Employers’ Liability Insurance vs. Workers’ Compensation: A Complete Analysis for Texas Employers

Ensuring the safety and well-being of employees is paramount in the workplace, particularly in high-risk sectors like oil and gas, maritime, and construction. Despite stringent safety protocols, accidents remain a significant risk, underscoring the need for robust insurance coverage to protect employees and employers.

In 2023, Texas private industry employers reported approximately 175,900 nonfatal workplace injuries, equating to an incidence rate of 1.8 cases per 100 full-time workers. Certain sectors exhibit higher incidence rates. For instance, the manufacturing industry reported an incidence rate of 1.9, while construction had a rate of 1.2 per 100 full-time workers.

These statistics underscore the unpredictable nature of workplace accidents and the substantial impact they can have on both employees and employers. This is where insurance policies such as workers’ compensation and employers’ liability insurance come into play. But what exactly differentiates these two forms of coverage?

In this article, we will examine the differences between the two policies and provide valuable insights into their purposes, coverage, and complementary nature.

Overview of Workers' Compensation Insurance

Workers' compensation insurance is a state-regulated insurance that provides medical and financial benefits to workers for work-related injuries or illnesses, regardless of fault. Its primary purpose is to ensure employees receive prompt medical attention and replacement for lost wages while protecting employers from direct lawsuits related to workplace injuries. 

Unlike many states, Texas does not mandate private employers to carry workers' compensation insurance. Employers who choose not to provide this coverage are referred to as ‘non-subscribers’ and must inform their employees of this decision. As of 2022, approximately 25% of Texas employers were non-subscribers to the state's workers' compensation coverage.

Common Scenarios Covered Under Workers’ Compensation

Texas workers' compensation covers a broad spectrum of work-related injuries and illnesses, ensuring employees receive the necessary support.

• Workplace Injuries - This includes accidents such as slips, trips, and falls that occur while performing job duties. Medical expenses and a portion of lost wages are covered through insurance, facilitating the employee’s recovery without financial strain.
• Medical Expenses - The policy covers all reasonable and necessary medical care related to the injury. This encompasses doctor visits, surgeries, hospital stays, medications, and rehabilitation services. 
• Lost Wages - When an injury keeps an employee from working, workers' compensation provides income benefits to replace a portion of lost wages. In Texas, these benefits are typically calculated as a percentage of the employee's average weekly wage, subject to state-set maximums. 

Exclusions from Coverage

While workers' compensation offers extensive coverage, certain situations are excluded to prevent misuse and ensure the system's integrity.

• Non-Work-Related Injuries - Injuries sustained outside the course and scope of employment are not covered. 
• Self-Inflicted Injuries - Injuries resulting from intentional self-harm or those incurred due to the employee's willful misconduct, including horseplay or violation of safety protocols, are excluded. 
• Intoxication - Injuries occurring while the employee is intoxicated or under the influence of any illegal substance are generally not covered.
• Injuries from Voluntary Activities - Harm resulting from voluntary social or recreational activities, such as company picnics or sports leagues, may not be covered.

Protect your workforce with tailored workers’ compensation coverage. Get a free personalized quote with TWFG Khan Insurance to secure the protection your team deserves today.

Now that you understand these basics, it’s also important to explore employers' liability insurance, which addresses claims beyond the reach of workers' compensation coverage.

Overview of Employers' Liability Insurance

Employers' liability insurance is designed to protect businesses from financial loss if an employee sues over a work-related injury or illness not fully covered by workers' compensation. It addresses the gaps, ensuring that employers are not left vulnerable to significant legal expenses and potential settlements. It acts as a financial buffer, ensuring employers can navigate complex legal challenges without jeopardizing their business operations.

Common Scenarios Covered Under Employers’ Liability Insurance

Employers' liability insurance covers a range of legal costs arising from employee-related claims, including:

• Legal Defense Costs - Attorney fees, court costs, and other expenses associated with defending against lawsuits are covered under the policy. These costs can quickly escalate, with legal defense averaging $150,000 for workplace injury cases in the U.S. 
• Settlements and Damages - If a lawsuit leads to a settlement or damages awarded by the court, employers’ liability ensures these amounts are covered. Without this protection, you risk facing significant out-of-pocket expenses.
• Third-Party Claims - Employers’ liability protects against lawsuits filed by third parties, such as a spouse or family member. These claims often involve allegations of emotional distress or loss of companionship, known as ‘loss of consortium.’

Exclusions from Coverage

While employer’s liability insurance offers broad protection, it's essential to understand its exclusions:

• Criminal Acts - If you’re found guilty of criminal behavior, such as fraud or deliberately violating workplace safety laws, employers’ liability will not cover claims arising from these actions.
• Intentional Injuries - Deliberate harm caused by you to an employee, such as physical assault, is excluded. These acts are considered outside the scope of business operations.
• Misconduct - Claims resulting from willful misconduct or gross negligence, such as failing to address known safety hazards, are not covered.

Now that we’ve thoroughly explained both insurance policies, we'll delve deeper into their distinctions and highlight how each protects employers and employees in different scenarios.

