Liability Insurance
Chapter 4
Employers’ Liability
This chapter will discuss the employers' responsibility when they hire employees. The employer assumes many responsibilities. These responsibilities can cost the employers large amounts of money. One of the most expensive costs can be the legal obligations under workers' compensation laws for occupational disability because of work injury or disease. Workers' compensation laws will also be included in this chapter.
The solution to the financial burden that employers face of a disability because of employment can be considered a dual one: social insurance and private insurance. Many of the state government requirements are met by workers compensation insurance contracts purchased from private insurance companies. The results are an unusual blend of social and private insurance.
Early Attempts
Employers finance the social-private system of insurance, which rises each year and is in the billions of dollars. They provide the employee with compensation for work injuries and diseases.
The Prussian Employers' Liability Law of 1838 often is considered the birth of workers' compensation legislations. This law provided that railroads were liable for injuries to both employees and passengers. There was no system of compensation established, and responsibility for each accident still had to be fixed. Prussia passed its sickness insurance law in 1883 and later added a law covering accident insurance. These constituted the first real workers' compensation plan the world had known. German workers were required to be insured. The cost was shared by the employee, with the employer having the main financial burden. In the United States, the origin of workers' compensation laws was employers' liability law.
An Employers Liability
The development of employers' liability has been progressing from common-law liability, to employers' liability statutes and then finally to the workers' compensation laws we have today.
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The origin of workers' compensation laws is employers' liability law. |
Common-law Liability
In common law an employer can be held responsible by the employee for damages when the negligence of the employer is the cause of such damages. The burden of proof, however, lies upon the employee to show that there was employer negligence and that this negligence was the cause of the employee's damages.
The employer could then turn around and use one or all of three strong defenses against employee claims under common-law liability.
1. Contributory Negligence Rule: Under this rule the employee must show, along with the above requirements, which they did not contribute to the negligence. When the employee had knowledge of the ordinary risks associated with their employment and they were paid for assuming those risks, they cannot recover for injuries caused.
2. Assumption-of-Risk Rule: Under this rule an employee cannot collect damages in cases in which the employee continues to work without complaint after the discovery of failure on the part of the employer to provide proper protection.
3. Fellow-Servant (or Common Employment) Rule: Under this rule, the employer is relieved of the responsibility when the cause of the injury was the willful wrongdoing or negligence of a fellow employee (servant).
The injured employee was faced with not only the burden of proof, but also was made to defend oneself against the above defenses afforded to the employers under common-law liability laws. This difficulty in establishing a case had caused favorable rulings on the side of the employers. Through statutory enactments the class of fellow-servant employees was narrowed to exclude supervisors or manages. Other laws followed but were to a degree nullified by employers who required workers to sign contracts releasing them from any liability.
Employers' Liability Acts
A number of states adopted employers' liability acts about the turn of the century, modeled after employers' liability legislation in England. Under this legislation, it held the employer responsible for accidents cause by defective machinery and the negligence of supervisors. The federal Employers' Liability Act of 1906 was held unconstitutional, but was later upheld by the U.S. Supreme Court. This law annulled or invalidated the fellow-servant rule and modified the operation of the contributory negligence and assumption-of-risk rules. The law also provided that contracts intended to exempt the employer from liability created by the act should be void.
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Legal liability is based on negligence law. |
Though these new rules seemed to benefit the employee, they did not. The employee still had to prove negligence of the part of the employer. Many accidents occurred where negligence could not be shown. Thus, great expense and delay were suffered by both the employee and the employers in litigation. For the employee to go ahead and file a suit against the employer they had to suffer job loss and therefore had problems paying for expenses incurred before, during and after litigation.
Workers' Compensation Laws
Employers' liability acts have been replaced by workers' compensation laws in all jurisdictions in the United States.
The theory behind workers' compensation legislation completely disregards the idea of liability based upon negligence. Workers' compensation is based on the theory that the cost of occupational disabilities is to be paid by the employer, regardless of liability, and then passed on to the consumer as a part of the cost of production.
Workers' compensation laws make the employer responsible for indemnity to the disabled employee without regard to the matter of fault or negligence. The amount of indemnity to apply in particular cases is predetermined by the law, although it does not equal the full income received while employed. The laws relate payments to injuries for sicknesses and if fatal, death benefits for the employee's dependents. Medical expenses, income and rehabilitation benefits are included.
