Employer’s liability insurance protects businesses from lawsuits filed by employees who have suffered a work-related injury or illness. It’s distinct from workers’ compensation insurance; workers’ comp (as it’s often called) provides benefits to employees who are injured on the job, while employer’s liability insurance covers the employer’s legal costs and potential damages if an employee sues for additional compensation beyond what is covered by workers’ comp.
How Does Employer’s Liability Insurance Work?
Employer’s liability insurance (ELI) works similarly to other kinds of liability insurance. In most states, ELI is included in a workers’ compensation insurance policy, which businesses are required to carry. There are four exceptions to this rule in what are known as “monopolistic states”: In North Dakota, Ohio, Washington, and Wyoming, you will need to buy workers’ comp insurance from a state-run agency and a separate ELI policy from a private company.
The general process for ELI goes like this: A business purchases a policy from an insurance company with specific limits, terms, and conditions. If an employee of the business files a suit against the company due to a work-related injury, the business notifies their insurance company. The insurance company then investigates the claim to determine coverage under the policy: if covered, the policy will pay for damages and legal fees up to the limit of the policy.
Let’s imagine an example. You run a small landscaping business, and your employee is injured in a lawn-mowing accident. They sue you, claiming that the accident was a result of negligence, namely poor maintenance on the lawn mower. Workers’ comp covers the employee’s medical bills; employer’s liability insurance covers your legal fees.
Employer’s Liability Insurance Coverage
Like all insurance, employers’ liability insurance has various levels of coverage depending on your policy, your insurance company, and where your business is located. Make sure you read your policy carefully, and consult an attorney (or public adjuster) with any questions.
What Is Covered by Employer’s Liability Insurance?
Employer’s liability insurance covers legal costs and damages in case an employee sues the employer. Typical items covered will include:
- Attorney’s fees
- Court costs
- Compensatory damages
- Punitive damages
- Other expenses incurred in defending a lawsuit
Compensatory damages are monies due to the employee to compensate for their losses, including pain and suffering, lost wages, and medical expenses. Punitive damages are intended to deter future misconduct by punishing the employer for egregious behavior. While most states do not allow for punitive damages, some do: Consult your policy and your local laws to determine which matches your case.
Employers’ liability insurance covers the following four kinds of lawsuits:
- Third-Party Lawsuits: These are suits filed by an entity who is not directly involved in the incident. Take our landscaping business scenario above: If an employee is injured in a lawnmower accident, they might sue the equipment manufacturer and claim a faulty piece of equipment, who might in turn sue the employer for failure to maintain the equipment properly.
- Loss of Consortium Lawsuits: These can be filed by family members of a deceased or disabled employee seeking compensation for the loss of the relative or their income.
- Consequential Bodily Injury Lawsuits: These lawsuits are also filed by a non-employee who has suffered physical damage as a result of the workplace incident. For example, if your landscaping employee is severely injured and their spouse has a heart attack brought on by the stress, they might file a consequential bodily injury suit.
- Dual-Capacity Lawsuits: These occur when an employee sues their employer in a dual capacity; in other words, the employer has a dual relationship to the employee. If, for example, your landscaping business also maintains properties that you own, your employee might sue you both as the employer and as the property owner where the incident occurred.
What Is NOT Covered by Employer’s Liability Insurance?
While ELI provides significant financial protection for a business, it does not cover the following:
- Intentional Acts: If an employer intentionally harms an employee, the insurance may not cover the damages.
- Criminal Acts: Insurance policies generally exclude coverage for criminal acts committed by the employer or its employees.
- Claims Covered by Workers’ Compensation: If a claim is already covered by workers’ compensation, employer’s liability insurance may not provide additional coverage.
Additionally, ELI does not cover costs associated with defending the business from employee claims of sexual harassment, discrimination, or wrongful termination. This kind of coverage can be found in an employment practices liability insurance policy, which must be purchased separately.
Do I Need Employer’s Liability Insurance?
