Does Umbrella Insurance Cover Workers Comp?

Most business owners are familiar with the need – and in some states, requirement – for workers’ compensation insurance to cover employee injuries. Less understood is the indirect role umbrella insurance can play in regard to workers comp claims. In this article, we’ll take a look at both types of insurance and clarify what each one covers, helping you make informed decisions for your business.

Overview of Workers’ Compensation Insurance

The purpose of workers’ compensation insurance is to shield businesses from lawsuits related to workplace injuries and to cover medical expenses and lost wages for employees injured or ill due to their job. This coverage is required in all states except Texas, where private employers can choose whether to provide it or not. With some exceptions, in South Carolina workers’ comp is required for businesses with four or more employees, full-time or part-time; in North Carolina, it’s three or more. 

Workers’ Comp Coverage:

• Medical bills for work-related injuries/illnesses
• Rehabilitation costs
• Partial wage replacement during recovery
• Disability benefits
• Occupational illnesses; repetitive stress injuries
• Death benefits

Workers’ compensation does not typically cover injuries from intoxication, self-inflicted injuries, or those outside the scope of employment.

Overview of Umbrella Insurance

Umbrella insurance is an optional, additional layer of liability protection that sits on top of your existing policies (e.g., general liability, auto, or homeowners insurance). It kicks in when the underlying policy’s limits have been exhausted, providing extra financial security in case of significant claims. 

Umbrella Insurance Coverage:

• Property damage 
• Medical bills
• Judgments and settlements
• Legal costs
• May protect against defamation, libel, slander, false arrest

Umbrella insurance does not cover workers’ compensation claims, intentional acts, or damages from business-related activities not covered by underlying policies.

Comparing Workers’ Compensation and Umbrella Insurance

Before we move on to the ways umbrella insurance may indirectly provide protection regarding workers’ comp claims, let’s do a quick side-by-side comparison of the two types of coverage.

Does Commercial Umbrella Insurance Cover Workers’ Comp?

As we have noted, umbrella insurance does not directly extend to workers’ compensation claims – however, umbrella coverage does offer important additional protection in scenarios where business liabilities exceed the limits of standard policies, including potential liabilities indirectly related to workplace injuries. This makes umbrella insurance a potentially valuable asset for comprehensive risk management.

Let’s look at some commonly-cited scenarios where umbrella insurance could indirectly provide additional protection related to business liabilities that might arise in connection with workers’ compensation claims. 

1. Third-Party Over Actions

Scenario

If an employee is injured on the job and receives workers’ comp benefits, they generally cannot sue their employer. However, if the injury was caused by a third party (like a manufacturer of faulty equipment), the employee might sue that third party. The third party could then sue the employer, arguing that the employer’s negligence contributed to the injury.

Umbrella Coverage

In this case, while workers’ compensation covers the employee’s direct benefits, an umbrella policy could step in to cover the employer’s liability if the third party sues them, and the primary general liability policy limits are exhausted.

2. Employer’s Liability

Scenario

Workers’ comp often includes an “employer’s liability” component, which covers lawsuits related to employee injuries that are not covered by workers’ compensation, such as claims of negligence leading to the injury.

Umbrella Coverage

If a claim exceeds the limits of the employer’s liability coverage within the workers’ compensation policy, an umbrella policy might cover the excess amount, providing additional financial protection.

3. Employment Practices Liability

Scenario
If an employee claims that their injury was a result of discriminatory practices, harassment, or wrongful termination related to their injury, these claims may not be covered by workers’ compensation but could fall under employment practices liability insurance (EPLI).

Umbrella Coverage
If the costs related to such claims exceed the limits of the EPLI policy, an umbrella insurance policy might provide additional coverage.

4. Other Business-Related Liabilities

Scenario
Umbrella insurance provides broad protection beyond what standard policies cover. For instance, if an incident unrelated to an injury (like defamation or property damage caused by an employee) leads to a lawsuit and the claim exceeds the limits of the general liability or commercial auto policy, umbrella insurance would provide coverage.

Umbrella Coverage

This type of coverage helps protect the business from large, unexpected liabilities that are not related to workers’ compensation but could still pose significant financial risks.

Considerations for Business Owners

Not every business will need to layer umbrella insurance over top of workers’ compensation insurance. Securing your business’s financial stability and long-term success as your needs and risks evolve requires consulting with an insurance broker or risk manager to comprehensively: 

• Assess your risks
• Ensure you have the right coverage
• Protect your assets and reputation

Understanding Business Risks and Evaluating Existing Coverage

Different industries have unique risks, making it crucial to assess those specific to your field. 

Businesses that are particularly susceptible to risk include those that are open to the public and whose employees interact with customers, drive, work offsite, handle dangerous products, or operate heavy machinery.

Reviewing your current insurance policies helps you understand what is covered and, more importantly, what might be missing. Working with an insurance professional will help you identify coverage gaps and avoid vulnerabilities, such as those not covered by standard policies.

Considering Additional Coverage and Meeting Legal Requirements

Specialized insurance, such as cyber liability or professional liability, may be necessary depending on your industry. It’s also important to ensure that your insurance coverage meets all legal and regulatory requirements. Understanding state-specific exemptions and requirements will help you stay compliant while adequately protecting your business.

Balancing Costs and Preparing for Unforeseen Events

While it’s important to manage the cost of insurance premiums, being underinsured can leave your business exposed to significant financial risk. Assessing policy limits to ensure they cover potential claims is crucial. Additionally, planning for catastrophic events, like natural disasters, and including insurance as part of a broader business continuity strategy, will help safeguard your operations against major disruptions.

If you have questions about your current coverage or want to explore prospective vulnerabilities, reach out to us today. The experienced professionals of Independent Insurance Associates are ready to serve as your advocates.