By Donald S. Malecki, CPCU
Blanket endorsements to insurance policies can be convenient and beneficial to everyone from the underwriter, through the distribution system, to the ultimate insurance consumer. The consumer may not appreciate the significance of the blanke t endorsement, but from the insurer's standpoint the endorsement can reduce costs as opposed to issuing separate endorsements, and from the agents' and brokers' standpoint the blanket endorsement can be convenient, since the endorsement only has to be iss ued once.
Unfortunately, however, blanket endorsements can have their limitations. One such example, which is the subject of this month's column, is the blanket endorsement used with the commercial general liability policy to provide e mployers liability coverage encompassing all of those states that have monopolistic workers compensation funds.
In light of developing changes, a blanket employers liability endorsement (or blanket stop gap endorsement, as it is common ly called) can serve to the detriment of the insurer, as well as the insured. It is the purpose of this article to explain the caveat of this kind of blanket endorsement so that problems can be avoided or reduced.
The fact that the cau se of the potential problems are regional in nature does not mean that the impact is not also widespread. To the contrary, agents, brokers and consultants must deal with businesses whose activities affect interstate commerce and in a growing number of ins tances, the global marketplace. The intricacies of this subject therefore need to be understood.
In light of the complexities of this subject matter, however, it is first necessary to discuss some of the fundamentals of insurance and i ts applications. Since the need for stop gap coverage is created by those states that do not permit competition in the workers compensation arena, it is first necessary to mention the characteristics of a monopolistic fund state. This is then followed by a brief discussion of employers liability coverage, and then on to the problem of why a blanket stop gap endorsement can create problems.
Briefly, a monopolistic workers compensation fund is the name commonly given when the state is th e sole distribution system for statutory workers compensation insurance. A state fund does not permit competition from insurance companies. A qualified employer, therefore, must purchase its workers compensation from the state, since no workers compensati on policy issued by a private insurer will be recognized as being valid protection. This is the reason these states are also referred to as "monopolistic."
Currently, there are six states that are monopolistic in nature: Nevada, North Dakota, Ohio, Washington, West Virginia, and Wyoming. On the other hand, some states are competitive in nature. An example is New York. As such, private insurers can compete with the state in providing workers compensation insurance.
Throughout this article, workers compensation insurance also is referred to interchangeably as statutory coverage, because the benefits payable under these policies are prescribed by statute. Readers who are interested in the latest state-by-state benefits of all states can refer to the PF&M Analyses, published by The Rough Notes Company.
If one were to look at the standard workers compensation policy issued by insurers in other states, he or she would notice that the policy is divi ded into two sections: Coverage A--Workers Compensation and Coverage B--Employers Liability. Monopolistic fund states, on the other hand, provide statutory compensation insurance only, or a policy equivalent to Coverage A only.
Employe rs liability coverage is not mandated by law. It is coverage designed to protect the common law liability exposure of an employer who may be sued in a situation that is not encompassed by a workers compensation law. Examples are suits filed against the em ployer by the family of the injured or deceased breadwinner for loss of consortium, love and affection.
A more important reason for employers liability coverage is to protect the employer who is confronted with a so-called "third party over action." Briefly, these actions arise when an employee sues a negligent third party, even though the employee has collected compensation benefits, and the third party files suit against the employer. The employer then looks to its employers liabilit y coverage for protection, unless the employer assumed the liability of the third party. In that instance, contractual liability coverage, rather than employers liability, would be the method of protection.
An example of a third party over action is when an employee is injured while using a machine in her employer's business. The employee collects workers compensation benefits but still files suit against the manufacturer of the machine alleging faulty design. The manufacturer, in turn , files suit against the employer alleging that the machine was improperly maintained or not operated according to the manufacturer's instructions.
Even though the employer's workers compensation insurance has responded to the benefit of its employee, the employer is still confronted with a legal action seeking more money damages. Whether damages may ultimately be assessed or not, the employer must expend certain legal costs until the matter can be resolved.
Employe rs liability coverage therefore is a beneficial form of protection. Since monopolistic fund states do not offer employers liability coverage, there is a potential gap in the employers' protection. To stop this gap, it is necessary to purchase employers li ability coverage by endorsement--the reason for the name "stop gap coverage."
The workers compensation insurance system was initially designed to be the exclusive remedy against the employer. Over the years, however, exceptions have be en carved out of this concept. An example is an allegation that an employee's injury was at the hands of an employer's deliberate intent to injure. If in fact an employer intentional tort is proved, the courts will permit the payment of damages over an ab ove those benefits prescribed by statute.
West Virginia is a state that permits recovery in addition to statutory benefits for employer intentional torts. It was the Mandolidis case of 1978 that brought about this development. Interest ingly, both the state as well as private insurers offer extra protection for employer liability under Section 23-4-2 of the West Virginia Code.