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Workers' compensation is based on the theory that the cost of occupational disabilities is to be paid by the employer, regardless of liability. |
Employers did not like this trend to liberalization, so they questioned the constitutionality of the first attempts at workers' compensation laws. In New York, in was held as unconstitutional when the employer has omitted no legal duty and has committed no wrong. The state evolved a new plan to overcome the unconstitutional difficulties. The new plan gave the employers a choice: They could choose to be governed by the workers' compensation act, or they could choose not to. Wisconsin had the first effective workers' compensation law in 1911, and many other states passed such laws by the early 1920s. Incentives were given to employers to choose to be governed by the workers' compensation act. If they failed to accept the act, the employer lost the defenses of contributory negligence, negligence of fellow employee and assumption-of-risk by an employee. With the losses of these common law defenses and the uncertainty of jury awards, the workers' compensation act was preferred by employers.
In the beginning, workers' compensation laws were enacted only for employees working in occupations regarded as hazardous such as coal mining, blasting operations, and explosive manufacturing. The tendency in compensation legislation has been to enlarge the application of the law.
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In the beginning, workers' compensation laws were enacted only for the employees working in occupations regarded as hazardous. |
No state at present brings all occupations within the operation of the law, but most occupations are covered, regardless of the extent of hazard considered in the work.
Most states cover all public employments and most private employments.
Compulsory and Elective Laws
There are two types of workers' compensation laws based on the employers' rights:
1. compulsory, and
2. elective.
Almost all of the state laws are compulsory. This means that all employers to whom the laws apply are required to pay for work injuries or diseases as specified under the compensation statutes.
Only a couple states have the elective type of law permitting the employer to accept or reject the workers' compensation act. The common-law defenses are lost if the employer rejects the workers' compensation act, so it is not surprising that such a choice is very unusual.
Not only do the employers come under the workers' compensation laws, so do the employees on a compulsory basis. A state may permit the employees to reject the applicable compensation law in writing, but normally this must be done before a loss occurs. It is safe to say that this is rarely done because the employer then retains the common-law defenses and a liability suit against the employer by the employee would be difficult to win a judgment for.
Covered Perils
Employees receive compensation for all injuries and diseases arising out of and occurring in the course of employment. There are no benefits under compensation acts when it is proven that the injury was occasioned by the willful intention of the employees or by their intoxication (by alcohol or nonprescription drugs) while on duty. An exception to the regulation covering intoxication is sometimes made if the employer knew that the employees were intoxicated or that they were in the habit of being intoxicated themselves while on duty.
An occupational disability would include both injury and disease. Occupational diseases are defined as diseases peculiar to the occupation in which the employee is engaged and due to causes in excess of the ordinary hazards of employment. In the last couple decades employers have seen suits claiming compensation for such diseases as those developing from exposure to chemical fumes and dust, radioactivity, prolonged industrial noise and so on.
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Employees receive compensation for all injuries and diseases arising out of and occurring in the course of employment. |
Liability for occupational disease is based on the common-law doctrine requiring the employer to use all reasonable precautions to safeguard employees from injury and to warn them of the existence of any particular danger. By statute in one form or another, occupational diseases have been covered in all jurisdictions, in some by the workers' compensation laws and others in separate occupational disease acts. There must be a cause-and-effect relationship between the occupation and the disease as well as a frequency and regularity of the occurrence of the disease in the particular occupation for the disease to be attributed to the work or its nature. In some states, the exposure must be peculiar to the workers' occupation and extend over a specific minimum period of time.
Types of Benefits Under Workers' Compensation Laws
The basic types of benefits would include:
1. Medical Expenses: this is a primary benefit and all states provide for complete medical care without any waiting period. About one-third of all workers' compensation benefits are for medical expenses.
2. Income Benefits: these benefits will differ from state to state, but they do have common points in all the acts. Definite Schedules of Benefits are provided for different types of disability. Lump-sum settlements may be made in certain situations. It is unusual to provide for the benefits on a weekly basis.
The weekly benefits are set at a fraction of the injured employee's weekly wage to discourage malingering. It is very typical for a state to allow 66.6 percent of the injured employee's weekly wage which may be about 75 percent of the take home pay. A maximum of 100 percent of the state average wage and a minimum of $20 - $50 per week often applies. In some states a maximum total payment is set in terms of amounts varying widely from state to state. In most states the duration is life or the period of the disability.
A couple of states have tried the Wage Loss System in which employees are only permitted benefits for periods during which an actual reduction or loss of earnings has occurred. With only a few exceptions, actual wage loss is all that is paid. This allows employer premiums to be reduced.
