Employer Liability Limits: Are Yours Putting Your Business at Risk?
So you’ve gotten a quote for workers’ comp insurance. When reviewing the quote, you see an interesting addition - ‘employer’s liability coverage’.
“Hmm... is this related to general liability insurance?” you wonder.
Or perhaps you've noticed that there were limits - say, $1,000,000 - on the policy and thought, "Wait a minute, I thought workers' comp didn’t have limits!"
In this blog, we’ll explain what employer’s liability insurance is, how it relates to worker’s comp, and what employers’ liability limits are. Then, we’ll give you our recommendations on choosing the right limits for your business.
What is Employer’s Liability Insurance?
Employer’s liability (EL) insurance is essentially Part II of a workers' comp policy. If you take a look at your policy, you'll see that Part I covers standard workers' compensation, while Part II pertains to employers' liability. Typically, these two coverages are bundled together in one policy package.
Employer’s liability provides financial protection for your business when an employee sues over a work-related injury or illness.
Note: Don’t confuse employer's liability with general liability, which typically covers claims from third parties for property damage or bodily injuries. Additionally, it’s easy to confuse EL with EPLI (Employer’s Practice Liability Insurance), which covers claims arising from employment-related issues such as harassment.
What's the difference between Employer’s Liability and Workers' Comp?
To better understand what EL covers, it's helpful to distinguish it from workers' comp and see how the two relate to each other.
Both coverages come into play when an employee gets injured or falls ill due to workplace conditions. The difference lies in the specific circumstances and the nature of the claims.
Workers' compensation provides benefits to employees for work-related injuries or illnesses, regardless of who is at fault.
On the other hand, employer's liability kicks in when an employee believes that an employer’s negligence caused their injury or illness. If the employee decides to sue for compensation beyond what workers’ comp offers, EL would cover the legal fees and any resulting claims.
Here’s the breakdown:
What will Workers' Comp cover?
Workers’ comp covers the following:
Medical Bills: Covers the cost of medical treatments, doctor visits, and medications.
Partial Wages for Missed Work: Compensates for a portion of the employee's lost income while they recover.
Vocational Training: If the injury prevents an employee from returning to their original job, it may cover the training cost for a new position.
Rehabilitation: This includes physical therapy or other necessary treatments to aid recovery and help the employee return to work.
Death Benefits to Survivors: Should a workplace injury or illness result in death, workers’ comp provides financial benefits to the deceased employee's dependents or survivors.
What will Employer's Liability cover?
Employer's liability insurance provides coverage for:
Legal Costs: This includes attorney fees, court costs, and other expenses related to claims brought by employees against the employer.
Injury Compensation: If a claim is successful, this insurance will cover the costs that result from the claim.
Here’s an example:
A pizza shop worker burns his hand severely while taking a pizza out of the oven. He’d repeatedly informed his employer about the need for oven mitts, but they were never provided. Workers’ comp insurance pays his medical bills and compensates him for a portion of his lost wages.
However, every weekend, this same worker used to mow the lawn for his family. Now, with his burnt hand, he can’t handle the lawnmower.
Seeing the added burden and feeling that the injury was preventable, his family decides to sue the employer for additional funds beyond what workers’ comp provides. This is where Employer's Liability insurance steps in.
Note: In monopolistic states where workers' comp insurance is provided directly by the state, employer's liability isn't always included. In such instances, you might need to purchase a standalone employer's liability policy.
What are Workers’ Comp Liability Limits?
Workers' compensation doesn't have a monetary cap. This means the insurance will cover all approved medical expenses and partial wages for the time the employee is off work, no matter the cost.
Here’s an example:
Medical Costs: If an employee needs a surgery that costs $800,000 and subsequent rehab totaling $500,000, that's $1.3 million the insurance carrier is on the hook for.
Lost Wages: If an employee used to earn $1 million and can't work due to an injury, the carrier might pay out, for instance, $700,000 as partial wages, depending on policy specifics and state laws.
While there isn't a dollar limit, states might impose time limits - determining how long the employee can receive benefits, whether that's in weeks, months, or years.
