A workers' comp twist

Employers liability insurance could offer you coverage when workers' comp won't


Managing workers' compensation insurance is a large part of a roofing contractor's business given the costs and risks, physical requirements and injuries inherent in roofing work. Except for federal government employees, workers' compensation insurance is governed by state statutes and regulated by state agencies. As a result, the rates, benefits, coverages and rules governing workers' compensation insurance vary.

Which states require it?

Every state except Texas (which allows employers to opt out of its statutory workers' compensation law) requires employers to purchase workers' compensation insurance to cover their employees. In most states, including Arizona, California, Colorado, Connecticut, Illinois, Kentucky, Maine, Maryland, Massachusetts, Michigan, Minnesota, New Jersey, Ohio, Oregon, Pennsylvania and Washington, the requirement to maintain workers' compensation insurance applies to employers that have as few as one employee.

Some states exempt employers that have a limited number of employees, but even in those states the requirement to maintain workers' compensation insurance may apply to all construction contractors regardless of the number of employees.

For example, Florida's workers' compensation law applies generally to employers with four or more employees, but for construction businesses, the workers' compensation law applies to employers with one or more employees. Similarly, Missouri and Tennessee do not require workers' compensation insurance be carried by employers that have fewer than five employees but require workers' compensation for all construction businesses with one or more employees. New Mexico requires construction businesses to carry workers' compensation insurance regardless of the number of employees while requiring other businesses with three or more employees to maintain workers' compensation insurance.

Georgia, North Carolina and Wisconsin require employers with three or more people to carry workers' compensation coverage. In Rhode Island and South Carolina, the trigger is four employees. In Virginia, it is two. Mississippi and Missouri do not require workers' compensation insurance unless the employer has five or more employees. None of these states make a distinction between construction contractors and other employers.

Texas is the only state where carrying workers' compensation insurance is optional. However, construction companies that contract with governmental entities in Texas must have workers' compensation insurance. Tennessee has been considering revising its workers' compensation law to allow employers to opt out of mandatory workers' compensation insurance. Oklahoma passed an opt-out statute in 2013, but it was declared unconstitutional by the Oklahoma Supreme Court in September 2016.

Penalties for failing to obtain required workers' compensation insurance vary by state and can be significant. In addition to being liable for all damages sustained by the injured employee in a civil suit, the state will impose a penalty.

In Florida, the penalty is two times the premium the employer would have paid within the past two years. In New York, the penalty is up to $50,000 in fines for employers with more than five employees. Virginia imposes a fine of $250 per day for each day of noncompliance up to $50,000. In Illinois, the fine is up to $500 per day of noncompliance with a minimum fine of $10,000. In California, in addition to a fine up to $100,000, an illegally uninsured employer could face jail time up to a year.

Typically, employers contract with private insurers to purchase workers' compensation insurance. In some states, a state-administered fund may be another option, particularly for contractors who have difficulty obtaining workers' compensation coverage from private insurers. In North Dakota, Ohio, Washington and Wyoming, workers' compensation can only be purchased from a state agency. In these four monopolistic states, a state agency sets the workers' compensation insurance rates, and benefits are paid from the state fund. There is no competition with private insurers.

What is covered?

The purpose of workers' compensation laws is to provide an assured recovery to employees who are injured while working without the employee having to proceed with a civil lawsuit or prove negligence to obtain compensation. For injured employees, workers' compensation provides payment of some level of medical expenses, ongoing care for medication and rehabilitation, and partial lost wages. In the event of a fatality, workers' compensation includes payment of funeral expenses and death benefits to support the family of the deceased employee. Workers' compensation benefits do not include any compensation for pain and suffering, which potentially can be recovered in a normal negligence or tort suit against a negligent defendant. Injuries resulting from intoxication or drug use, self-inflicted injuries, or a fight or horseplay initiated by the injured employee typically are excluded.