Some states also require a Waiting Period of a few days to one week during which no compensation is paid to the employee. This waiting period was instituted to try to prevent the malingering employee from staying off work beyond the duration of their actual injuries or illness. The waiting period acts as a kind of deductible. This period is now decreasing in most states to about three days and often full retroactive payment is provided for losses of more than two weeks.
Fixing the exact benefit due with as much detail as possible in each specific type of injury is an important feature of compensation legislation. As stated before, there is much variations between the states, but normally the following injuries and disabilities are specifically provided for:
a) fatal injury,
b) temporary total disability,
c) permanent partial disability,
d) temporary partial disability, and
e) permanent partial disability.
Some state laws also provide benefits for such disfigurements as might be a handicap in securing employment.
The federal Old Age, Survivors, Disability, and Health Insurance (OASDHI) program has also provided benefits for serious disabilities such as total and permanent disabilities. In some cases disabled employees can collect from both workers' compensation and OASDHI a total benefit of up to 80 percent of their wages before they were disabled. The limitation is appropriate because these disability income payments are tax-free making them as much as or sometimes even more than net normal earnings.
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Disabled employees may be able collect from both workers' compensation & OASDHI a total benefit of up to 80% of their wages before they were disabled. |
3. Death Benefits: Survivors of various categories such as widows, widowers, children and other dependents are paid income as a death benefit. Benefits are normally the same amount as the workers' permanent total disability, with an added amount in about nine states for children. Remarriage normally stops the parent's payments. States have different limits regarding survivor payments. Burial expenses are also normally paid.
4. Rehabilitation Benefits (which most state now provide): The benefits of rehabilitating workers or even permitting them to return to work at the earliest possible date can save the insurance company much money. Hence the value of this benefit is being realized more and more in our society. The cost of the claim is reduced. The employer gets the trained worker back on the job sooner and this ultimately reduces the cost of the insurance to the employer. Some states only provide a referral service to other rehabilitation programs. Most states pay a retraining allowance.
To guarantee that benefits will be paid to the employee, employers are required by all states to have some form of insurance. In many states they are given a choice among private insurance companies (insurers), state funds, and self-insurance. Regardless of the insurance method chosen, there is no doubt that the cost of workers' compensation is substantial. The costs vary from state to state and the type of occupation and individual business firm (on accident records). The general level of benefits is determined by state laws which set forth the income percentage, the duration, and the minimum and maximum payments. Different classifications have extremely different costs, as rates may vary from a few cents to hundreds of dollars.
Workers' Compensation Insurers
The employers are normally offered options as to how they are going to guarantee the payment of workers' compensation claims. Insurance may be provided either through:
1. a state fund (either competitive or monopolistic), or
2. by private insurers (stock, mutual or reciprocal) authorized by the particular state to transact the business of workers' compensation.
As an alternative in each of the above groups, most states employers who can provide satisfactory proof of financial ability may carry their own risk which means they can self-insure themselves.
There are many arguments brought forth about the pros and cons of private insurers versus state funds which can be difficult to remove from political considerations. All of the states with monopolistic (monopoly of the compensation business) funds have had the funds in existence for many years and these states are very reluctant to give up or change a system that has been existence for such a long time. The following arguments in no way reflect the opinions of the staff of United Insurance Educators, Inc.
Supporters of a state fund contend:
· that since workers' compensation insurance is virtually compulsory, it should be the duty of the state to provide a means for buying the insurance;
· that with respect to a compulsory coverage it is not appropriate that it be a source of profit for a private insurance company; and
· that since the cost of workers' compensation insurance is a cost of production, to allow a profit reflects an unnecessary charge to the consumer.
Supporters of private insurance contend:
· that a state fund does provide protection at the lowest possible cost because in the absence of competition's inefficiency in management may evolve;
· that competition affords a superior service to the policyholders providing insurance on an interstate basis and that private insurers provide employers' liability protection, medical expenses coverage and other forms of protection not available through state funds, not to mention the loss prevention education that can be put forth;
· that under private insurance the cost is definitely established, whereas under a state fund an unseen cost may develop if the taxpayer is called upon to subsidize the fund to maintain its solvency; and
· in a system of private enterprise any activity that may be carried on to advantage by private business establishments should not be delegated to the government.
