Most business owners think of workers compensation as one thing. It's actually two. When you buy a standard workers comp policy from a private insurer, you get Part A and Part B bundled together. Part A pays your injured employee's medical bills and a portion of their lost wages. Part B, known as employers liability, responds when that same employee (or their family) turns around and sues you for negligence on top of filing the workers comp claim.
The two coverages do completely different jobs. Workers comp is a statutory benefit with no dollar cap. Employers liability is a liability policy with defined limits that your business selects. Understanding the distinction matters because the gap between what workers comp pays and what a lawsuit demands is exactly where employers liability coverage earns its place.
Part A: What Workers Compensation Actually Covers
Workers compensation is mandatory in 49 states. Texas is the only state that does not require it, though most Texas employers carry it voluntarily. The U.S. Department of Labor oversees federal workers comp programs, while each state administers its own system with its own rules, benefit levels, and compliance requirements.
When an employee is injured at work, Part A of the workers comp policy responds regardless of fault. It covers:
- Medical treatment, surgery, and rehabilitation
- A portion of lost wages while the employee is unable to work (typically 60 to 67 percent of their average weekly wage, depending on state law)
- Permanent disability benefits if the injury causes lasting impairment
- Death benefits to the employee's dependents if the injury is fatal
There is no dollar cap on Part A. The policy pays what the claim costs under the state's statutory schedule, which is why workers comp premiums are tied to payroll and job classification rather than a fixed coverage limit. Higher-risk work means higher potential claims, which means higher premiums.
The trade-off built into the workers comp system is often called the "compensation bargain": the employee receives guaranteed benefits regardless of fault, and in exchange gives up the right to sue the employer for negligence in most circumstances. Most circumstances, not all.
Part B: What Employers Liability Covers
The compensation bargain has exceptions. Employees can still sue their employer outside the workers comp system in specific situations, including:
- The employer's intentional act or gross negligence causes an employee's death (in Texas, the surviving spouse or heirs can seek exemplary damages)
- A third party (such as an equipment manufacturer) caused the injury and the employer is also implicated
- A family member brings a claim their state allows outside the comp system, such as a spouse injured while caring for the worker (Texas bars ordinary loss of consortium claims against an employer that carries workers comp)
Employers that skip required coverage are a different case. They lose exclusive-remedy protection entirely and have no Part B to fall back on.
When a lawsuit of this type is filed, Part A of the workers comp policy does not respond. That's where Part B, employers liability, steps in. It pays defense costs, attorney fees, and court costs on top of the limits, and covers any settlement or judgment up to the policy limits.
The Insurance Information Institute notes that workers compensation usually protects employers from lawsuits by injured workers, but the "usually" carries weight. The situations where it does not are precisely what employers liability is designed to address.
Standard employers liability limits are:
| Coverage element | Standard limit |
|---|---|
| Bodily injury per accident | $100,000 |
| Bodily injury by disease per employee | $100,000 |
| Bodily injury by disease, policy limit | $500,000 |
These limits are low relative to the potential exposure. Construction, manufacturing, and other high-risk industries routinely purchase higher limits, and umbrella policies can extend coverage further. If your business operates in an environment where serious injuries are possible, the standard limits deserve a second look before a claim forces the issue.
How the Two Parts Work Together
The relationship between Part A and Part B is sequential. When an employee is injured:
- Part A responds first, covering medical expenses and lost wages under the state's workers comp schedule
- If the employee or a family member subsequently files a lawsuit alleging employer negligence, Part B responds to that legal action
- If the lawsuit results in damages exceeding the employers liability limits, the business absorbs the remainder unless a commercial umbrella policy is in place
In practice, the two parts of the policy almost never run simultaneously on the same claim. Part A pays benefits. Part B defends against lawsuits. They address different phases of the same incident.
One practical implication: an employee who accepts workers comp benefits can still sue the employer in states where exceptions to the compensation bargain apply. Settling the workers comp claim does not automatically close the door on a lawsuit. Employers liability is the coverage that keeps that door from becoming a financial crisis.
The Monopolistic State Problem
In most states, both parts come bundled in a single policy purchased from a private insurer. Four states are different: North Dakota, Ohio, Washington, and Wyoming. These are known as monopolistic states, where workers comp must be purchased directly from a state-run fund.
The state funds in these four states only provide Part A coverage. They do not include employers liability. Businesses operating in these states end up with the statutory benefit coverage but no protection against employee lawsuits related to workplace injuries.
The solution is stop-gap coverage, a standalone employers liability policy or endorsement purchased separately from a private insurer. It fills exactly the gap the state fund leaves open. For businesses operating exclusively in a monopolistic state, a stop-gap policy should be treated as a non-optional companion to their state fund coverage.
Businesses with employees in both monopolistic and non-monopolistic states face additional complexity. A private workers comp policy covering operations in other states will include employers liability for those employees, but the monopolistic state employees remain uncovered by that policy. Each group needs appropriate coverage secured through the right channel.
This guide is general information, not a coverage determination. What your policy covers is governed by its own terms, conditions, and exclusions.