In most states, workers' compensation is the only way an employee can recover damages from an employer. In return for an employee being entitled to recover benefits without a showing of fault or negligence by the employer, the employer is granted tort immunity, meaning an employee who received workers' compensation benefits cannot sue the employer for negligence, wrongful death or a tort unless the employee can prove the employer intentionally or deliberately caused the injury.

Standard workers' compensation insurance policies apply to bodily injury by accident or bodily injury by disease, including death. Bodily injury by disease must be caused or aggravated by the conditions of the insured's employment. Bodily injury by accident must occur during the policy period. The insurer has the right and duty to defend at its expense any claim, proceeding or suit against the employer for benefits covered by the workers' compensation law, and the insurer has the right to investigate and settle claims and suits without seeking the employer's approval.

The insurer's obligation is to promptly pay the benefits required by the applicable state workers' compensation and occupational disease law. Unlike commercial general liability (CGL), automobile liability and other liability insurance policies, there are no limits stated in workers' compensation insurance policies. The amount for which the workers' compensation insurer is potentially liable is the aggregate amount of the benefits allowed by state law to injured workers entitled to recover workers' compensation benefits. The policy should identify all the states where the employer conducts business.

Workers' compensation insurance policies do not cover payments in excess of benefits regularly provided by the state workers' compensation law if an employer is found to have engaged in willful misconduct or knowingly employed an employee in violation of law.

Workers' compensation policies state the insurer has the right to recover the insurer's payment from anyone liable for the employee's injury and the employer "will do everything necessary to protect those rights for us [the insurer] and to help us [the insurer] enforce them." In other words, a typical workers' compensation insurance policy grants subrogation rights to the insurer and calls for the employer not to waive subrogation rights. Construction contracts often include provisions stating the subcontractor waives subrogation rights. Such a waiver may violate terms of the subcontractor's workers' compensation policy.

Employers liability insurance

Although most contractors are familiar with workers' compensation insurance, many are not familiar with employers liability insurance, which is intended to insure an employer against claims arising from bodily injuries to employees not covered by workers' compensation insurance.

Similar to workers' compensation, employers liability insurance applies to bodily injury by accident or bodily injury by disease, including death; the bodily injury must arise out of and during the course of the injured employee's employment by the insured employer; bodily injury by accident must occur during the policy period; bodily injury by disease must be caused or aggravated by the conditions of employment; and the insurer has the right and duty to defend, at its expense, any claim or suit against the employer for damages covered by the insurance and to settle claims and suits without the employer's approval.

Employers liability insurance requires the insurer to pay all sums the employer legally must pay as damages because of bodily injury to its employees up to the limits stated in the policy unless excluded. Employers liability insurance sometimes is referred to as a "gap filler" because the policy may cover claims that are not covered by workers' compensation statutes. Standard employers liability limits are $100,000 for each occurrence of bodily injury, $100,000 for each occurrence of employee disease and $500,000 aggregate. These limits are considered low. You should consider obtaining higher limits and check whether your umbrella insurance will extend to employers liability insurance. Defense costs are covered and generally do not erode coverage limits.

Four categories of claims not covered by workers' compensation insurance are enumerated in standard employers liability insurance policies. These are:

  • Third-party claim over suits. This occurs if an employee sues a third party who, in turn, initiates a tort claim against you, alleging your negligence was a contributing or exclusive cause of the accident resulting in personal injury to the employee.
  • Loss of consortium. This occurs when an employee's spouse brings a claim against you for damages suffered as a result of the injury or death of the employee.
  • Dual-capacity suit. These suits happen in instances where you were the installing contractor and supplier of a material or product and your employee files suit against you alleging the product or material you manufactured or fabricated caused his or her injury.
  • Consequential bodily injury to a spouse, child, parent or sibling of the injured employee. These lawsuits are filed by a family member of the inured employee, alleging he or she was injured as the direct consequence of the injury to the employee.

What is excluded?