Employers' Liability Insurance vs. Workers' Compensation

Understanding the distinctions between employers' liability insurance and workers' compensation is crucial for businesses, especially in Texas, where unique regulations apply. Let's delve into the specific differences:

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With this, the distinction between workers' compensation and employers' liability insurance is clear – each addresses different aspects of workplace risks. However, they are not mutually exclusive. Next, let’s explore how these two insurances complement each other.

Complementary Nature of Workers' Compensation and Employers' Liability Insurance

Understanding the interplay between workers' compensation and employers' liability insurance is crucial for businesses, especially in high-risk industries like maritime, oil and gas, and construction. While each serves a distinct purpose, together, they provide a comprehensive safety net that protects both employees and employers.

How Employers’ Liability Complements Workers’ Compensation

• Workers' compensation offers a no-fault system, ensuring employees receive benefits for work-related injuries, such as medical expenses, lost wages, and rehabilitation costs. However, its scope has limitations.
• Employers' liability insurance steps in to address scenarios where workers' compensation does not apply, particularly when negligence is alleged. In such cases, it covers legal defense costs, settlements, and awarded damages, safeguarding the employer's financial interests.

To better understand, let’s take the example of a construction company in Texas. An employee sustains severe injuries due to a scaffold collapse. The employee alleges that the equipment is improperly maintained, claiming employer negligence.

In such a case, workers' compensation would cover immediate medical expenses, but the employee could still file a lawsuit seeking additional damages for pain and suffering. With employers' liability insurance in place, the company would be protected, as the policy would cover legal fees and settlement costs, helping the business avoid significant financial strain.

Importance for Businesses to Carry Both Types of Insurance

Operating without adequate insurance coverage exposes businesses to substantial risks. Carrying both insurances ensures comprehensive protection:

• Financial Security - Workers' compensation covers direct costs associated with employee injuries, while employers' liability insurance addresses potential lawsuits alleging negligence.
• Legal Compliance - Although not mandatory, having these insurances aligns with best practices and can mitigate legal repercussions.
• Employee Trust - Comprehensive coverage demonstrates a commitment to employee welfare, fostering a positive work environment.

Having discussed the differences and complementary nature of employers’ liability insurance and workers’ compensation, let’s explore the state requirements and inclusion of these insurances and see how businesses can ensure compliance and optimal protection.

State Requirements and Inclusion

For businesses operating in the Lone Star State, where regulations differ from those in other states, it’s important to understand the specific requirements and inclusions of both insurances.

Workers' Compensation Requirements in Texas

As mentioned before, Texas does not mandate private employers to carry workers' compensation insurance. This opt-in system allows employers to choose whether to provide coverage. However, certain exceptions exist:

• Public Projects - Employers engaged in building or construction work for governmental entities are mandated to provide workers' comp coverage for each employee working on the public project.
• Contractual Obligations - Some contracts may require workers' compensation coverage, especially when dealing with larger corporations or government agencies.

It is worth noting that the percentage of non-subscribing employers in Texas has actually decreased over the years, from 44% in 1993 to 25% in 2022, indicating a trend toward opting for coverage. 

Considerations for Businesses Operating in Monopolistic and Non-Monopolistic States

Understanding State Systems

• Monopolistic States - These require employers to purchase workers' compensation insurance exclusively from a state-operated fund. In these states, employers' liability insurance is often not included in the workers' compensation policy and must be purchased separately.
• Non-Monopolistic States - They allow employers to buy workers' compensation insurance from private insurers, often bundled with employers' liability coverage.

Texas's Classification

Texas is a non-monopolistic state, granting employers the flexibility to purchase workers' compensation and employers' liability insurance from private carriers. This flexibility enables businesses to tailor coverage to their specific needs but also requires careful consideration to ensure adequate protection. For this, businesses must take into account the following strategic considerations:

• Risk Assessment - Evaluate workplace hazards to determine necessary coverage levels.
• Insurance Consultation - Work with insurance professionals to customize policies that address both workers' compensation and employers' liability needs.
• Legal Compliance - Stay informed about state regulations and any contractual obligations that may influence insurance requirements.

By staying informed and securing appropriate coverage for their employees, businesses can protect themselves from financial and legal challenges arising from unforeseen workplace incidents.

Conclusion

Protecting the business from the financial and legal risks of workplace incidents requires a strategic approach to insurance coverage. Together, workers’ compensation and employers’ liability insurance create a safety net that shields your employees and your business, especially in high-risk industries like maritime, oil and gas, and construction.

At TWFG Khan Insurance, we understand the unique challenges faced by businesses operating in complex, high-risk sectors. Whether you’re a contractor managing heavy equipment, an oilfield operator navigating hazardous environments, or a shipping company handling intricate maritime logistics, our deep industry knowledge and tailored policies are designed to meet your needs.

Our expertise extends beyond just offering policies. We provide 24/7 claims support and direct access to top-rated carriers, ensuring your business is always protected. With our guidance, you can navigate the complexities of insurance and secure your operations against the unexpected.

Don’t wait for a costly lawsuit or unforeseen accident to test your coverage. Get a free customized quote with us today to ensure your business is equipped with the protection it deserves. Or, if you have questions, our team is here to help. Contact us today to learn how we can be your strategic partner in managing risks.