Employer’s Liability Insurance: What It Is, Which Businesses Need It

Employer’s liability insurance protects your company from costs arising from employee injury lawsuits, including legal fees, damages and settlements. It's usually included as an add-on to workers' compensation insurance as "Part 2" or "Part B" of the policy. You don't even have to ask for it.

But there are four states that require you to purchase workers’ comp through a state insurance fund and don't include employer's liability insurance with workers' comp: North Dakota, Ohio, Washington and Wyoming. If you live in one of these states and want this protection, you'll have to buy stop-gap coverage, a form of employer liability coverage that's not bundled in a workers' comp policy.

Which businesses need employer’s liability insurance?

Every business with employees should have employer’s liability insurance. While workers' comp covers the direct costs of employee illnesses and injuries, it doesn't cover legal fees and other expenses that come up when an employee sues your business. Employer's liability insurance does.

Even in workplaces that are low risk from a workers' comp perspective — meaning that they're unlikely to have people getting sick or injured on the job — lawsuits against employers can still happen. For example, employees of marketing firms don't often do work that could result in serious injury. They do, however, spend long hours at their desks working on computers, which can cause illnesses like migraines or injuries like carpal tunnel syndrome. If an employee sues your business because of this for damages or even negligence, employer’s liability insurance could potentially protect your business from taking a large financial hit.

» MORE: Small-business insurance: What coverage do you need?

What does employer’s liability insurance cover?

Employer’s liability insurance, or stop-gap coverage, bridges the gap between what workers’ comp covers and what your business might be liable for in a lawsuit. Some of these potential liabilities include:

• Legal fees. If your business gets sued for an employee's injury, it will incur legal fees and court costs. Workers' comp doesn't cover these costs, but employer's liability insurance does.

• Damages. Pain and suffering, negligence and similar claims aren't covered by workers' comp. These claims can be costly if a court finds in favor of your employee. Adequate employer's liability insurance can save your business from financial ruin.

• Settlements. You and the injured employee might decide it is better to settle any lawsuits out of court. Your employer’s liability insurance provider will work with the employee’s attorney to arrive at a settlement. It will also make the settlement payments.

• Indirect liabilities. Work-related injuries or illnesses sometimes impact people other than the employee. Third parties, spouses or caretakers can sue your business if they are impacted by an employee’s illness or injury. Employer’s liability insurance protects the business from these claims, too.

» MORE: Business owner's policy (BOP): What does it cover?

What does it exclude?

There are some things employer’s liability insurance doesn’t cover:

• Situations covered under employment practices liability insurance. Don't confuse employer's liability insurance with employment practices liability insurance. Employer’s liability insurance protects your business from work-related illness or injury lawsuits. Discrimination, sexual harassment or wrongful termination claims are covered by employment practices liability insurance.

• Injuries incurred by the employee while breaking the law. Employer's liability insurance doesn't cover any lawsuits related to an employee's illegal activities. Check with your general liability insurance or umbrella insurance provider for this coverage.

• Injury intentionally caused by the employer. Employer’s liability insurance won't cover intentional harm to your employee. Speak with your insurance provider about personal liability coverage to protect you from these claims.

How much does employer’s liability insurance cost?

A business with only a few employees doing low-risk work, such as clerical tasks, can expect to pay a few hundred dollars per month for employer’s liability insurance. Larger businesses doing higher-risk work, like construction, might pay a few thousand dollars per month. This can seem like a large expense, but without it, certain employee lawsuits could cost your business millions of dollars.

Employer’s liability insurance costs increase if you have a history of filing claims. More employees, larger average payroll costs and higher coverage limits can also increase the cost of your policy.

The coverage needed depends on how likely a business is to get sued for an employee’s injury. Getting ample coverage can be well worth the cost. Most insurance companies charge an additional 2% to 3% of the premium for increased liability limits. This is a small price to pay to protect your business from bankruptcy.

» MORE: How much does business insurance cost?

How to purchase a policy

Because employer's liability insurance is usually included with workers' comp, you'll generally shop for both policies at the same time. You can buy these policies from third-party sites that aggregate insurance offers or you can purchase directly from an insurance carrier.

The Hartford, Travelers and Liberty Mutual are the best-known workers’ comp and employer’s liability insurance companies. Don’t limit yourself to "business" insurance companies in your search for coverage, though. Companies known for personal insurance, like State Farm, Farmers and Progressive, also offer workers’ comp and employer’s liability insurance.

» Read NerdWallet's reviews of The Hartford, Travelers and Liberty Mutual.

Shop around and compare options to get the best price and coverage for your business. You can often get a discount on premiums by bundling insurance products.

Wherever you buy, make sure to carefully review the policy. You want to make sure your liability limits are adequate and that there aren’t any surprise exclusions.