Standard employers liability insurance policies contain 12 exclusions. The most significant exclusion is "[a]ny obligation imposed by a workers' compensation, occupational disease, unemployment compensation, or disability benefits law, or any similar law." Because employers liability insurance is intended to cover bodily injury claims of employees not covered by workers' compensation insurance, claims that would be covered by workers' compensation insurance are excluded in employers liability insurance policies. Employers liability coverage is intended to complement workers' compensation insurance and not be an alternative to or in lieu of other coverage. Because of the workers' compensation exclusion, workers' compensation and employers liability coverage generally are considered mutually exclusive.

Other important exclusions in employers liability policies are the exclusions for bodily injury intentionally caused or aggravated by the employer, punitive or exemplary damages because of bodily injury to an employee employed in violation of law, and liability assumed under a contract.

An intentional act by an employer resulting in or substantially certain to result in injury or death to an employee is not covered by either workers' compensation or employers liability policies. Bodily injury to an employee while employed in violation of law with the employer's knowledge is excluded under employers liability insurance. Employers liability insurance also does not cover fines or penalties imposed for violation of federal or state law or claims, such as discrimination, harassment or termination that typically would be covered by employment practices liability insurance.

Who has it?

Unless you are located in one of the four monopolistic states, you automatically have an employers liability policy if you have a workers' compensation policy. Employers liability coverage is included as part two of the standard workers' compensation policy promulgated by the National Council on Compensation Insurance, commonly known as NCCI. When you purchase a workers' compensation insurance policy, you also purchase an employers liability policy. There is no separate premium for employers liability coverage. In North Dakota, Ohio, Washington and Wyoming, employers liability insurance is not included as part of the workers' compensation policy. Employers in those states must separately purchase an employers liability policy as an endorsement to their CGL policies.

Just as with workers' compensation and CGL insurance, the employers liability insurer has the right and duty, at its expense, to defend any claim, proceeding or suit against the employer for damages covered by the employers liability insurance policy and the right to settle any claims, proceedings and suits. A typical employers liability policy also includes a provision affording subrogation rights to the insurer so the employers liability insurer can seek to recover payment for claims caused by the negligence of another party. The employer is to preserve the insurer's subrogation rights.

A question that sometimes arises is whether an employee can forego workers' compensation benefits and sue his or her employer for negligence and recover from the employer's employer liability policy. Although workers' compensation suits are decided by state law, the general answer is "no" based on the employers liability policy, which excludes any claim that is covered under the workers' compensation law. The availability of employers liability coverage to an employee is not based on whether the employee elected to receive or deny workers' compensation benefits; the exclusion applies to all claims that fall within the workers' compensation law.

Another question that has arisen in several lawsuits is whether the employers liability insurer can decline to defend the employer based on the workers' compensation exclusion in the employers liability policy.

For example, in the 2003 case Quick v. Ronald Adams Contractor Inc., the Fifth U.S. Circuit Court of Appeals ruled the insurer had a duty to defend the employer because the insurer's duty to defend is broader than its liability to pay claims. The insurer was obligated to defend the employer and did successfully defend the employer by obtaining a dismissal of the employee's claim based on the exclusive remedy of the workers' compensation statute and the workers' compensation exclusion in the employers liability policy.

Wrapping up

Although claims covered by employers liability insurance are relatively infrequent, employers liability insurance could become valuable under certain circumstances, including lawsuits initiated by an injured employee or the estate of a deceased employee prosecuting a wrongful death suit against a third party who then brings a claim against the employer.

Keep in mind CGL insurance policies exclude claims for bodily injury to employees arising out of and during the course of employment or performing duties related to the conduct of the insured's business and claims filed by the spouse, child, parent or sibling of the employee as a consequence of an injury to an employee. The time to review your employers liability insurance limits is not when you face a claim but when you evaluate your insurance program with an insurance professional who is familiar with your business and the risks you face.

Stephen M. Phillips is a senior partner with Atlanta-based law firm Hendrick Phillips Salzman & Siegel P.C.



To read more about this topic, see "How many do you employ?" August 2010 issue.

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