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Only the most complete and formal plans for financing risk are properly deemed as self-insurance plans. |
The larger employers have the choice in most states to self-insure the risk of workers' compensation. Only the most complete and formal plans for financing risk are properly deemed as self-insurance plans. For an employer to deserve the designation of self-insurance, a plan must include certain requisites which apply similarly for sound insurance company operations. For a company to be self-insurable they need large numbers of important, homogeneous, and accidental risks which have the quality of being definite and calculable and do not involve the chance of too large a catastrophic loss. High frequency and low severity loss are essential in order to have reasonable predictability. Normally, large organizations are the only ones that can meet these requirements properly. There can be self-insurance only if the risks are sufficiently spread so that such that a severe loss will not adversely affect the employer. Self-insurance is available to employers with sufficient assets and annual workers' compensation premiums of several hundred thousand dollars.
Standard Workers' Compensation & Employers' Liability Policy
There is no statutory enactment requiring a standard workers' compensation policy. This is because of the diversity of the compensation laws as enacted by the various states. Insurance companies have developed a state form sufficiently broad to meet the requirements of insureds and at the same time meet the legal demands in each jurisdiction. This form is known as the standard workers' compensation and employers' liability policy. This form has had only one major revision in 1954 which reduced to a minimum the number of endorsements necessary and the majority of policies issued to the average risk without endorsements. There are a few situations, due to statutory requirements, manual rules or underwriting practices in which endorsements are still required.
The standard workers' compensation and employers' liability policies follow the pattern of liability policies with four main divisions:
1. declarations,
2. insuring agreements,
3. exclusions, and
4. conditions.
The language of the policies themselves tries to follow the language of comparable provisions in liability policies.
1. Declarations: These consist of five items and cover such pertinent information as the name of the insured, the policy period, the states in which operations are carried on and the liability limits for employers' liabilities. The premium basis, rates and classification of operations required by the insurance company appear here. The declaration basically provides the underwriting data relied upon by the insurance company for the issuance of the policy.
Item 1: Includes the name of the insured, the address, the form of business organization and all of the usual permanent workplaces of the insured.
Item 2: This states the policy period. The policy runs from 12:01 a.m. standard time at the address of the insured. This reference is very important in the case of a risk that extends to a number of states and includes more than one time zone.
Item 3: This could be considered the most important of all items in the declarations portion of the policy. This states that coverage A of the policy applies to the workers' compensation law and any occupational disease law of the state or states listed. The policy would cover all operations of the insured in the state or states listed. In the case of an insured operating on a nationwide basis, item 3 may list the states to be covered, and for the states that are not covered, the policy would insert "all states except . . . ." The states that are excepted would then be listed. When this situation happens, states with monopolistic state funds, states in which the insurance company is not qualified to write compensation insurance, and states in which the insured is not within the provisions of the workers' compensation law must be listed with the exceptions.
Item 4: This classifies the operations of the insured. The estimated total annual remuneration of all employees is given as a premium basis. The rates per $100 of payroll are listed together with the minimum premium, the total estimated annual premium and the deposit premium. The policy must indicate if the premium adjustments are to be made on a semiannual, quarterly or monthly basis.
Item 5: This supplies a single limit to apply to the employers' liability feature of the coverage. Sometimes provision is made for a different limit of liability for certain operations. This limit applies only to employers' liability coverage and not to workers' compensation benefits which are all fixed by the law.
2. Insuring Agreements: In this part of the policy there are four parts, designated by roman numerals.
Insuring agreement I concerns coverage A for the insured's liability under workers' compensation laws, and coverage B provides an employers' liability coverage with respect to injuries and sicknesses arising out of and in the course of employment.
Insuring agreement II covers matters of defense, settlement and supplementary payments.
Insuring agreement III provides for definitions.
Insuring agreement IV is concerned with limiting liability to disease or injury that originates within the policy.
3. Exclusions: There are six exclusions. Other workers' compensation insurance, including coverage as a qualified self-insurer, is excluded in order to avoid duplicate coverage. Domestic or farm employment is excluded unless it is covered by the compensation law or described in the declarations. The remaining exclusions apply only under coverage B, the employers' liability coverage. The policy does not apply to:
a) assumed liability in a contract,
b) punitive damages for employees hired in violation of law or to any such employees hired in violation of law with the knowledge of the insured,
c) suits filed after 36 months after the end of the policy,
d) obligations under employment or disability benefit laws of the states.
e) The last exclusion also excludes employers' liability coverage for any obligations under workers' compensation or occupational disease laws of the states designated in the declarations section.
4. Conditions: The conditions in the policy follow closely those in policies making use of the national standard provisions program for liability policies. Most conditions apply to either calculation or payments of the premium or to the settlement of losses.
