Contractual Liability Coverage for Employee Injuries

Construction worker falling off ladder inside new structure
Image courtesy of [Stewart Cohen] / Getty Images.

Have you signed a contract that makes you liable for claims stemming from injuries to your employees? Such contracts are common in the business world. As this article will explain, employee claims for which you are responsible due to your assumption of liability may be covered by your liability policy. These claims are covered by an exception to an exclusion found under Coverage A, Bodily Injury and Property Damage Liability.

Employers Liability Exclusion

Suppose that an employee of yours is injured on the job and sues your company for bodily injury. Will the suit be covered under your general liability policy? The answer is generally no. Coverage A of the policy contains an exclusion that applies to employee suits. This exclusion is called the employers liability exclusion. The exclusion applies to two types of suits:

  1. Any suit alleging bodily injury to an employee of yours, if the injury occurs in the course of the workers' employment by you. For instance, Jack, an employee of yours, is injured on the job. You have purchased a workers compensation policy as required by law. Nevertheless, Jack rejects workers compensation benefits and sues you for bodily injury.
  2. Any suit alleging bodily injury to certain family members of the injured employee as a consequence of the employee’s injury. For instance, Jack's wife sues you for bodily injury. She claims that she has developed migraine headaches as a consequence of caring for her injured husband. 

    While they are excluded by your liability policy, employee suits are covered under employers liability coverage. This coverage is included in your workers compensation policy under Part Two.

    Exception for Liability Assumed Under a Contract

    The employers liability exclusion in your liability policy contains one important exception.

    The 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.

    Example

    Classic Construction is a general contractor. Classic has been hired by a building owner to remodel an apartment building. Classic Construction hires a subcontractor, Pronto Painting, to paint the exterior of the building.

    Employees of Pronto Painting could be injured while working on the apartment building. Most state workers compensation laws prohibit workers from suing their own employer as long as the employer has provided workers compensation coverage. (These laws contain some exceptions, which is why workers compensation policies include employers liability coverage.)

    Workers compensation laws may not prohibit injured workers from suing someone other than the employer. Classic Construction does not want to be sued by injured employees of Pronto Painting.

    Thus, Classic includes an indemnity clause in the contract. This clause requires Pronto Painting to assume liability for any claims against Classic Construction that stem from injuries to Pronto's employees, if the injuries occur while Pronto is working on the apartment project. In other words, if Classic Construction is sued by an injured employee of Pronto Painting, Pronto (or its liability insurer) must pay all costs related to the claims.

    Suppose that Jim, an employee of Pronto Painting, is painting a wall of the apartment building when he falls off a scaffold. Jim injures his back. He collects workers compensation benefits and then hires a lawyer. The lawyer helps Jim file a bodily injury claim against Classic Construction. Jim demands a large sum of money. He contends that Classic Construction is liable for his injury because it failed to provide a safe workplace.

    When Classic Construction receives Jim's lawsuit, it notices the indemnity agreement in the contract Pronto signed. Since Pronto Painting assumed liability for claims like Bill's, Classic sends the claim to Pronto Painting.

    Pronto Painting forwards the claim to its liability insurer. The contract between Pronto Painting and Classic Construction meets the definition of an insured contract under the painting contractor's liability policy. The contract is covered because it is a typical indemnity agreement (assumption of tort liability) in which Pronto Painting assumed liability for bodily injury to Pronto's employees on behalf of the general contractor.

    Employer Pays Twice

    In the above example, Pronto Painting (or its insurers) has essentially paid for Jim's injury twice. Pronto's workers compensation insurer paid for the workers compensation benefits it provided to Jim. Then Pronto's liability insurer paid the costs related to Jim's lawsuit against Classic Construction. Both claims arose from the same injury.

    In some states Jim would be required to reimburse the workers compensation insurer if the damages he received from his lawsuit exceeded the amount of workers compensation benefits. For instance, suppose that Jim received $100,000 in workers compensation benefits and $200,000 in damages (or a settlement). Some states would require Jim to reimburse the workers compensation insurer for the $100,000 it paid to him.

    Additional Insured

    Finally, property owners, contractors and other parties that hire subcontractors don't like to rely solely on a contract to protect them against lawsuits by the subcontractor's employees. They will also require an additional insured endorsement on the subcontractor's liability policy.

    In Classic Construction example, Classic would likely require Pronto Painting to add Classic to Pronto's liability policy as an additional insured. As an insured under Pronto's policy, Classic would likely be covered for Jim's suit. The employers liability exclusion in the policy will not apply to Classic because Jim is not an employee of Classic Construction.