The standard workers' compensation and employers' liability (WC/EL) insurance policy provides coverage for employment-related injuries or illnesses sustained by employees. The most widely used WC/EL policy form (WC 00 00 00A) was developed and issued by the National Council on Compensation Insurance (NCCI).

The 1997 version of the WC/EL policy contains three coverage parts:

•    Part One (workers' compensation insurance) of the policy provides the insured statutory coverage for bodily injury (including death) by accident or disease sustained by an employee as a result of his or her employment.

•    Part Two (employers' liability insurance) of the policy provides the insured coverage for liability imposed by law as respects any work-related bodily injury or disease sustained by employees that is covered by the policy but is not compensable under workers' compensation statutes.

•    Part Three (other states insurance) provides both workers' compensation and employers' liability coverage in states which are not designated in Item 3.A of the policy information page, but which are listed under Item 3.C of the information page.

In addition to the three coverage parts described above, there is a “General Section” and three additional sections captioned Part Four, Part Five and Part Six. The General Section explains the content of the policy, describes who is insured, contains the policy definitions of “workers compensation law” and “state”, and affirms that coverage applies to all workplaces shown in Items 1 and 4 on the policy information page. Coverage also applies to workplaces shown in Item 3.A. of the information page unless the insured has other insurance or is self-insured for such workplaces.

Part Four (your duties if injury occurs) specifies the insured's duties if a loss occurs. The insured must tell the insurer at once if an injury occurs that may be covered by the policy. Other duties of the insured include (1) providing for immediate medical or other services as required by law, (2) providing the insurer or its agent with names and addresses of injured persons and witnesses, (3) giving the insurer all notices, demands and legal papers regarding the injury, claim, proceeding or suit, (4) cooperating with and, upon request, assisting the insurer in the investigation, settlement and defense of claims, proceedings or suits, (5) not impairing the insurer's right of recovery from others, and (6) making no voluntary payments, assuming no obligations and incurring no expense, except at the insured's own cost.

Part Five (premium) contains information regarding the assignment of premium classifications and how premiums are to be calculated and paid. The insured is required to keep records that relate to the calculation of premiums and to make those records available to the insurer upon request. The insurer's requirements as respects documentation and how an audit will be conducted are also described in this section.

Part Six (conditions) contains five policy conditions. The most important of these are the insurer's right (but not obligation) to conduct an inspection of the workplace at any time, policy cancellation provisions, and the sole representative condition. The sole representative condition states that the first named insured will act on behalf of all insureds to change the policy, receive return premium and give or receive notice of policy cancellation.

Part One—Workers' Compensation Insurance

Part One (workers' compensation insurance) coverage is statutory and varies from state to state. Because workers' compensation coverage is not included within the scope of coverage of umbrella liability policy, only Part Two (employers' liability insurance) and Part Three (other states insurance) coverages are discussed in The Umbrella Book.

Part Two—Employers' Liability Insurance

Almost all general liability policies exclude coverage for bodily injury (including disease) to employees unless liability for such injuries is assumed by the employer under an insured contract. Where liability for employee injury is assumed under contract (such as might occur if the insured hires a contractor whose employees perform work on the insured's behalf), that liability would likely be covered by the insured's general liability coverage form.

Under Part Two coverage, the insurer promises to pay all sums the insured legally must pay as damages because of bodily injury by accident or disease (including resulting death) to employees and which are covered by Part Two of the policy. For coverage to apply, the employment must be necessary or incidental to the insured's work in a state or territory listed under Item 3.A. on the policy's information page. Bodily injury by accident must occur during the policy period. Bodily injury by disease must be caused or aggravated by the conditions of employment, and the last day of the employee's last exposure to the conditions must occur during the policy period.

Where permitted by law, damages payable include (1) those for which the insured is liable to a third party because of that party's claim or suit against the insured to recover damages as a result of injury to the insured's employee, (2) cost of care and loss of services, (3) damages for consequential bodily injury to an inured employee's spouse or relatives, and (4) damages that are the direct consequence of the employment-related bodily injury claimed against the insured in a capacity other than as an employer.

The insurer has the right and duty to defend, investigate or settle any claim, proceeding or suit against the insured for damages payable under the policy. Such payments will be made at the insurer's expense and in addition to the policy's limit of liability. Costs payable by the insurer include reasonable expenses (other than loss of earnings) incurred at the insurer's request, premiums for appeal and attachment bonds, litigation costs taxed against the insured and post-judgment interest. However, the insurer has no duty to defend after the applicable limit of liability under the policy has been paid.

Three separate limits of liability apply to employers' liability coverage and are shown in Item 3.B. of the policy information page:

1.  A maximum limit for each accident involving bodily injury, including disease that directly results from bodily injury by accident. This limit applies regardless of the number of employees injured in any one accident;

2.  A maximum limit for all damages because of bodily injury by disease to any one employee, providing the disease does not result from bodily injury by accident; and

3.  An annual maximum policy limit applying to all bodily injury by disease. This limit is the maximum amount the insurer will pay regardless of the number of employees making claims during the policy period.

