Stop Gap Coverage Explained: Closing the Gaps in Workers’ Comp

Most business owners assume workers’ compensation covers every possible workplace injury claim. After all, that’s the point of carrying the coverage — to take care of injured employees and avoid costly lawsuits.

But here’s the catch: workers’ comp doesn’t always protect employers from legal action. In certain states and scenarios, there’s a gap in protection. And if an employee — or even their family — sues, the costs can be devastating.

That’s where stop gap coverage comes in. It’s designed to fill the liability gap left by standard workers’ comp policies. While Texas isn’t one of the “monopolistic” states where this coverage is most common, it’s still something businesses with operations here (and across state lines) should understand.

What Is Stop Gap Coverage?

Stop gap coverage is supplemental liability insurance that protects employers when workers’ comp alone doesn’t cover an employee lawsuit.

Think of it as lawsuit protection for situations workers’ comp won’t touch. For example, workers’ comp covers medical bills and lost wages after a workplace accident — but if the injured worker sues their employer for negligence, workers’ comp won’t step in to pay defense costs or damages. Stop gap coverage fills that hole.

It’s important to note: stop gap coverage is not a substitute for workers’ compensation. You still need workers’ comp to provide benefits to employees. Stop gap simply adds another layer of protection for the employer.

Why Workers’ Comp Isn’t Always Enough

Workers’ comp is designed as a no-fault system — employees receive benefits in exchange for giving up the right to sue. But lawsuits can and do still happen, especially in states where employer liability isn’t included with workers’ comp.

Employers may face lawsuits from:

• Employees claiming unsafe conditions or negligence caused their injury. 
• Family members suing for loss of consortium or loss of services. 
• Dual capacity claims where the employer is seen in another role (such as also being the product manufacturer).
• Third-party-over claims, when another company is sued and tries to shift liability back to the employer.

Even if a lawsuit is frivolous or quickly dismissed, the legal defense costs can add up. Stop gap coverage ensures the employer isn’t paying those expenses out of pocket.

Where Stop Gap Coverage Matters Most

Stop gap coverage is most critical in the so-called monopolistic states — Ohio, Wyoming, Washington, and North Dakota. In these states, workers’ comp is provided exclusively through a state-run fund, and those programs don’t include employer liability protection.

That leaves a gap: the state provides workers’ comp benefits, but employers still need liability protection in case of lawsuits. The solution is to purchase stop gap coverage separately through a private insurer.

For businesses outside monopolistic states — including Texas — stop gap coverage can still be purchased as an endorsement. It adds peace of mind for employers who want broader protection against lawsuits and liability risks.

What Stop Gap Coverage Includes

While policies vary by insurer, most stop gap coverage addresses the following:

• Employer liability for lawsuits filed by employees that aren’t covered by workers’ comp.
• Defense costs and legal fees, even if a claim is dismissed. 
• Family member lawsuits, such as spouses suing for loss of consortium. 
• Dual capacity and third-party-over claims, which can arise in manufacturing, construction, and other industries.

What It Doesn’t Cover

Stop gap coverage won’t protect an employer against intentional harm or deliberate acts meant to injure an employee. Courts generally distinguish between negligence (covered) and willful misconduct (not covered).

How Stop Gap Coverage Is Priced

Stop gap coverage isn’t a standardized policy, so costs can vary by insurer. Generally, pricing depends on:

• Business size and payroll
• Industry risk classification (e.g., construction vs. clerical) 
• Location of operations (especially if you work in monopolistic states) 
• Policy limits selected 

The National Council on Compensation Insurance (NCCI) provides some guidance, but insurers have flexibility. That’s why it’s critical for employers to review policy terms with an experienced broker to ensure they’re truly covered.

Why Stop Gap Coverage Still Matters in 2025

Business risks have only grown since stop gap coverage was first developed. Here’s why it’s still relevant today:

• Rising litigation costs: Defense fees and settlement amounts have climbed significantly in the past decade.
• Expanded employee rights: Workers are more aware of legal remedies, and family members are more likely to pursue claims.
• Multi-state operations: More businesses are expanding across state lines, which increases the chance of exposure in monopolistic states.
• Vulnerable small businesses: A single lawsuit can strain or bankrupt a company without proper coverage.

For many employers, stop gap coverage is a relatively small expense compared to the financial devastation of even one uninsured lawsuit.

Real-World Example: A Texas-Based Scenario

Imagine a Houston-based construction company that occasionally sends crews to work on projects in Ohio.

In Texas, the company has workers’ comp that includes employer liability coverage. But in Ohio, workers’ comp is only available through the state fund — and that policy does not provide employer liability.

During a project in Ohio, a worker is injured on the job and receives medical benefits through the state system. But the worker also sues the employer for negligence, claiming unsafe worksite conditions.

Without stop gap coverage, the Houston company would have to pay for legal defense and any damages out of pocket. With stop gap coverage in place, the employer has a safety net — the policy steps in to cover those costs.

This example highlights why Texas-based businesses with multi-state operations must review their coverage carefully.

Questions to Ask When Reviewing Coverage

To determine if you need stop gap coverage, ask yourself:

• Do we operate in Ohio, Wyoming, Washington, or North Dakota? 
• If so, does our current policy include employer liability? 
• Are we covered for lawsuits filed by family members or in dual capacity situations?
• What are our current liability limits — are they high enough to protect the business?
• Has our broker reviewed endorsements and exclusions with us recently? 

Closing Coverage Gaps Before They Become Lawsuits

Stop gap coverage isn’t the most well-known type of insurance, but for many employers, it’s one of the most important. It closes the loopholes that can expose businesses to unexpected lawsuits and expenses.

Whether you’re a Texas business with crews working in monopolistic states or simply a company that wants extra protection, understanding your options is critical.

At Dean & Draper, we specialize in helping businesses identify and close coverage gaps before they become costly surprises. Our team can review your policies, explain where you might be exposed, and recommend solutions tailored to your business.

Ready to make sure your workers’ comp truly protects you? Contact Dean & Draper today to learn more about stop gap coverage and other liability solutions.

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