What are Employer’s Liability Limits?
Unlike workers' comp, employer's liability insurance does have specific dollar limits. These limits are what you, as a business owner, would decide upon when setting up your policy. The standard options are:
- Basic Limits: The basic limits are often referred to as "100/500/100”. They stand at $100,000 for bodily injury by accident per occurrence, $500,000 policy limit for bodily injury by accident, and another $100,000 for bodily injury by disease per employee.
- Progressive Limits: The next tier often is $500,000 across all categories.
- Enhanced Limits: Many businesses choose a $1 million limit across all categories for added protection. Some insurance carriers even provide options for $2 million.
Which Employer’s Liability Limits are right for your business?
White Collar Professions:
Industries like legal services, accounting, consulting, and other office-based professions usually experience minimal workplace injuries. As a result, employees in these industries almost never make claims beyond what worker’s comp covers.
Recommendation:
Go with the basic limits. Most claims are adequately addressed by standard workers' comp payouts.
Construction Industries:
Construction is inherently riskier, with employees frequently handling heavy equipment, working at heights, or being exposed to hazardous materials. Many construction contracts require firms to carry higher liability limits.
Recommendation:
Always go with at least $1 million. This not only offers adequate coverage but also ensures you meet contractual obligations.
The Gray Area - Specialized Trades and Services:
For professions that don't neatly fit into the white-collar or construction categories, there's a bit of a gray area.
These might include:
- Tradespeople: Such as plumbers, HVAC technicians, electricians, landscapers, etc.
- Light Manufacturing: Businesses that produce goods but aren't engaged in heavy industrial work.
- Maintenance and Repair: Professionals who work in varying environments, sometimes dealing with machinery or electrical systems.
Recommendation:
Go with $1 million! The higher limit ensures broader protection. And the slightly higher premium often pales in comparison to the peace of mind and financial safety net provided.
From Our Files:
We secured a workers’ comp policy for a freight forwarding company in Missouri. It was a straightforward warehouse operation—neither a white-collar firm nor a construction site.
Given the nature of their operation, we immediately advised them to raise their employer’s liability limits to $1 million; it was a no-brainer. This comprehensive coverage protected them from potential lawsuits, and enhancing their coverage added only $75 to their yearly premium!
Keep in Mind: Should your business needs change or if you reconsider your coverage level, you can always add an endorsement mid-policy.
Making the Case for Higher Employer's Liability Limits
If you operate in an industry that’s not 100% white-collar, but is not construction-related either, you may be tempted to just go with the basic EL limits of 500/1000/500. However, such a decision, while saving you money in the short run, might not be the best strategy in the long run. Here's why:
The Reality of Lawsuits:
Data shows that 1 in 5 small businesses will eventually be faced with a lawsuit. In such an environment, it's essential to have robust protective measures in place.
A Small Increase, Significant Coverage:
Going with the $1 million limit might result in only a small increase in your premium. This minimal investment can drastically mitigate your risk exposure, offering a considerable return in terms of peace of mind.
The Role of Umbrella/Excess Policies:
An umbrella policy kicks in when your standard employer's liability coverage reaches its limit. It's worth noting that many insurance providers are often hesitant to add umbrella policies to coverage below $1 million.
By going with higher limits, you not only get better protection, but you also increase your chances of being able to secure an umbrella policy.
Need Guidance on Employer’s Liability Insurance?
If you're uncertain about where your business stands or have questions about employer liability insurance, don't hesitate. Give us a call at 866-338-6388. We're here to help!
Note: The information provided in this blog is intended for general informational purposes only and is not a substitute for professional legal or insurance advice. Laws and regulations regarding workers' compensation insurance are complex and vary by state and by specific circumstances. Therefore, readers are encouraged to consult with a qualified legal or insurance professional to obtain advice with respect to any particular issue or problem they might have.
Mordechai Kamenetsky, co-founder and lead agent of Kickstand, is recognized as an expert in workers' compensation. He is passionate about helping small businesses manage risks and lower their workers' comp costs. In his articles, he educates readers and clients on the intricacies of workers' comp insurance.
