Master Guide to Employers’ Liability Insurance: Definition, Coverage, & Limits

What Is Employers’ Liability Insurance?

Employers’ liability insurance provides coverage to workers who have suffered a job-related injury, illness, or death and protects businesses from financial loss due to claims not covered by standard workers’ compensation policies. It also covers third-party lawsuits and loss of consortium but excludes criminal acts. It’s important that businesses understand policy limits and the need for a separate employment practices liability insurance (EPLI) policy to cover sexual harassment, discrimination, and wrongful termination claims.

Understanding the Mechanics of Employers’ Liability Insurance

The majority of private-sector employees are covered by workers’ compensation laws established at the state level (federal employees work under federal workers’ compensation laws). Many states require employers to have workers’ compensation insurance.

Workers’ compensation provides some level of coverage for medical expenses and lost wages for employees or their beneficiaries when an employee is injured, falls sick, or is killed as a result of their job. There is no need for the employee to sue the employer to establish fault in order to qualify for workers’ compensation benefits.

However, if an employee feels that workers’ compensation does not adequately cover their loss—perhaps because they feel their employer’s negligence caused their injury—they may decide to sue their employer for punitive damages arising from their situation, for things such as pain and suffering.

This is where employers’ liability insurance comes in. Designed to deal with expenses that fall outside the realm of the workers’ compensation statutes or general liability insurance, it provides additional protection against financial loss for the company or business.

Businesses usually buy employers’ liability coverage with workers’ compensation insurance. In fact, employers’ liability insurance is often called “part 2” of a workers’ compensation policy. Part 1 of the policy is the actual “workers’ comp,” which pays for medical/death expenses and partial lost wages from work-related injuries and illnesses. Part 2 would be the employers’ liability coverage, protecting the business from claims for additional damages and compensation.

Comprehensive Coverage Offered by Employers’ Liability Insurance

Other sorts of claims covered by employers’ liability insurance include:

• Third-party lawsuits: Filed by another entity distantly involved in the workplace incident. An employee may be injured by a piece of equipment on the job, for example, and sue the equipment manufacturer—who then files suit against the employer.
• Loss of consortium lawsuits: 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: Filed by a non-employee who suffers physical damage as a result of an employee’s injury, such as a spouse who develops health problems from taking care of the injured worker.
• Dual-capacity lawsuits: When an employee sues their employer both as an employer and as something else—the maker of a product, provider of a service, landlord, etc. One example: A piece of a ceiling in the workplace falls and hits a worker, and they file suit against their company in its dual capacity as employer and as the premises owner.

Many companies choose to carry employers’ liability insurance to help cover the costs of defending the organization in court. Claims can become complicated and costly for employers, particularly in the case of a lawsuit. A liability claim may be legitimate or not, but even so, many businesses cannot accept that level of risk, and they take measures to insure against it. Their liability coverage applies to both court-awarded sums and to payments reached in out-of-court settlements.

Employers’ liability insurance policies tend to place limits on payouts per employee, per injury, and overall. These limits might be as low as $100,000 per worker, $100,000 per incident, and $500,000 per policy. Employers’ liability insurance covers only full- or part-time employees, not independent contractors or those working outside the U.S. or Canada.

Coverage Limits and Exclusions in Employers’ Liability Insurance

Employers’ liability insurance does not cover all cases. Exclusions include criminal acts, fraud, illegal profit, violations of the law, and claims from downsizing, layoffs, and mergers.

If an employer worsens an employee’s work-related injury intentionally, employers’ liability insurance won’t cover the costs, and the employer will pay if the employee wins in court.

Also, many states do not allow insurers’ coverage to apply to punitive damages. However, many employers’ liability insurance policies do manage to cover these costs through a “most-favored jurisdiction” clause. The clause specifies that the policy’s coverage will be regulated by the state law that does allow employers’ liability insurance to provide compensation for punitive damages—a jurisdiction that favors them, in other words.

For example, consider a company with offices and work sites across the U.S. A claim arises in a state where punitive damages are excluded from employers’ liability insurance. If the company is established in a state that does allow punitive damages coverage, then the company employers’ liability insurance policy can protect it after all.

Employment Practices Liability Insurance (EPLI)

It’s important to note that employers’ liability insurance and workers’ compensation do not cover employers against employee claims alleging discrimination (for example, based on sex, race, age, or disability), wrongful termination, harassment, slander, libel, and other employment-related issues such as failure to promote. The employer would need to purchase a separate type of policy—called employment practices liability insurance (EPLI)—for this kind of coverage.

The Bottom Line

The primary purpose for employers’ liability insurance is to protect a company against employee claims not covered by workers’ compensation coverage. It’s important coverage that can safeguard against the financial burden of lawsuits and potential punitive damages. Employers’ liability insurance protects a company from legal claims filed by workers who have experienced a job-related injury or illness. Both employers’ liability insurance and workers’ compensation should be considered together for comprehensive coverage against work-related injuries. Criminal acts, fraud, and violation of the law are not covered by employers’ liability insurance. Employee lawsuits claiming discrimination, sexual harassment, or wrongful termination are covered under employment practices liability insurance (EPLI).