Contractual Liability Coverage for Employee Injuries
Employers Liability Exclusion Contains a Contractual Exception
Like many business owners, you may have signed a contract in which you assumed liability for claims filed against another party by your employees for injuries sustained on the job. In many industries, such assumptions of liability are a normal part of doing business. For this reason, they are automatically covered by a general liability policy.
Employers Liability Exclusion
Work-related suits by employees are addressed in the employers liability exclusion found under Coverage A (Bodily Injury and Property Damage Liability). The exclusion eliminates coverage for suits filed directly against the employer. That is, if an employee of yours is injured on the job and sues your company for bodily injury, the suit won't be covered by your liability policy. The exclusion applies to two types of suits:
- Any suit alleging bodily injury to an employee of yours, if the injury occurs in the course of the workers' employment by you. For example, Jack, an employee of yours, is injured on the job. Jack rejects the workers compensation benefits you offer and sues you for bodily injury.
- Any suit alleging bodily injury to certain family members of the injured employee as a consequence of the employee’s injury. This exclusion would apply if say, Jack's wife sued you for a neck injury she allegedly sustained as a consequence of caring for Jack.
Employee suits are excluded by your liability policy because they are insured under employers liability coverage. This coverage is included as Part Two of your workers compensation policy. However, suits by your employees against other parties are covered by your liability policy, if you have assumed liability for such suits under a contract. Coverage for suits against other parties is provided by an exception to the employers liability exclusion.
Exception for Contractual Liability
The employers liability exclusion does not apply to bodily injury to an employee of yours if you assume liability for that injury under a contract. For coverage to apply, the contract must qualify as an insured contract, as that term is defined in your policy. In other words, if you assume liability for employee injuries under a contract that meets the definition of an insured contract, you should be covered for any suits that arise out of those injuries. The following example demonstrates how the exception works.
Royal Realty owns the Grand Galleria, a small indoor shopping center. The shopping center needs refurbishing so Royal Realty hires Pronto Painting to paint the building.
Pronto Painting has purchased workers compensation insurance as required by law. Because it has fulfilled this obligation, Pronto is largely immune from employee suits. Most state workers compensation laws prohibit workers from suing their own employer for work-related injuries as long as the employer has provided workers compensation coverage.
Workers compensation laws may not prohibit injured workers from suing someone other than their employer. This means that Royal Realty could be sued as a result of injuries sustained by employees of Pronto Painting. To avoid such suits, Royal Realty includes an indemnity provision in its contract with the painting company. The provision requires the painting company to assume liability for any claims against Royal Realty by Pronto's employees for injuries sustained on the Grand Galleria project. In other words, if Royal Realty is sued by an injured employee of Pronto Painting, Pronto (or its liability insurer) must pay the costs associated with the claims.
For example, Jim is a Pronto Painting employee. Jim is painting a wall of the shopping mall when the ground beneath his ladder collapses into a sinkhole. Jim falls and injures his back. He collects workers compensation benefits and then sues Royal Realty for bodily injury. His suit contends that the building owner failed to provide a safe workplace. It knew about the sinkhole danger and it failed to warn Jim about the risk.
When Royal Realty receives Jim's lawsuit, it directs the claim to Pronto Painting, citing the indemnity agreement. Pronto forwards the claim to its liability insurer. The contract between Pronto Painting and Royal Realty meets the definition of an insured contract under the painting contractor's liability policy. The contract is covered because it involves an assumption of tort liability by Pronto Painting on behalf of the property owner for claims arising from bodily injury to Pronto's employees.
Employer Pays Twice
In the above example, Pronto Painting (or its insurers) has paid for Jim's injury twice. First, Pronto's workers compensation insurer paid for the workers compensation benefits it provided to Jim. Secondly, Pronto's liability insurer paid the costs related to Jim's lawsuit against Royal Realty. Both claims arose from the same injury.
Some states require employees who receive third-party settlements to reimburse the workers compensation insurer for the benefits they received. For instance, Jim receives $100,000 in workers compensation benefits and $200,000 in a settlement from a lawsuit. In some states, Jim would be required to reimburse the workers compensation insurer for the $100,000 in benefits he received out of his $200,000 settlement.
Additional Insured Coverage
Finally, property owners and general contractors can't rely on contracts alone for protection against lawsuits by injured employees of contractors or subcontractors. They also need additional insured status on the contractor's or subcontractor's liability policy.
In Royal Realty example cited above, Royal would likely require Pronto Painting to cover the property owner as an additional insured under Pronto's liability policy. As an insured under Pronto's policy, Royal should be covered for Jim's suit. The employers liability exclusion in the policy will not apply to Royal because Jim is not an employee of Royal Realty.