Workers’ comp vs. general liability: who pays when someone gets hurt

When someone gets hurt at your business, the first question is whether they work for you. If your dishwasher slips on a wet floor and breaks a wrist, that’s a workers’ comp claim, and if a customer slips on the same wet floor an hour later on the way to the restroom, that’s a general liability claim. The hazard is identical; the only thing that changes the policy is who was walking. Workers’ comp pays your own employees’ medical care and part of their lost wages for work injuries, under your state’s rules, while general liability pays for injuries your business causes to customers, visitors and other outsiders, along with your defense if they sue.

The two policies are designed so they don’t overlap, which keeps you from paying twice for the same injury. It also leaves a seam between them, and the people who fall into that seam, such as independent contractors, a subcontractor’s crew or the friend who helps out on a busy Saturday, are where small businesses get caught with a bill neither policy will pay.

Start with one question: do they work for you?

The dividing line fits in one sentence from Oregon’s small business insurance guide: general liability pays an injured outsider’s medical expenses, but it excludes you and your employees, who are covered by workers’ compensation. The mistake to avoid is assuming the reverse works, that a good liability policy can stand in for comp, and Illinois’s Workers’ Compensation Commission warns employers about exactly that, saying general liability, group health, disability and property insurance won’t cover workers’ compensation liability.

So the sorting usually goes like this:

The top three rows are easy. The bottom four are where the surprises live. For the last row, do business owners need workers’ comp for themselves? explains the choice.

The exclusion is half of a trade

Owners sometimes read the employee exclusion in general liability as a hole in their coverage. It makes more sense once you see what workers’ comp gives the employer in exchange for its premium.

The California Department of Insurance describes workers’ compensation as the exclusive remedy for injured employees, and says that an injured employee covered under the workers’ compensation laws cannot sue the employer for damages in civil court. That’s the trade at the heart of state workers’ comp systems: the employee gets medical care and wage benefits without having to prove the employer did anything wrong, and the employer is generally protected from being sued over the injury. General liability excludes employee injuries because the injury already has a home, and two policies paying for the same broken wrist would serve nobody but the lawyers.

Skip workers’ comp and you lose the employer’s half of the deal. Illinois’s commission says an employer that fails to carry required coverage loses the protections of the state’s act, so an injured worker can sue in civil court, and that a knowing and willful failure can bring fines of up to $500 for every day without coverage. That’s a single state’s rule, and penalties differ elsewhere, but the shape is common: the uninsured employer ends up facing the lawsuit the system was built to prevent, without a policy behind it.

Exclusive remedy has exceptions, and they vary by state. Treat it as the general rule, with the understanding that some employees can still sue.

What if an employee sues anyway?

A workers’ comp policy has two parts, and the second one is for that. Part One pays the benefits your state’s law says an injured worker is owed. Part Two, employer’s liabilityEmployer’s liabilityEmployer’s liability insurance helps pay legal costs and damages when an employee, or their family, sues your business over a work-related injury or illness.Read the definition, protects you when an employee’s injury or disease falls outside the workers’ compensation laws, which is how the California Department of Insurance describes the split.

In practice, employer’s liability tends to come up in the claims that slip around the exclusive remedy rule, such as a lawsuit from an injured employee’s spouse or family, or a case where a client is sued by your injured employee and turns around and sues you for it, though which claims qualify depends on your state and your policy. Unlike the benefits in Part One, which follow your state’s rules without a limit for you to choose, employer’s liability has a limit you pick, and it caps what the policy pays on those lawsuits. And if you signed a contract promising to indemnify that client, the client’s claim against you may also reach your general liability policy through its insured contractInsured contractAn insured contract is a type of agreement, defined in general liability policies, under which liability you take on for someone else’s injury or damage claims can still be covered.Read the definition exception, subject to its terms, which is one reason general contractors ask their subcontractors for both policies.

That limit is easy to miss, because it sits next to a benefits line with no number. Look anyway, since a contract may set a minimum for it, and the lowest option isn’t always enough.

The people who fall in between

This is where the bills come from. Most injury claims sort themselves out in the first table, but the expensive surprises come from workers who aren’t clearly your employees and aren’t clearly someone else’s, and three situations account for most of them.

Independent contractors. Your workers’ comp generally covers your employees, so a true independent contractorIndependent contractorAn independent contractor is a self-employed person or business you hire for a job who controls how the work gets done, rather than working as your employee.Read the definition who’s hurt on your job is usually covered by their own insurance, or by none. The catch is the word “true.” The IRS says that deciding whether a worker is an employee means looking at the entire relationship, including how much right you have to direct and control the work, how the worker is paid and who supplies the tools, and states apply their own tests for workers’ comp purposes, which can be stricter. Minnesota’s Department of Labor and Industry warns contractors that a worker they call an independent contractor, and pay on a 1099 without withholding taxes, may still be treated as an employee under workers’ comp law, and that if that person is injured, the contractor can be found liable for the benefits.

Uninsured subcontractors. This one catches general contractors who have done everything else right. Minnesota’s department states that a general contractor is liable for all of the workers’ compensation benefits due to an injured employee of any subcontractor that doesn’t have workers’ comp insurance, and that where there’s a chain of contractors, the benefits may be collected from any contractor up the chain, even one with no employees of its own. Rules vary by state, so check yours, but the department’s own conclusion is worth repeating: contractors often buy workers’ comp to protect against the risk that a subcontractor will be uninsured when someone gets hurt.

Contractors’ injuries under your liability policy. If an independent contractor’s worker is hurt because of something your business did, they may bring a claim against you as a third party, and general liability may respond. But some general liability policies, especially those written for contractors, add exclusions for injuries to contractors’ and subcontractors’ workers. Read your endorsements for that wording before you assume the policy has your back.

Our view is simple. If you hire subcontractors, collect a certificate of insuranceCertificate of insuranceA certificate of insurance (COI) is a one-page summary that proves your business has insurance, listing your policies, limits, insurers and policy dates.Read the definition showing workers’ comp from every one of them before they start, check the dates and keep a copy, and if they can’t produce one, assume their workers are your problem. A certificate is only a snapshot, though: a policy can lapse after it’s issued, and in some states a subcontractor’s policy can cover the owner alone, so confirm the policy covers employees and check again on long jobs. How to collect and check certificates from your subcontractors covers the routine, do independent contractors need workers’ comp? goes deeper on classification, and what is a premium audit? explains how uninsured subcontractors can turn up on your bill.

What to buy, and in what order

If you have employees, start with workers’ comp, because in most states it isn’t optional. The rules differ on who counts, so look up your state’s agency on the federal Department of Labor’s list of state workers’ compensation officials; Illinois, for example, says that if you have one employee, even a part-time one, you must have it, while other states set different thresholds or exempt certain kinds of work. Don’t assume a small payroll keeps you under the line.

Then add general liability if customers, clients or the public come to your space or you work in theirs. The businesses that need both most are the ones with crews on other people’s property, like contractors, cleaners and landscapers. What to do when a customer is hurt at your business and what to do when an employee is hurt at work cover the first steps for each.

Even with both policies at good limits, a business can still pay for an injury out of pocket when the worker who got hurt was a subcontractor’s helper or a “contractor” the state considers an employee, because neither policy was written for that person. Paperwork closes that seam, and it only works if it’s done before anyone gets hurt.