What Is Employer's Liability Insurance?

Employer's liability insurance protects employers from financial loss if a worker has a job-related injury or illness not covered by workers' compensation. Employer's liability insurance can be packaged with workers' compensation insurance to further protect companies against the costs associated with workplace injuries, illnesses, and deaths not covered under workers' compensation. Employer's liability insurance is also called “part 2” of a workers’ compensation policy.

[Important: Because workers' compensation laws do not cover all workers or all types of injuries, an injured worker may sue their employer for work-related injuries. Employer's liability coverage provides protection for the employer.] 

How Employer's 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, sickened, or 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.

Employer’s liability coverage is designed to cover expenses not covered by workers' compensation or general liability insurance. In the event of a payout under an employer's 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.

Limits of Employer's Liability Insurance Policies

Even with adequate employer's 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 major financial loss. For this reason, many organizations choose to carry employment practices liability insurance (EPLI) 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 insure against it.

EPLI 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. 

Furthermore, if an employer intentionally aggravates an employee’s work-related injury or illness, employer’s liability insurance will not cover the employer’s financial obligations to the employee, and the employer will have to pay the employee if the employee wins in court. Employer's 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. In addition, this insurance does not cover independent contractors.

Key Takeaways:

  • Employer's liability insurance protects the employer if a worker is not covered by workers' compensation or they decide to sue the employer.
  • When purchasing workers' compensation, in most cases, a company is also purchasing employer’s liability insurance. 
  • Employer's liability insurance places limits on the amounts that are paid out per employee, per injury, or per illness.

[Fast Fact: According to the 2017 Hiscox Guide to Employee Lawsuits, which uses data on employment charge activity from the Equal Employment Opportunity Commission (EEOC), without additional employer liability protection, an employer would have to pay an additional $110,000 out of pocket to settle a case.]