The minimum limits of liability under employers' liability coverage varies by insurer. If necessary to satisfy underlying coverage limit requirements of an umbrella insurer, the employers' liability limits provided by the WC/EL policy may be increased, subject to underwriting acceptance and the payment of additional premium.

Need For Coverage

There are several situations that create the need for employers' liability coverage. In some states, workers' compensation coverage is not compulsory unless the employer has a specified minimum number of employees. If the employer has fewer than the minimum number of employees, it may elect not to purchase workers' compensation insurance. In the absence of employers' liability coverage, the employer may then have no insurance protection for employment-related claims or lawsuits.

Examples of claims that may fall within the scope of employers' liability coverage include the following:

1.  Third-party-over actions: Typically, a third-party-over action arises when an injured employee collects workers' compensation benefits and then files suit against a negligent third party. The third party then files suit against the employer to recover all or a portion of its costs. For example, assume an employee is injured in an accident while driving a company car for business purposes. The employee may receive workers' compensation benefits for injuries sustained in the accident and still have the right to sue the car manufacturer alleging a defect in the vehicle. The car manufacturer might then sue the employer, alleging that damages were paid for an employee's injury because the employer failed to properly maintain (i.e., service) the vehicle.

In the previous example, employers' liability insurance would provide the employer with coverage for the suit filed by the car manufacturer, unless the employer had contractually assumed the auto manufacturer's liability. If the employer had assumed the auto manufacturer's liability under an “insured contract,” the contractual liability coverage under the employer's general liability insurance would be a possible source of insurance protection.

2.  Loss of Services: Family members may have a cause of action against an employer for loss of income or consortium (comfort, companionship, affection, etc.) that results from an employee's injury. General liability policies typically exclude coverage for such claims, making employers' liability coverage the sole source of insurance protection for the employer.

3.  Consequential bodily injury to a spouse, child, parent, brother or sister of the insured employee. An example of consequential bodily injury is illness sustained by a family member of an employee who is exposed to toxic substances at work and then brings those substances home on his or her clothing.

4.  Dual-Capacity Allegations: Dual-capacity situations arise when workers' compensation is not the sole and exclusive remedy against the employer for an employee's work-related injury or illness. For example, an employee who is injured at work while using a machine manufactured by his or her employer may be eligible to collect workers' compensation benefits and also sue the employer under a products liability action.

In such a situation, the employee's injury may be alleged to have resulted from the use of the insured's defective product as well as from his or her employment. Employers' liability insurance would provide coverage for the products liability suit because the policy states that the insurer will pay damages, where recovery is permitted by law, because of bodily injury to the employee that arises out of and in the course of employment and is claimed against the employer in a capacity other than as an employer.

Exclusions

Coverage under Part Two—employers' liability insurance of the WC/EL policy is subject to 12 exclusions. These exclusions are:

•          Liability Assumed Under Contract.

This exposure is usually covered under the contractual liability provisions of a commercial general liability (CGL) policy. Although the CGL policy form typically excludes employers' liability for bodily injury to an employee arising out of and in the course of employment, the policy also usually states the exclusion does not apply to liability assumed by the insured under an insured contract. The exclusion does not apply as respects a warranty that the insured's work will be done in a workmanlike manner.

•    Punitive Damages.

Coverage is excluded for punitive or exemplary damages in the case of bodily injury to an employee who is employed in violation of the law.

•    Employment in Violation of Law.

Coverage is excluded for bodily injury to an employee who is employed in violation of the law. However, this exclusion only applies if there was actual knowledge of the illegal employment by the employer or any of the employer's executive officers.

•    Obligations Under Laws.

Coverage is excluded for any obligation imposed under workers' compensation, occupational disease, unemployment compensation, disability benefits any similar law. The workers' compensation portion of this exclusion prevents an overlap of coverage that may be available under Part One (workers' compensation insurance) of the policy.

•    Intentional Bodily Injury.

Coverage is excluded for bodily injury intentionally caused or aggravated by the insured. Allegations of such intentional acts have sometimes been made by employees in an attempt to circumvent the “exclusive remedy” provision of workers' compensation statutes.

•    Bodily Injury Occurring Outside the Coverage Territory.

Bodily injury that occurs outside the United States of America, its territories or possessions, or Canada is excluded from coverage. The exclusion does not apply if the bodily injury is to a citizen or resident of the United States or Canada who is outside these countries for a short period of time.

Foreign nationals who work in their own country for a U.S.- or Canadian-based firm, or employees who remain in foreign jurisdictions for longer than a temporary period must usually obtain foreign WC/EL insurance. For coverage to apply, any original suit for damages must be brought within the coverage territory.

•    Wrongful Employment Practices.

Coverage is excluded for damages arising out of specified employment-related acts, including but not limited to wrongful demotion, discipline, defamation, harassment, humiliation, discrimination or termination of any employee. Also excluded from coverage are any wrongful personnel practices, policies, acts or omissions.

Coverage is excluded for these offenses whether or not the offense is in violation of any law. The insurer is thus allowed to deny coverage for mental stress claims that are alleged to have arisen out of employment-related activities such as discrimination, harassment or wrongful termination. However, if the courts determine a mental stress claim is compensable under workers' compensation, Part One of the WC/EL policy would provide statutory coverage for the claim.

