compensation.
- Employers' liability insurance places limits on the amounts paid out per employee, per injury, or per illness.
How Employers' Liability Insurance Works
Most employees are covered by workers' compensation laws established at the state level (federal employees work under federal workers' compensation laws). States require most employers to carry workers' compensation insurance.
Workers' compensation provides some level of coverage for medical expenses and lost wages for employees or their beneficiaries when an employee is injured, falls sick, or is killed as a result of their job. There is no need for the employee to sue the employer to establish fault to qualify for workers' compensation. However, if an employee feels that workers' compensation does not adequately cover their loss—perhaps because they feel their employer’s negligence caused their injury—they may decide to sue their employer for punitive damages such as pain and suffering.
Employers' liability coverage is designed to cover expenses not covered by workers' compensation or general liability insurance. In the event of a payout under an employers' liability insurance policy, an employer can help limit their losses by including, as a condition of the payout, a clause that releases the employer and their insurance company from further liability related to the incident in question.
Because workers' compensation laws don't cover all workers or injuries, an injured worker may sue their employer for work-related injuries; employers' liability coverage provides protection for the employer.
The Limits of Employers' Liability Insurance Policies
Even with adequate employers' liability insurance coverage, claims can become complicated and costly for employers, particularly in the case of a lawsuit. The cost of defending against such a suit itself can be a major financial loss.
For this reason, many organizations choose to carry employers' liability insurance to help cover the costs of defending the organization from a lawsuit. A claim may be legitimate or not, but even so, many businesses cannot accept that level of risk, and they take measures to ensure against it.
Employers' liability insurance covers employers against employee claims alleging discrimination (for example, based on sex, race, age, or disability), wrongful termination, harassment, and other employment-related issues such as failure to promote.
If an employer intentionally aggravates an employee’s work-related injury or illness, employers' liability insurance will not cover the employers' financial obligations to the employee, and the employer will have to pay the employee if the employee wins in court.
Employers' liability insurance policies also place limits on what they must pay out per employee, per injury, and per illness. These limits might be as low as $100,000 per employee, $100,000 per incident, and $500,000 per policy. This insurance does not cover independent contractors.
Special Considerations: Policy Exclusions
Employers' liability insurance coverage does not cover every situation. Exclusions include criminal acts, fraud, illegal profit or advantage, purposeful violation of the law, and claims arising out of downsizing, layoffs, workforce restructurings, plant closures or strikes, mergers, or acquisitions.
In the case of punitive damages, many states rule out allowing insurers to compensate against them. However, many employers' liability insurance policies provide punitive damages through the "most-favored jurisdiction" clause.
The clause specifies that punitive damages coverage will be regulated by the state law that favors insuring against punitive damages. For example, take a company that has business operations in many states and a claim arises in the state where punitive damages coverage is excluded. If the company was established in a state that supports punitive damages coverage, then the company can get coverage under its employers' liability insurance policy.
According to the 2017 Hiscox Guide to Employee Lawsuits, an employer without additional liability protection would have to pay an additional $110,000 out of pocket to settle a case.