When is Employers Liability Coverage Necessary?

An agent lives in a state which allows corporate officers to opt out of workers compensation and employers liability separately.

Q: What does an insured give up if they opt out of employers liability in addition to workers comp?

A: Employers liability coverage fills the gap between the workers comp policy and the commercial general liability policy.

Liability for employee injuries is essentially totally excluded under the CGL, with few exceptions, including third-party-over claims resulting from contractual risk transfer. Workers comp covers medical, indemnity and other expenses to and for the benefit of only the injured employee, provided the injury arose out of and was in the course and scope of employment. No one other than the employee receives payment or the benefit of payment under workers comp, except when the death benefit goes to the family.

Employers liability coverage fills this gap, providing a source of funds for a person or entity injured—financially or literally—due to an injury to an employee. It also covers a worker when they sustain injuries as a consumer rather than just an employee. 

Essentially, employers liability covers four types of loss costs:

1) Third-party-over actions: Not to be confused with the third-party-over action covered by the CGL, under employers liability, this coverage protects the employer against the legal liability assigned to it as a result of an outside party suffering financial injury arising out of injury to the employee.

In simpler terms, an employee sues someone else as a result of an injury; during and after the suit, it comes to light that the employer was somehow negligent, not the third party; the claim is turned over to the employer under employers liability.

2) Loss of consortium: Also known as loss of family services, this refers to when an employee is injured and the family still suffers financial injury even though workers compensation pays medical and indemnity costs. They still have to mow the lawn, clean the house and drive the kids around, and they may need to hire these services out. Employers liability covers these increased costs.

3) Consequential bodily injury: For example, one spouse brings a work-related disease home, and someone in the family contracts the disease.

4) Dual capacity actions: If an employee is injured by a product their employer manufactured, the employee may have a cause of action outside that granted them as an employee—they have the rights of a consumer.

The classic example is a tire manufacturer delivery driver who is injured by a tire exploding while they are filling it with air. The tire was manufactured by the employer, and the employee has coverage under workers comp as a compensable injury. But the employee has also suffered an injury to which a consumer would be exposed, and therefore holds two positions in the claim. Employers liability covers this position as a consumer.

One caveat to employers liability: The employer must be legally liable for causing the injury to the outside party, or the employee in a dual capacity situation. While workers comp does not require fault, employers liability is more like the CGL, requiring that the employer be proven negligent in causing the injury to the employee that led to financial loss for an outside party. 

That’s what an insured gives up when they reject employers liability coverage. It's not loss of protection for the employee, but rather the employer.

Chris Boggs is executive director of the Big “I” Virtual University (VU).

This question was originally submitted by an agent through the VU’s Ask an Expert Service. Answers to other coverage questions are available on the VU website. If you need help accessing the website, request login information.