Basic Rating Plans
Basic workers' compensation insurance rates are usually compiled from total industry statistics, divided into industry groups such as manufacturing, contracting, and so forth. This data is subdivided into rates for about 600 classifications of products and processes by rating bureaus who submit them in the various states for approval. In many states, deviations from the manual rates are permitted but only infrequently sought or even approved.
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States may allow deviations from the manual rates but are infrequently sought after or even approved. |
In addition to the basic classifications and rates, the individual insured may have several opportunities to benefit from special risk rating plans which include:
1. Experience Rating Plans: These plans are based on the past loss experience of the particular risk under consideration. All states permit experience rating plans. If the loss history shows a cost below normal for the class, a reduction in the rate is allowed. If the loss history shows a cost well above normal, with the creditability factor of 1.00, the risk is said to be self-rated. To qualify for experience rating, the risk must produce a designated annual average premium figure at manual rates. To determine the experience, the plan requires a period of not less than one year and can usually include a maximum of three years.
Standard premium is used to designate that premium determined by applying manual rates to the employer's payroll modified by experience rating. When the annual standard premium exceeds $1,000, two additional types of plans may further modify the premium charge. These would include:
a) the premium discount plan, and
b) five retrospective rating plans.
2. Premium Discount Plans: Workers' compensation rating plans acknowledge that certain factors which enter into the premium charge do not increase proportionally as the premium increases. The principal factors considered are:
a) losses,
b) claim expense,
c) engineering and accident prevention,
d) administrative and payroll audit expenses,
e) acquisition costs, and
f) taxes.
As the premium increases, it is the purpose of the plan to give credit for those expenses that do not increase proportionately. It is a mandatory device to reflect expenses savings for larger risks. Premium in excess of $1,000 is grouped in brackets and larger discounts are applied as the premium increases in amount.
3. Retrospective Rating Plans: These types of plans differ from the experience rating plans. Modification for current loss experience is the distinguishing feature of the retrospective plans. These plans are not separate and apart from experience rating, but are supplementary to it. Retrospective rating plans base the premium on actual losses of the current policy year, whereas experience rating looks definitely to the past to determine the premium rate. It is an optional arrangement for eligible risks, typically larger firms with good loss records and loss-prevention programs. Minimum standard premiums of about $5,000 are required, but to be effective $50,000 or more is often needed.
With retrospective plans when the experience is particularly good, a credit is reflected in the premium charge, whereas with experience rating plans the actual anticipated experience can only be estimated. If the risk is unsatisfactory, the cost to the insured is reflected in an increased premium. In actual operation the retrospective plan provides for three premiums:
a) the minimum retrospective premium,
b) the maximum retrospective premium, and
c) the retrospective premium.
The retrospective plans provide that the insured shall pay in any case the minimum retrospective premium. The insured can never be called on to pay more than the maximum retrospective premium either. The premium that the insured will actually pay will probably be between the two which is known as the retrospective premium. The retrospective premium is determined by adding to the basic premium the losses incurred, modified to provide for taxes and claim adjustment expenses. Individual claims included in the loss experience are often limited beforehand to stipulated maximum amounts.
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The insured can never be called on to pay more than the maximum retrospective premium either. |
The retrospective plans give the insured the same credit for decreasing administration and acquisition expenses as does the premium discount plan. The retrospective plan reflects current losses in the current premium charge. This is in fact, a protected profit-sharing plan in which the insured shares the profits by receiving immediate credit for lower loss experience. One of the most important effects of the compensation rating plans is that they give the insured a direct incentive to provide all parties to use the best loss-prevention and loss reduction techniques.
Occupational Safety & Health Act (OSHA)
The federal law passed in 1970 called the Occupational Safety and Health Act (OSHA) usurped from the state considerable control of work-safety regulations. A state must put into effect rules at least as stringent as the federal standards if the state wishes to maintain jurisdiction for work-safety conditions of employees within its borders. The penal fines and investigative rules of OSHA are extensive, with many employers feeling the effects of inspections across the nation by compliance officers who enforce the safety regulations under the act. Insurance companies are facing potential increased liability if the laws are not met by the insured.
Second-Injury Funds
Second-injury funds have been established to facilitate employment of physically handicapped workers. Under the compensation laws, employers are liable for a disability resulting from injuries incurred in employment, but not for preexisting handicaps. Additional compensation due because of the combination of two injuries is paid from the second-injury fund. The financing method of the fund varies from state to state. Normally insurance companies contribute on the basis of the total compensation paid during the year, or on premiums collected. Some states support the second-injury fund through legislative appropriations.
End of Chapter 4