While the legal requirements vary by state, in most states workers’ compensation insurance is mandatory, and ELI is included in workers’ comp (unless you are in one of the four monopolistic states). No matter where your business is located, though, it’s a good idea to purchase employers’ liability insurance. Even if you only have one employee and work in a low-risk field, there is always the potential for on-the-job injury and resulting financial strain on your business.
How Much Does Employer’s Liability Insurance Cost?
The cost of ELI varies widely depending on several factors, making it difficult to identify exact costs. Some of the most important factors include: How many employees you have, what industry you’re in, the safety measures and training you implement, and the amount of coverage you choose. Most relevant are the number of employees and your industry; more employees means more risk and therefore higher premiums, and riskier industries like construction or manufacturing will also have higher premiums.
How To Buy Employer’s Liability Insurance
Buying insurance can be confusing at the best of times: buying employer’s liability insurance means considering multiple interconnected factors. To start, consider your needs: How big is your business? How much coverage do you need? What kinds of premiums can you afford? Then, get quotes from businesses and compare policies; you’ll need to also review your state’s requirements to ensure that you’re in compliance with local laws. We recommend consulting with an insurance broker who specializes in business insurance to ensure that you’re making the best choice for your business.
Benefits of Employer’s Liability Insurance
The main benefit of ELI is financial protection and legal compliance, since most states require workers’ compensation insurance. Additionally, legal fees accumulate quickly and can be overwhelming, especially for smaller businesses. Financial protection can in turn provide peace of mind for you as a business owner, since the additional security removes a source of worry.
Employer’s Liability Insurance FAQs
Is Employer’s Liability Insurance Mandatory?
That depends on where you’re located. Most states require employers to carry workers’ compensation insurance, and ELI is often included. To be sure, check your state’s laws.
What’s the Difference Between Employer’s Liability Insurance and Worker’s Compensation Insurance?
Employer’s liability insurance protects a business from legal fees associated with suits filed by employees; workers’ compensation insurance pays the medical bills of employees in case of work-related injury or illness. For example, let’s say you run a small manufacturing business, and one of your employees is injured on the line and sues you, claiming you haven’t properly maintained the equipment. Workers’ comp covers the employees’ medical bills, and employer’s liability insurance pays your legal fees associated with the suit.
What’s the Difference Between Employer’s Liability Insurance and General Liability Insurance?
General liability insurance protects business owners from third-party suits due to injury or property damage, while employer’s liability insurance is specific to liability claims filed by employees of the business. In other words, employer’s liability insurance is a specialized form of coverage that specifically addresses the unique risks associated with employee injuries. General liability insurance provides broader protection against claims from third parties if they’re injured on your property, such as customers, pedestrians walking by on the property, a delivery driver dropping something off, etc.
How Does Employer’s Liability Insurance Differ from Employment Practices Liability Insurance?
Employment practices liability insurance covers the employer from liability associated with employee claims of sexual harassment, wrongful termination, discrimination, or other legal issues associated with employment. Employer’s liability insurance, on the other hand, protects business owners from financial costs associated with physical injury to an employee.
What Happens If I Don’t Have Empoyer’s Liability Insurance and an Employee Gets Injured at Work?
If an injured employee sues and you’re found at fault as the business owner, you would be responsible for the full financial outcome of the suit. This might include personal liability for the employee’s medical and legal costs, as well as your own legal costs. Additionally, since most employers are required to carry workers’ compensation insurance, and most workers’ comp policies include ELI, you could face legal penalties for your lack of compliance.
How Can I File a Claim Under My Employer’s Liability Insurance Policy?
As an employer, you typically would not file a claim on your own employer’s liability insurance; however, if your employee files suit against you, you will need to notify your insurance carrier of the lawsuit. You will then need to cooperate with your insurance company as they investigate the circumstances of the incident. The company will likely appoint a defense attorney to defend the business, which will result in either settlement or trial. Throughout, make sure you are cooperating as fully as possible with your insurance company.
Do You Have Questions About Employer’s Liability Insurance? Contact Merlin Today!
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