Understanding Stop Gap Coverage: Essential Protection for Employers

An employer's responsibility for injuries to his or her employees is usually handled through workers compensation coverage; this coverage is designed to provide injured employees with a schedule of benefits in exchange for their giving up the right to sue the employer. However, there are instances when an employer can be sued for injuries to employees, regardless of the existence of workers compensation.

In such instances, the employer should have employers liability insurance; this coverage is normally part of the standard workers comp policy. A problem arises, though, when the standard workers comp policy can not be written, as for example when the workers comp program is run by the state through a monopolistic state fund. When the state runs the workers comp program, employers liability coverage is not offered by the state, and in that situation, a gap in coverage for the employer exists. Coverage known as "stop gap" is there to plug that gap. This article offers a description of stop gap coverage.

Note first of all that stop gap coverage is not a substitute for workers compensation (WC) coverage. Stop gap coverage is designed to provide liability insurance for an employer who can be sued by an employee injured in the course of employment. Now, the standard workers compensation policy does provide employers liability insurance which applies to sums that the employer legally must pay as damages because of bodily injury to employees; insurance protection, in effect, for employers who are sued by their employees. However, such insurance is not offered under the workers comp program written in monopolistic workers compensation states, such as Ohio. To fill this "gap" in employer protection, stop gap coverage should be purchased.

In the monopolistic workers comp state funds jurisdictions, employers can purchase stop gap coverage from private insurers to give themselves employers liability coverage (or self insure the exposure). If the employer does buy stop gap coverage, the coverage can be the same as exists under the terms of the employers liability section of the workers comp policy; however, the terms of stop gap coverage do not automatically mirror those found in the employers liability insurance part of the workers comp policy. Stop gap coverage is not a standardized policy-such as, an ISO personal auto policy or a commercial general liability form-and the insured needs to read the specifics to make sure he or she is getting the coverage needed and requested.

Since insurers can write their own version of stop gap coverage, the premium charge relies heavily on the individual insurer's underwriting rules and procedures. However, the National Council on Compensation Insurance (NCCI) does offer guidelines for rating a stop gap exposure. Basic limits of liability are $100,000 each accident for bodily injury by accident; $100,000 each employee for bodily injury by disease; and $500,000 policy limit for bodily injury by disease. Higher limits of liability are permitted. The premium is based on the WC classifications and rates in the NCCI workers comp manual. The initial premium is estimated, with the final premium subject to an audit of the employer's actual exposures.

Here is an example of stop gap coverage language: it is agreed that such insurance as is afforded by the policy under bodily injury liability applies also to the liability of the insured for damages because of bodily injury by accident or disease, including death at any time resulting therefrom, sustained by any employee of the insured arising out of and in the course of his employment by the insured.

Note that this wording does sound like that found in the employers liability insurance part of the workers compensation policy. But, regardless of how the stop gap coverage is worded, the bottom line is: stop gap coverage applies to employers liability for damages because of bodily injury to employees, bodily injury not covered by workers comp statutes. But stop gap coverage does not necessarily end there.

Defense costs can also be provided by stop gap insurance. If an employee can sue an employer over work-related injuries, that lawsuit brings with it attorneys' fees and court costs, even if the lawsuit is found to be frivolous or is dismissed-and stop gap can help defray those costs.

Lawsuits brought by spouses or other family members of the injured employees for loss of consortium or loss of services could be another item handled by stop gap coverage. And, dual capacity and third-party-over claims can likewise be subject matters for stop gap.

One more thing to consider here-intentional torts. Employers liability insurance ideally does not cover bodily injury intentionally caused by the employer; neither should stop gap coverage. However, consider the case of Harasyn v. Normandy Metals, Inc., 551 N.E.2d 962 (1990). In that case, the Ohio Supreme Court held that "where an employer's policy of coverage purports to cover an injury to his employee arising out of and in the course of employment, intentional tort which is inferred from a substantial certainty of injury and not as a deliberate intent to harm an employee, is covered by the policy".

The Ohio Supreme Court is saying that there is a difference between an intentional tort based on a "direct intent to injure" and one based on an "act performed with knowledge that an injury was substantially certain to occur". The prior intentional tort is not to be insured; the latter one can be, if the insurance policy language infers it, either directly or implied. So, it is possible for stop gap coverage to be interpreted as providing coverage for the intentional torts of employers; and it is up to the insurer, as the author of a stop gap endorsement, to phrase the insuring agreement and the exclusions in such a way as to preclude any coverage for intentionally caused bodily injury.

Note that the ruling in the Harasyn case was questioned in a later case due to the fact that the Ohio legislature repealed a state law that was enacted in conjunction with the Harasyn ruling. However, in Presrite Corporation v. Commercial Union Insurance Company, 680 N.E.2d 216 (1996), an Ohio appeals court said that the repeal of the state statute did not affect the policy reasons stated in the Harasyn for allowing intentional tort insurance. Ohio public policy does not prohibit insurance for substantial certainty intentional torts.

Stop gap coverage can be added as an endorsement to either a general liability policy or a workers compensation policy, depending on the situation of the insured and the underwriting guidelines of the insurer.

An example of an endorsement to a general liability policy was reviewed previously. Here is another example: in consideration of the premium herein provided, it is agreed that if under any circumstances it is determined that any employee of the insured who is reported and declared as injured in the course of his employment, but is not entitled to receive, or elects not to accept, the benefits provided by the workers compensation laws of the state where he or she is employed at the time of the injury, then this policy shall cover the legal liability of the insured for such bodily injury, disease, or death.

The wording of the two examples is a bit different, but the results are the same-the employer has insurance to apply to his legal liability that may arise due to an employee being injured in the course of employment.

As for an endorsement to a workers comp policy, NCCI offers a couple of examples for providing stop gap coverage in monopolistic workers comp states.

WC 00 03 B-employers liability coverage endorsement-applies to work in the states shown in the endorsement's schedule. WC 00 03 B applies the employers liability insurance provisions of a workers compensation policy to work in states shown in the schedule. This endorsement can be used in monopolistic state fund states, except Ohio.

For Ohio, NCCI offers WC 34 03 B. This endorsement applies only to work in Ohio. WC 34 03 B states that the workers compensation part of a workers comp policy does not apply to work in Ohio, but that the employers liability insurance part does.

Of course, the examples shown here do not exhaust the methods by which stop gap coverage can be provided. As noted previously, insurers can write their own versions of the coverage.

FC&S