What Is Employers' Liability Insurance?

What Is Employers' Liability Insurance?

Let me explain employers' liability insurance directly: it's a policy that deals with claims from workers who've suffered a job-related injury or illness not covered by workers' compensation. As a form of liability insurance, you can package it with workers' compensation to better shield your company from costs tied to workplace injuries, illnesses, and deaths.

Keep in mind, though, that this insurance doesn't handle legal costs from employee lawsuits involving discrimination, sexual harassment, or wrongful termination. For those, you'll need a separate policy known as employment practices liability insurance, or EPLI.

Key Takeaways

You should know that employers' liability insurance covers companies against costs and claims by employees that workers' compensation doesn't handle. Many organizations carry it to manage legal costs and lawsuits. Most workers' compensation policies include employers' liability insurance automatically. These policies set limits on payouts per employee, per incident, or per policy overall.

How Employers' Liability Insurance Works

Most private-sector employees fall under state-level workers' compensation laws, while federal employees follow federal ones. States generally require employers to have workers' compensation insurance.

Workers' compensation offers coverage for medical expenses and lost wages for employees or their beneficiaries if an employee gets injured, sick, or killed due to their job. The employee doesn't need to sue to prove fault to get these benefits.

But if an employee believes workers' compensation falls short—say, because they think their employer's negligence caused the injury—they might sue for punitive damages, like pain and suffering. That's where employers' liability insurance steps in. It handles expenses outside workers' compensation or general liability, providing extra financial protection for your business.

You typically buy employers' liability coverage with workers' compensation. It's often called 'part 2' of a workers' compensation policy. Part 1 covers medical or death expenses and partial lost wages from work-related issues. Part 2 protects against claims for additional damages and compensation.

Consider this: without employer liability insurance, firms face an average additional $110,000 in court cases, according to the Hiscox Guide to Employee Lawsuits.

What Employers' Liability Insurance Covers

This insurance covers various claims, including third-party lawsuits from entities indirectly involved in a workplace incident—for instance, if an employee sues a equipment manufacturer after an injury, and the manufacturer then sues you as the employer. It also handles loss of consortium lawsuits from family members of a deceased or disabled employee seeking compensation for lost income or companionship.

Consequential bodily injury lawsuits are covered too, where a non-employee suffers harm due to an employee's injury, like a spouse developing health issues from caregiving. Dual-capacity lawsuits apply when an employee sues you both as their employer and in another role, such as the product maker or premises owner—think a worker injured by a falling ceiling suing the company as both employer and landlord.

Many companies get this insurance to cover court defense costs. Claims can get complex and expensive, whether legitimate or not, so businesses insure against that risk. Coverage applies to court awards and out-of-court settlements.

In a payout scenario, you can limit losses by including a clause that releases you and your insurer from further liability related to the incident.

Employers' Liability Insurance Limits

These policies set limits on payouts, often as low as $100,000 per worker, $100,000 per incident, and $500,000 per policy. Coverage applies only to full- or part-time employees, not independent contractors or those working outside the U.S. or Canada.

Not every situation is covered—exclusions include criminal acts, fraud, illegal profits, purposeful law violations, and claims from downsizing, layoffs, restructurings, plant closures, strikes, mergers, or acquisitions.

If you intentionally worsen an employee's injury or illness, the insurance won't cover your obligations, and you'll pay if the employee wins in court. Many states bar coverage for punitive damages, but policies often use a 'most-favored jurisdiction' clause to allow it by following laws from a state that permits such coverage. For example, if a claim arises in a restrictive state but your company is based in one that allows it, the policy can still protect you.

Employment Practices Liability Insurance (EPLI)

Remember, employers' liability insurance and workers' compensation don't cover claims of discrimination based on sex, race, age, or disability, nor wrongful termination, harassment, slander, libel, or issues like failure to promote. For that, you need employment practices liability insurance, or EPLI.

How Is Employers' Liability Insurance Different From General Liability?

General liability insurance covers your business from outside claims, like customer injuries or negligence, but it doesn't handle employee-related issues. Employers' liability insurance specifically addresses legal claims from injured workers.

What Is Excluded From Employers' Liability Insurance?

Exclusions cover criminal acts, fraud, illegal profits, law violations, and claims from downsizing, layoffs, restructurings, mergers, or acquisitions.

Do You Need EPLI and ELI?

EPLI differs from employers' liability insurance (ELI). You need EPLI to protect against employee lawsuits alleging discrimination, sexual harassment, or wrongful termination, which ELI doesn't cover.

The Bottom Line

Employers' liability insurance safeguards your company from legal claims by workers with job-related injuries or illnesses. Paired with workers' compensation, it covers costs and claims from injured employees. It excludes criminal acts, fraud, and law violations, while discrimination, harassment, or wrongful termination fall under EPLI.