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Managing your risk by Michael Kelly

NCACC Risk Management Director Michael Kelly writes a regular column on risk management for CountyLines. With more than 41 years of risk management/ insurance experience, he holds the CPCU - Chartered Property & Casualty Underwriter, ARM-P - Associate in Risk Management for Public Entities, CRM - Certified Risk Manager, ARe - Associate in Reinsurance and CIC - Certified Insurance Counselor Professional Designations. He can be reached at michael.kelly@ncacc.org or (919) 719-1124.  For archives of this column click here.

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Oct 29

Workers Compensation Employers Liability - An Extra Safety Net

Posted on October 29, 2013 at 3:37 PM by Chris Baucom

I would imagine that the majority of Risk Managers have a working understanding of the fact that in a workers’ compensation insurance contract, the specific benefits under Coverage A are established by each state’s compensation act and obviously vary from state to state.
However Coverage B-Employers Liability is also an important coverage section of the policy that is often misunderstood or even overlooked.

In actuality the employer’s liability coverage language is structured somewhat similar to a traditional general liability coverage document. It reads something to the effect that the insurance carrier will pay for damages in your behalf for which you are legally responsible, subject of course to a set of exclusions and other specific conditions.  In simpler terms, it is designed to cover an employer for the common-law liability arising out of occupational injury to employees that are not otherwise covered by the state’s workers’ compensation statutes.

Types of employees that are examples of possible exceptions to the workers’ compensation act might be employers with less than a specified number of employees, farm laborers, domestic servants, casual workers, railroad workers, voluntary ski patrol persons, and  individual sawmill or logging operators with fewer than 10 employees who operate less than 60 days over a six-month period.1   

This raises an important point for consideration: When an employee or employer is excluded by exception from the workers’ compensation statutes, it then becomes possible for an injured employee to sue the employer for their occupational injury under the principal of common-law.  Remember the purchase of workers’ compensation coverage is supposed to eliminate the ability (and necessity) for an injured employee to sue their employer – and the statutory benefits are supposed to be the sole remedy for said injuries.   However if an employer falls outside of the statute (for example, a contractor with only one employee) they might not provide workers’ compensation coverage for their employees, which poses a serious exposure and potential impact to your loss history.

It would be wonderful if determining who is and who is not an employee was always a black and white consideration – unfortunately often it is not.  Injured individuals may be able to seek indemnity under your workers’ compensation coverage if they are found to be “statutory employees” at the time of the accident.  A statutory employee is an individual that may be afforded workers’ compensation benefits by law in accordance with the loss detail specifics and their relationship to the employer at the time of the accident.

Since general liability policies specifically exclude coverage for any legal responsibility resulting from injury to an employee of the insured, employer’s liability in the workers’ compensation policy is designed to fill this gap in coverage.  The key element here is the employer must become legally obligated to pay because of some kind of bodily injury by accident or disease to the injured individual, AND the bodily injury must arise out of and in the course of employment and NOT be covered under a state or federal workers’ compensation law.

Some textbook examples2 for the need of employer’s liability might be:
• Third-party action over claims – This refers to an organization other than the employer or employee that is sued by the injured employee for an occupational injury, such as while operating a leased vehicle on county business, alleging some type of negligence from the leasing company, and then the automobile leasing company turns around and sues your county for reimbursement alleging it was in fact poor fleet maintenance that was the systemic cause of injury to your employee.

• Claims for care and loss of services – This is typically known as loss of consortium, which is generally defined as the right of association and companionship with one’s husband or wife.

• Claims for consequential bodily injury – such as a case where the spouse of a county health department employee becomes ill as a result of a covered injury (e.g. their spouse, an employee in the county health department, suffers a needle prick while treating a patient with AIDS and subsequently passes it along to their spouse). The spouse of the employee can sue as a result of alleged negligence (improper training in handling AIDS patients) attributed to the employing county.

• Dual-capacity claims – This may occur when an injured employee sues their employer for damages arising out of the employer having acted in some capacity other than the employer.  In county government this is a rarity, in that typically it stems from product liability issues and the employer is the manufacturer of the product that caused the injury.  Essentially the injured employee is suing their employer in their capacity as a manufacturer rather than as an employer.

Like all insurance policies, there are exclusions that eliminate coverage for certain conditions.  

This is done to prevent an overlapping or essentially providing double coverage with other forms of insurance, as well as to eliminate coverage not intended by the insurance carrier.  

Two examples are employees subject to the Longshoreman and Harbor Workers’ Compensation Act (employees injured while working on navigable waterways doing marine type work, such as ship building or repair) or the Federal Employers’ Liability Act (employees of interstate railroads). In both instances there are other specific coverage endorsements available that may be added for an additional charge in workers’ compensation premiums.

The takeaways here are to recognize your potential exposure to financial loss and to understand that employer’s liability coverage is designed to catch what falls through the cracks for an injured individual who seeks retribution for their injuries while working in your behalf, is not a statutory employee, and have no workers’ compensation coverage of their own.  Regardless, an outside individual may be able to extract benefits under Coverage A or Coverage B of your workers’ compensation policy.  As such, I cannot think of a better reason to mandate any and all outside contractors, companies or individuals that provide services or do work in your county’s behalf purchase their own.  Politically this can be a challenge, but if handled in a unilateral, equally applied manner, it should pass muster.

 1 2013 Analysis of Workers Compensation Laws – Sedgwick CMS, Inc.
 2 Commercial Liability Risk Management and Insurance 1st Edition - CPCU