Last updated: November 29th, 2022
Reviewed by
Paige Geisler
Licensed Insurance Agent
Purchasing adequate insurance is one of the most effective ways for employers to protect themselves against the costs involved when an employee files a lawsuit against them. Employer’s liability insurance is one type of coverage that can pay legal and settlement costs.
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Employer’s liability insurance covers employee and third-party claims for losses caused by a work-related injury, illness, or death. Many companies purchase employer’s liability insurance as a bundle with workers’ compensation insurance, and the latter is compulsory for most employers under state laws.
Employer’s liability and workers’ compensation insurance are broadly similar because they both cover employee claims. However, workers’ compensation insurance pays certain expenses to a claimant if they experience a work-related illness or injury. It may also pay out if an employee dies while carrying out their duties. Typically, workers’ compensation insurance covers costs such as medical expenses and lost wages up to the state limit.
Employer’s liability insurance provides supplemental coverage by covering costs beyond the scope of workers’ compensation insurance. For example, workers’ compensation insurance doesn’t cover pain and suffering resulting from workplace incidents. Employees may choose to sue their employers for punitive costs such as pain and suffering if they don’t feel their settlement from workers’ compensation insurance adequately reflects their loss.
Generally, employer’s liability insurance policies cover costs such as settlements and legal fees. They sometimes cover claims for pain and suffering, although some states prohibit insurers from covering punitive damages. Coverage includes dual-capacity lawsuits, when an employee sues a company as an employer and also a premises owner or manufacturer. For example, an employee may file a dual-capacity lawsuit if they develop an illness after using products manufactured by their employer.
Certain other lawsuit types may be eligible for coverage:
Employer’s liability insurance policies don’t cover damages resulting from a criminal act, such as fraud or deliberately injuring an employee. They also exclude discrimination, sexual harassment, and wrongful termination lawsuits, which require employment practices liability insurance.
Most workers’ compensation insurance policies include employer’s liability insurance automatically. Costs can vary widely depending on the insured party’s location, how many employees it has, and how much it pays in wages. Insurers generally charge higher premiums if the employer operates in a high-risk sector or has a poor prior claims history. High-risk jobs include mining, construction, electricians, automobile mechanics, roofers, and law enforcement.
The National Academy of Social Insurance publishes studies measuring how much workers comp costs on average in each state. Therefore, a straightforward way for employers to estimate the likely costs of workers’ compensation insurance is by using the state average premiums per $100 of paid wages. For example, the average employer in Alabama paid $1.03 per $100 of covered wages in 2019 (the most recent year with complete data). The five most expensive states for purchasing workers’ compensation insurance are:
| State | Cost of workers’ compensation insurance per $100 of covered wages |
|---|---|
| Wyoming | $1.98 |
| Alaska | $1.95 |
| Montana | $1.77 |
| Hawaii | $1.70 |
| California | $1.67 |
Meanwhile, employers in the following states typically pay the lowest workers’ compensation insurance premiums:
| State | Cost of workers’ compensation insurance per $100 of covered wages |
|---|---|
| Texas | $0.52 |
| Tennessee | $0.57 |
| Michigan | $0.66 |
| Indiana | $0.68 |
| Virginia | $0.69 |
Usually, employers don’t need to worry about purchasing separate employer’s liability insurance because it almost always comes with workers’ compensation insurance. However, monopolistic states require all businesses to purchase workers’ comp coverage through the state’s workers’ compensation program. Therefore, employers in monopolistic states must purchase a separate employer’s liability insurance policy through a private insurer to supplement their workers’ comp insurance. The four monopolistic states are:
Brian is the founder and CEO of Insurist and carries Life, Health, and Property & Casualty licenses in all 50 U.S. states. Since 2013, Brian has been a member of Million Dollar Round Table, a designation for the top 1% of financial advisors worldwide. Brian has been featured in Yahoo! Finance, Money.com, Entrepreneur.com, Life Happens, Forbes, MSN, and Good Financial Cents. Brian’s goal is to show customers the best products, the quickest answers to their questions, and provide expert advice.
Paige is an assistant agent for State Farm and is licensed to sell property and casualty, health, and life insurance in Virginia. She handles all different types of insurance and financial services and is currently working on a securities and bonds license. Paige has a degree from Radford University in English and is a certified notary.
