Employer's Guide to Workers' Comp: The Coverage Details That Could Save You Thousands

As a business owner, navigating Workers' Compensation insurance can feel like a complex maze. However, understanding the core components of Workers' Compensation coverage is essential for protecting both your business and your employees. In this blog post, we’ll break down the key parts of Workers' Compensation coverage, including Parts One, Two, and Three, and explain why each one matters to you as an employer.

What is Workers' Compensation and Why Does it Matter?

Workers' Compensation (WC) is a no-fault insurance system that provides benefits to employees who are injured on the job. These benefits help cover medical expenses, lost wages, and other related costs. Workers' Compensation is vital for protecting both employees and employers.

• Medical Expenses: This includes hospital bills, doctor visits, physical therapy, and other medical costs associated with the injury.

• Disability Benefits: Employees who are unable to work due to their injury may be entitled to temporary or permanent disability benefits.

• Death Benefits: If a worker dies as a result of a workplace injury, their dependents may receive death benefits to help with funeral costs and living expenses.

• Vocational Rehabilitation: If an injured worker is unable to return to their original job, they may receive training to help them transition to a new role.

But Workers' Compensation isn’t just about providing support for employees. It also shields employers from lawsuits related to workplace injuries, giving you peace of mind while ensuring your business is protected from legal risks.

Understanding Part One and Part Three Coverage

In Workers' Compensation policies, there are typically two main types of coverage: Part One and Part Three. Let’s take a closer look at both:

• Part One (3.A. Coverage) Part One coverage refers to the states where you are currently conducting business. These states should be listed on your policy, and it’s important to make sure they are up to date. If you expand operations to new states, they need to be added to Part One.

  
  

• Part Three (3.C. Coverage) Part Three coverage applies to states where you may plan to operate in the future. These states are not automatically covered under your policy. To ensure you have coverage in these states, you’ll need to contact your insurance agent and update your policy.

Key Tip: Always review your policy regularly and make sure all states you operate in or plan to operate in are covered. If you’re expanding into new territories, contact your agent to move those states from Part Three into Part One.

What is Employer’s Liability Coverage and Why Is It Important?

Employer’s Liability coverage (Part Two) protects you in cases of negligence or other legal actions outside the scope of Workers' Compensation.

Employer’s Liability coverage helps cover:

• Negligence lawsuits: If a worker, or their dependents, claim that an injury occurred due to employer negligence (e.g., unsafe working conditions), this coverage will protect you.

• Third-party claims: If an injured worker sues a third party (such as a subcontractor), and that third party then sues you for negligence, Employer’s Liability will provide protection.

• Additional legal fees: This coverage will help cover legal costs such as attorney fees, court filing fees, and other defense costs.

  
  

Though Employer’s Liability coverage is generally included in the workers compensation policy, there are states where it is optional. However, this coverage is definitely recommended in that the lawsuits and fees mentioned above, along with other court costs, are very costly to an employer.

Employer’s Liability Coverage Limits

The standard limits for Employer’s Liability coverage are typically:

• $100,000 per employee for injury-related claims.

• $100,000 for disease claims per employee.

• $500,000 aggregate for disease-related claims during the policy term.

  
  

For businesses with higher risks, these limits can be increased up to $1 million or more for an additional premium. This is particularly important for industries such as construction, where the risk of accidents and legal claims is greater.

Defense Costs

While these policies can vary, it is always a good practice to make sure that any policy you purchase that the defense costs do not erode the stated coverage amount. Preferably, the legal costs need to be outside the coverage limits. However, some policies have defense costs inside the policy limit. For example, if you have a case and the legal costs are $30,000 and the coverage is $100,000 that leaves only $70,000 of insurance coverage. So if the cases is settled or awarded $90,000 the insured will owe $20,000 in damages above the policy limits. (Legal Fees $30,000 + $90,000 = $120,000 Total - $100,000 Policy Limits = $20,000 not covered by the policy)

Whereas, if the legal fees are outside of the policy limits the entire loss would be covered.

Monopolistic States and Stop-Gap Coverage

Some states, known as monopolistic states, do not allow private insurance companies to sell Workers' Compensation insurance. Instead, employers in these states are required to purchase coverage from the state-run fund. These states include:

• Ohio

• North Dakota

• Washington

• Wyoming

However, monopolistic states do not provide Employer’s Liability coverage like other states do. To cover situations where an employer might be found negligent, businesses in these states can purchase Stop-Gap Coverage from private insurers.

Stop-Gap Coverage fills the gap left by the lack of Employer’s Liability in monopolistic states, protecting employers from lawsuits for negligence or third-party claims.

Key Takeaways:

• Regularly review your policy: Ensure all states you currently operate in are listed under Part One, and move states you may expand into from Part Three to Part One.

• Employer’s Liability coverage is optional but valuable: It protects against lawsuits for employer negligence and third-party claims.

• Higher coverage limits might be necessary: If you’re in a high-risk industry or your contracts require higher limits, consider increasing your Employer’s Liability coverage.

• Monopolistic states and Stop-Gap Coverage: If you’re located in a monopolistic state, you’ll can purchase Stop-Gap Coverage to protect yourself against negligence claims.

Conclusion

Workers' Compensation insurance is a critical part of protecting both your employees and your business. By understanding the different parts of the policy, including Part One, Part Two (Employer’s Liability), and Part Three, you can ensure that your business is properly covered. Don’t forget to regularly review your policy, especially if you’re expanding into new states or facing potential risks that require additional coverage.

By taking the time to understand and update your Workers' Compensation coverage, you’ll not only safeguard your business but also give yourself the peace of mind you deserve.

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Blog Written By: Chris Cain, CWCP

ABOUT CHRIS

Current

• Host of Work Comp Chaos | licensed in multiple states as both an insurance adjuster & agent

• Vice President of The Southern Agency Insurance in charge of Operations and Claims

• United Heartland Insurance Company Claims Advisory Council

Speaking Events

• Altaworld Insurance Tech & Innovation Conference: Fireside Chat The Role of Automation in Claims Processing - Reducing Fraud or Reducing Jobs? 

• Stairbuilders & Manufacturers Association: Hidden Liabilities

• Georgia Public School Board Workers' Compensation Association: How To Handle Work Comp Claims

• Homebuilders of Atlanta: Claims and Warranties

• Lunch & Learn: Various Uses of Life Insurance - Key Man, Tax-Free Benefits, Buy-Sell Agreements

  
  

Prior

• State of Tennessee Telehealth Advisory Committee assisting in developing rules and statutes

• Utilization Review Advisory Committee

• Past President of the Tennessee State Claims Association

• Served 15 years as President of the Chattanooga Claims Association