Why coverage as significant and crucial as employers' liability is routinely ignored is baffling. Employers' liability protection has been mistakenly viewed as a throw-away coverage that is simply tacked on to the workers' compensation policy. Understanding and focusing attention on workers' compensation and general liability is seen as a better use of the agent's time. One reason may be that few agents have ever been a part of an employers' liability claim.

But as mentioned in the first employers' liability coverage discussion, the importance of this dovetail coverage cannot and should not be overlooked. This is the tie that binds two main coverages together - such gap coverage deserves as deep an understanding as do the coverages it joins together.

Work Comp and CGL Provisions

Part Two - Employers' Liability Insurance fills the gaps between the workers' compensation policy and the commercial general liability policy. Workers' compensation coverage does not, per se, have any specific exclusions, penalties are assessed, but no specific exclusions apply; the limited breadth of protection necessitates this additional coverage. Conversely, the commercial general liability policy contains two specific employee injury exclusions that underline the need for this dovetail protection.

Workers' compensation insurance benefits are statutorily mandated and restricted to costs directly assignable to a specific employee injured in the course and scope of employment. Coverage is not designed to compensate any outside party, only the injured employee or the employee's dependants if the injured worker dies as a result of the work related injury or illness (death benefits are considered payments directly attributable to and solely for the "benefit" of the deceased employee not for the injury suffered by any outside party).

Commercial general liability is different. Two exclusions found in ISO's CGL policy preclude the extension of coverage to any party suffering bodily injury or financial loss as a result of an injury to an employee. These exclusions are:
• Exclusion "d." Workers' Compensation and Similar Laws excludes any obligation of the insured under a workers' compensation, disability benefits or unemployment compensation law or any similar law; and
• Exclusion "e." Employers' Liability excludes bodily injury to: 1) An employee of the insured arising out of and in the course of employment by the insured; or while performing duties related to the conduct of the insured's business; or 2) The spouse, child, parent, brother or sister of that "employee" as a consequence of an employee injured in the course and scope of employment. Exclusion "e" applies whether the insured may be liable as an employer or in any other capacity and to any obligation to share damages with or repay someone else who must pay damages because of the injury. Exclusion "e" does not apply to liability assumed by the insured under an "insured contract."

The limited provisions of the workers' compensation policy and the exclusions in the commercial general liability policy combine, with one exception, to preclude coverage for any injury or loss suffered by an outside party as a result of an injury to an employee. This gap is closed, to some extent, by the employers' liability insurance.

Before jumping into the coverage provided by the employers' liability policy, the exception to the commercial general liability policy's exclusion "e" requires exploration and comment.

Exception to the Employers' Liability Exclusion in the CGL

Liability to an "outside party" arising out of an injury to an employee is covered by the unendorsed commercial general liability policy, provided such liability is contractually assumed prior to the injury under an "insured contract" as defined in the applicable CGL form.

Take a few minutes to go back and reread 'Contractual Risk Transfer Done Right With Wrong Results' contained in the August 4, article, "Workers' Compensation - Contractual Risk Transfer." This subsection within that article recounts an employee injury claim that accurately highlights how this exception to the commercial general liability's employers' liability exclusion (exclusion "e") applies. Each higher tier contractor transferred its exposure down to the lower tier contractors beginning with the general contractor and ending at the sub-subcontractor.

Since the sub-subcontractor contractually agreed to assume the liability of the upper-tier contractor prior to the injury, the sub-subcontractor's general liability policy responded and paid for injury to the sub-subcontractor's own employee. So, yes, an insured's general liability policy may respond and pay for injury to its own employee when such employee contractually qualifies as an "outside party" (as defined in the last post) by exception to the general liability policy exclusion.

Beware and do not depend on the automatic this extension of coverage. Even though this is standard wording in ISO's CGL policy, many insurance carriers are removing this standard protection by attaching the CG 21 39 exclusion to contractors (and many other classes of insureds) commercial general liability policies. The CG 21 39, titled "Contractual Liability Limitation," redefines an insured contract by removing definition "f." Removing "f." deletes coverage for the assumption of tort liability of another party via contract.

In short, the contractual risk transfer coverage as recounted above and detailed in the prior article will be negated in any commercial general liability policy containing this exclusionary endorsement. Additionally, such contractual assumption is specifically excluded in the employers' liability coverage part (which will be detailed in an upcoming commentary). If this exclusion has been attached, a large coverage gap is created in the contractual liability coverage available to the insured.

Many construction contracts request proof via the certificate of insurance that "broad form contractual liability" exists; this is a hold-over term from the years prior to the 1986 CGL revisions. However, stating that broad form contractual liability protection does in fact exist may actually be misrepresentation if the definition of "insured contract" has been limited by the attachment of the CG 21 39. Such misrepresentation may leave the client open to charges of breach of contract and the agent open to an errors and omissions suit.

THIS IS A WIDE GAP!

Next Up!

Employers' liability coverage specifics will be the topic of the next post to include the types of claims covered with brief examples of each.