Employers Liability Insurance and Third-Party-Action-Over Claims

Third-Party Action-Over claims are one of the fastest growing types of claims in contractor’s general liability insurance.  In a nutshell, lawyers have figured out a way to file a claim on your general liability policy for something that should be covered through your Employers Liability Insurance. The results of these claims for contractors are higher rates on their liability insurance and potential gaps in their liability insurance coverage.  The purpose of this article is to explain how these claims work and educate contractors on what they can do to protect themselves.  

What is Employers Liability Insurance?
Although different from Workers Compensation coverage, Employers Liability is typically included in your workers compensation policy.  It is meant to cover losses that fall outside of the scope of workers compensation like third-party action-over, dual capacity, loss of consortium and consequential bodily injury.  Unlike Workers Compensation, which is typically not capped by policy limits, Employers Liability is subject to limits.  Key Exclusion: Standard Employers Liability policies typically exclude coverage for liability assumed in a contract. 

What is Commercial General Liability Insurance?
Commercial General Liability Insurance (CGL) covers bodily injury and property damage to third parties.  It covers losses that occur on your premises, jobsite or as a result of your products and completed operations. 

CGL – Employers Liability Exclusion
Below is a sample of the standard Employers Liability Exclusion in the CG0001 Commercial General Liability Policy.  As you can see, this type of liability is excluded with one key exception: when the Employers Liability is assumed in an “insured contract”.  To read more about Contractual Liability and Insured Contracts, check out this article. 

How Action-Over Claims Work

Here’s the example scenario:   

1. A subcontractor’s employee is injured on the jobsite.  The subcontractor’s workers compensation insurance pays the employee for his injuries and lost time at work. 
2. In addition to filing a claim on the subcontractor’s workers comp policy, the employee also sues the general contractor for failure to provide a safe work environment.
3. As a condition of the construction contract, the general contractor is indemnified by the subcontractor and named as an additional insured on his commercial general liability policy. 
4. The subcontractors general liability policy must respond to the claim because although Employers Liability is excluded in his CGL policy; the exception to the exclusion provides coverage because the subcontractor’s indemnification agreement with the general contractor is considered an “insured contract”.

Action-Over Exclusions
Due to the increase in these types of claims, many general liability insurance carriers have responded by adding an Absolute Employers Liability Exclusion to the policy.  There are many versions of this exclusion but they all serve the same purpose of removing the exception to the standard Employers Liability Exclusion.  The result is that a contractor would not have coverage in the event of a third-party action-over claim. 

What Can You Do?
In addition to providing a safe work place for all of your employees and subcontractors, buy a general liability policy that does not include an Absolute Employers Liability Exclusion.  Additionally, address this type of liability in your construction contracts and indemnification agreements.  Failure to do so could leave you stuck paying for someone else’s legal fees. 

For more information, please contact Tarah Gruber at 619-487-0376 orTarah@redhotinsurance.net.  Or visit www.redhotinsurance.net.