In addition to the seven exclusions discussed above, the following five exclusions apply to federally related laws and employment situations:

•    Coverage is excluded for bodily injury to persons who are subject to the Longshore and Harbor Workers' Compensation Act (L&HWCA), the Nonappropriated Fund Instrumentalities Act, the Outer Continental Shelf Lands Act, the Defense Base Act and the Federal Coal Mine Health and Safety Act of 1969. The exclusion also applies to any other federal workers or workers' compensation law or other federal occupational disease law, or any amendments to these laws.

•    Coverage for L&HWCA, Nonappropriated Fund Instrumentalities Act, Outer Continental Shelf Lands Act and Defense Base Act claims can be added to the WC/EL policy by a separate endorsement for each act. These endorsements remove the exclusion as it pertains to both Part One and Part Two of the policy. Coverage also can be added for Federal Coal Mine Health and Safety Act claims under Part One of the policy, but the exclusion is not removed as respects Part Two coverage.

•    Coverage is excluded for bodily injury covered under the Federal Employer's Liability Act, and any other federal laws (including amendments) that obligate an employer to pay damages to an employee who sustains employment-related bodily injury.

•    Coverage for Federal Employer's Liability Act claims can be added to Part Two of the WC/EL policy by endorsement, but the exclusion is not removed as respects Part One Coverage.

•    Coverage is excluded for bodily injury to a master or member of the crew of any vessel. If coverage for this exposure is added by endorsement, this exclusion is removed from Part Two of the WC/EL policy.

•    Coverage is excluded for fines and penalties imposed for violation of federal or state law.

•    Damages payable under the Migrant and Seasonal Agricultural Worker Protection Act and under any other federal law awarding damages for violation of laws protecting these workers are excluded. Coverage for claims under this act can be obtained by endorsement. The endorsement removes the exclusion as it pertains to Part Two coverage only.

Part Three—Other States Insurance

Workers' compensation (Part One) and employers' liability (Part Two) coverage for the insured is only provided in the states listed in Item 3.A of the policy information page and does not apply to claims arising from employment in other states. Part Three (other states insurance) is designed to provide both workers' compensation and employers' liability coverage in states where the insured is not operating at the time of policy inception, but may begin work at a later date.

There are several situations that can result in the need for other states coverage. For example, a large company with headquarters in one state may have a small office in a state other than a state listed in Item 3.A of the policy information page. If workers' compensation coverage is optional in the state where the small office is located, the employees in that office may not be covered under the employer's WC/EL policy.

Another situation can occur if an employer has employees who travel to other states on business. If one of those employees is injured in a state for which the employer has no coverage, the WC/EL policy may not respond.

Part Three of the 1997 WC/EL policy requires that the insurer be informed at once if the employer begins work in a state not listed under Item 3.A of the information page. The consequences of an employer failing to provide this notice are not stated in the policy and are therefore unclear. This issue is important because once a policy is issued, the employer may forget about the reporting requirement until the need to present a claim is made.

The policy also provides that coverage will not be afforded unless the insured notifies the insurer of the operations in a new state within thirty days. It is unclear whether the 30 days begins with the inception date of the policy, the date work in the unlisted state begins, or with the date on which the insured becomes aware that work in the state has not been reported.

Insureds can reduce the likelihood for coverage disputes and the potentially uninsured exposure created by new operations in states other than those listed in Item 3.A. by requesting the following wording be included in Item 3.C. of the policy information page:

All states except the monopolistic states of North Dakota, Ohio, Washington, West Virginia, Wyoming and states designated in Item 3.A of the Information Page.

Under the above wording, if the insured begins work in any state other than a state listed in Item 3.A. of the information page after the inception date of the policy, coverage will apply as though that state was listed in item 3.A..

Prior to July 1, 1999 the state of Nevada was usually included in the list of monopolistic states designated in Item 3.A. of the information page. However, as of that date, Nevada permits insurance for workers' compensation and, hence, is no longer monopolistic.

Limitations on “Other States” Insurance

There are distinct advantages to “other states” coverage. However, it is important to note that “other states” coverage is subject to two major limitations:

1.  There are five monopolistic fund states that cannot be listed in item 3.C. of the information page: North Dakota, Ohio, Washington, West Virginia and Wyoming. An employer with an exposure in these states is required to purchase statutory workers' compensation coverage directly from the state funds.

     Not all state funds offer employers' liability coverage, however. If employers' liability coverage is not available in a monopolistic state, the employer can usually purchase “stop-gap” coverage through a commercial insurer. This coverage can be provided under a separate policy or by an endorsement to a general liability insurance policy.

2.  A regional insurance company may not be able to list certain states under Item 3.C. of the policy information page because the insurer is not licensed to write coverage in those states. If an employer anticipates (or has) an exposure in a state where the insurer is not licensed to do business, the employer must purchase another WC/EL policy from an insurer that is licensed to operate in that state, or from an insurer that is licensed to operate in all states.