FIVE REASONS WHY EMPLOYERS LIABILITY IS IMPORTANT
Be aware of workers compensation loopholes
By Paul Martin, CPCU
The workers compensation system is a fascinating compromise. Before workers compensation laws were passed by state legislatures, workplace injuries were resolved using tort law, where the employee could pursue a claim of injury against the employer, and the employer defended itself with standard arguments against claims of negligence.
This system for resolving injury disputes turned out to be not in either side’s interest in the long run. The employer often had more resources to fight off any claim, to the employee’s disadvantage. In turn, the employee could pursue unlimited damages, meaning if they won the lawsuit, it could be very expensive to the employer.
What if the employer purchased workers compensation insurance?
- The employer could be protected from suits by the employee against it.
- The cost to the employer could be made more predictable in the long run.
- The injured employee would be guaranteed benefits established in the law.
- The injured employee was guaranteed those benefits regardless of the fault of the parties.
Wrapped up in the workers compensation compromise were two doctrines—“no-fault” protection, meaning the employee was protected even if the negligence in the accident was their own, and “exclusive remedy,” where the injured employee was statutorily prevented from bringing a lawsuit against their employer for their injuries, with a few rare exceptions.
More than 100 years later …
The workers compensation experiment has clearly worked. It has created a stable environment where both labor and employers are protected. Of course, the systems in each state have been tinkered with over the years. Disability benefits to employees have risen and sometimes expanded. The experience modifier system brought some fairness to the premium employers paid, with less safe employers paying more and more safe employers paying less. How disputes are adjudicated have been adjusted in many ways. But overall, the system has held together.
But there are some loopholes. And these were the reason why that “other coverage” provided in a workers compensation policy, employers liability, is so important. Some workers compensation statutes give permission in some unusual situations for an employee or the employee’s family to sue the employer. In other cases, case law itself provided a work-around to the “exclusive remedy” doctrine. And sometimes something novel occurs.
Claims against employers liability coverage don’t happen often, but when they do, they can be big, and there’s often no other insurance to which the employer can turn.
Here are five additional reasons why employers liability insurance is important:
- Third-party action-over claims. A third-party action-over claim is defended against and paid for by employers liability coverage because of a claim being made by an employee against a third party for their injuries, which is not limited by workers compensation statute.
Consider a simple example: An employee using a particular tool in their work is injured by that tool. The employee brings a product defect suit against the manufacturer of the tool. The employee wins the lawsuit and is paid damages for their injuries. During the suit, it is discovered that a guard on that tool had been modified by the employer before it was used by the employee. The manufacturer brings a separate lawsuit against the employer who altered the safety feature claiming that the employer’s negligence was the reason, in whole or in part, for the employee’s injury. In this scenario, the employee can also have a legitimate claim for workers compensation benefits.
These kinds of workplace injuries can go in other directions. For example, if the manufacturer had secured an indemnity agreement from the employer, then the commercial general liability policy could respond to the suit because of the exception to the employers liability exclusion in the CGL. The example above is for situations where there is no contractual agreement with the third party.
- Loss of care and services. Most workers compensation statutes allow for lawsuits against the employer in situations where the injury or death of the employee was the result of gross negligence on the part of the employer. These are situations where the employer’s actions, as one court ruling put it, “showed a wanton disregard for the life and safety of the employee.”
Here’s an example to help you better understand how a gross negligence claim could arise: An excavation contractor is digging some deep ditches that will contain pilings for a building’s foundation. During the digging, the contractor orders one of its employees to go into the ditch to retrieve some items that fell into it. While the employee is in the hole, the ditch wall collapses and buries him under tons of dirt. Fellow employees are unable to extricate him before he suffocates and dies.
In this example, the employer violated what in many parts of the country is known as the “six-foot rule.” This rule could apply to this example in that the contractor put its employee in harm’s way by asking him to enter an unshored hole in the ground that is deeper than six feet. To shore up a ditch would typically involve using wood to hold up the sides of the ditch. Since an excavation contractor would or should know of the grave danger of not doing this, courts frequently find that this kind of accident constitutes classic gross negligence.
Other types of businesses may also have cardinal rules against certain actions that would be viewed by a court as gross negligence. Consider other inherently dangerous industries such as blasting operations, fishing on the high seas, working at heights, or drilling for oil and gas.
The nature of the claim itself is that the employee is injured severely or is killed and therefore is unable to provide the kind of care and services to the spouse and children of the employee that they were accustomed to enjoying. The claim could be for services such as yard work, childcare, or even loss of affection and companionship. The family dependents could also have a workers compensation claim in the event of a fatality where benefits are paid to the spouse and children for many years or for life.
- Consequential bodily injury. These claims typically also involve the family of the injured employee. Examples could include things such as a spouse having a heart attack in response to hearing the news of the employee’s injury, or a healthcare provider employee contracting a disease after an accident at work, and passing that disease onto their spouse, who becomes seriously ill.
These claims represent bodily injury damages to members of the injured employee’s family that were the result of an accident injuring an employee in the course of their employment for the employer.
- Dual capacity. In some situations, an employee could be injured in an accident by the defective products of the employer. Imagine a ladder manufacturing operation. An employee uses a ladder produced by the employer to reach something on a high shelf. The ladder is defective and collapses with the employee on it. The employee then falls and is injured. In this example, the employee could sue their employer not as an employer, but as the manufacturer of a defective product. The employee of course could also have a separate and valid workers compensation claim.
- Everything else. The final reason that employers liability is so important is that it can respond to all kinds of injuries and situations from an endless list of circumstances. Here are some examples:
- Many states allow sole proprietors or officers of corporations to exclude themselves from coverage under workers compensation to reduce the payroll applicable to the premium. Should an excluded officer be injured in the course and scope of their employment and allege that the accident was due to the negligence of the employer, that’s an employers liability claim.
- Most workers compensation laws state that if the employee was intoxicated at the time of an accident, then the employee’s workers compensation claim can be controverted (denied). For example, imagine a construction employee goes to lunch and instead of having a burger and fries, runs by a convenience store to pick up a 12-pack of his favorite beer. Upon returning to the work site, the now intoxicated employee resumes his duties. Shortly thereafter, a fellow employee drops a brick from four stories hitting the drunk employee in the head and hurting him badly. Can his workers compensation claim be controverted? Absolutely. What comes next? An employers liability claim.
- Finally, employers liability can be used to deal with employee injuries in creative ways. In one claim, the spouse of a deceased employee and the insurance company were in a dispute over a controverted claim. As the claim moved through the dispute resolution process, the insurance company was losing at every level. The litigation got to a point that, if the insurance company lost, it would be setting a precedent in that state that would have far-reaching complications for them and every other worker compensation insurer in the state. To avoid the chance of a negative precedent, the company chose to settle the matter with the surviving spouse using the limits of the employers liability coverage.
Claims against employers liability coverage don’t happen often, but when they do, they can be big, and there’s often no other insurance to which the employer can turn. Remember these five reasons when you need to help others understand the value of the coverage.
For more information on workers compensation and to earn continuing education credits, register for the Workers Compensation self-paced course at scic.com/workers-compensation. The workers compensation course introduces participants to the workers compensation system, examines how state statutes create the need for insurance, and how the insurance responds.
Paul Martin is director of academic content at The National Alliance for Insurance Education & Research headquartered in Austin, Texas. Paul works to develop, maintain, and deliver quality educational programs for the organization. Paul has over three decades in the insurance and risk management industry.