It is important to note, however, that the above coverage is effected by special endorsemen t for an additional charge. Blanket stop gap endorsements do not provide this extra protection. Unless the employer therefore purchases this extra protection from the state, there may be a gap in the employer's protection.
The situatio n in Ohio is somewhat less certain. In fact, there have been so many changes in recent years, it is difficult even for resident insurance agents and company underwriters to get a handle on the situation.
A new law has been drafted in O hio, which at the time of this writing has not been signed by the governor but is expected to be enacted. This new law will again make workers compensation the exclusive remedy except for an employer intentional tort whose standards appear stringent.
Once this law is passed, the blanket stop gap endorsement offered by insurers may once again be a safe and useful tool for agents and brokers, but not necessarily for insurers. While it is difficult to explain this pitfall in an article, i t nonetheless is essential if problems are to be avoided or reduced.
Currently in Ohio, there are two kinds of employer intentional tort. One is the deliberate intent to injure, which is against public policy to insure. The other deals with bodily injury resulting from an act which is determined to have been committed by the named insured with the belief that an injury is substantially certain to occur. The courts have said that this latter intentional tort (hereinafter referred to as "substantially certain to occur") is insurable.
In 1992, the National Council on Compensation Insurance made available on an "advisory" basis, an employers liability coverage endorsement that specifically excluded the "substantially ce rtain to occur" exposure. Some insurers incorporated this change and others did not.
Some of those insurers that implemented the "substantially certain to occur" exclusion, then began to offer, in about 1993, coverage against such alle gations subject to an additional premium by, in essence, deleting the exclusion, and listing the conditions precedent to a covered claim or suit.
The question of whether a blanket stop gap endorsement became deficient at that point in time hinged on whether it specifically incorporated the "substantially certain to occur" exclusion. If it did not, chances are the blanket stop gap endorsement will still cover "substantially certain to occur" allegations, because, if the endorsement does not exclude the exposure, it is considered to be covered.
One of the cases commonly cited for the above statement that coverage applies unless a specific exclusion appears in the policy is Harasyn v. Normandy Metals, 49 Ohio St. 3d 17 3 (1990). A more recent case is Beacon Insurance Company of America v. Kleoudis, et al., 652 N.E.2d 1 (Ohio App. 8 Dist. 1995).
The above situation therefore also places the underwriters of blanket stop gap endorsements (including a se parate Ohio stop gap endorsement) in a quandary. They have to specifically incorporate the "substantially certain to occur" exclusion in their endorsements, or they may find themselves providing protection in Ohio for the insurable kind of intentional tor t created by the Ohio courts for no additional premium.
At the moment, it appears as though it is only the monopolistic fund states of Ohio and West Virginia that may present problems ov er the use of blanket stop gap endorsements.
From the standpoint of West Virginia, it may be safe to use a blanket stop gap endorsement, so long as the employer has been given the option to purchase the intentional tort coverage separa tely by endorsement to the CGL policy or under a form available from the state.
From the standpoint of Ohio, the situation is somewhat more complex.
When this new law is signed, the blanket stop gap endorsements off ered by insurers will likely be acceptable, because, in the absence of the employer's deliberate intent to injure, workers compensation insurance will be the exclusive remedy. Stop gap therefore may be a useful tool to handle the legal costs associated wi th third party over actions, and other kinds of employment-related litigation.
However, it will be important for insurers to include a specific "substantially certain to occur" exclusion in their stop gap endorsements. Otherwise, this insurable type of intentional tort may still be subject to automatic coverage by interpretation for no additional cost.
If some insurers decide to continue to offer separate coverage against the "substantially certain to occur" exposur e, or coverage within their own stop gap forms, for competitive or other reasons, it may be advisable for agents and brokers to offer this coverage over and beyond the usual stop gap endorsement, whether it is on a blanket basis or not. Cost may be a dete rrent, but the employer should be the judge of that.
Insurers in the above category that are contemplating the continued offer of this special coverage need to ponder the situation carefully. With a stringent standard of proof require d for employer intentional tort under the new law, plaintiffs would most assuredly welcome the more easily understood standard of "substantially certain to occur." Insurers therefore should prepare themselves for the kind of allegations that will meet the criteria of their coverage with a price commensurate with the exposure.
Finally, as one can perhaps conclude from this discussion, the stop gap endorsement (blanket or otherwise) that has been effect over the years without an exclusio n for the "substantially certain to occur" exposure may likely be sufficient to handle old cases that make such allegations.
However, the stop gap endorsement (blanket or otherwise) that has incorporated the exclusionary wording as rec ommended by NCCI in 1992, may fall short of needs in any allegation of injury stemming from a "substantially certain to occur" event taking place prior to the enactment of the latest Ohio law.
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Donald S. Malecki, CPCU, an independent insurance and risk management consultant, is the author and co-author of nine books on insurance and risk management. He serves on the Society of Risk Management Consultants' board of directors and chairs the legislative committee.