6.2 Workers' Compensation & Employers Liability Policy Structure

6.2 Workers' Compensation & Employers Liability Policy Structure

Workers' compensation insurance is a mandatory statutory coverage for employers across South Carolina and nationwide. Developed by the National Council on Compensation Insurance (NCCI), the standard Workers' Compensation and Employers Liability Policy is a dual-coverage instrument. It fulfills an employer's statutory duty to provide no-fault benefits to injured workers while simultaneously providing liability insurance for common-law claims arising outside statutory compensation schemes. Claims adjusters must thoroughly understand the five functional parts of this standard policy form.

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Policy Layout: The Information Page & Operational Parts

The policy begins with the Information Page (the declarations component), which sets forth the essential parameters of coverage:

• Item 1: Named Insured, address, legal entity structure, and workplace locations.
• Item 2: Policy period (effective date and expiration date).
• Item 3.A: States where Part 1 (Workers' Compensation) statutory coverage applies.
• Item 3.B: Policy limits for Part 2 (Employers Liability) coverage.
• Item 3.C: States listed for Part 3 (Other States Insurance) automatic coverage.
• Item 3.D: Schedule of policy endorsements and forms.
• Item 4: Classification codes, estimated total payroll, premium rates per $100 of payroll, and estimated deposit premium.

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Part 1: Workers' Compensation Coverage

Part 1 creates an unconditional contractual obligation for the insurer to pay all benefits mandated by the workers' compensation law of any state listed in Item 3.A of the Information Page.

Core Features of Part 1

1. No Dollar Limits: Unlike virtually all other commercial casualty policies, Part 1 contains no policy dollar limits. The insurer is obligated to pay whatever statutory benefits are prescribed by law, regardless of total cost.
2. Statutory Benefits Provided:
   • Medical Expenses: 100% of reasonable and necessary medical, surgical, hospital, and prescription expenses required to cure or relieve the effects of the injury.
   • Disability Indemnity Benefits: Wage-replacement benefits based on state statutory percentages (typically 66 2/3% of Average Weekly Wage [AWW]) for Temporary Total (TTD), Temporary Partial (TPD), Permanent Partial (PPD), or Permanent Total (PTD) disability.
   • Rehabilitation Benefits: Vocational training, physical therapy, and medical rehabilitation.
   • Death Benefits: Burial expenses and cash indemnity payouts to surviving dependents.
3. Exclusive Remedy Doctrine: In exchange for guaranteed, no-fault statutory benefits, employees surrender their common-law right to sue their employer for workplace negligence.

Exclusions under Part 1

Part 1 excludes coverage for penalties imposed on the employer for serious and willful misconduct, illegal employment of minors, intentional self-inflicted injuries, or injuries caused solely by employee intoxication or drug abuse (as enforced under S.C. Code § 42-9-60).

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Part 2: Employers Liability Coverage

Part 2 protects the employer against common-law bodily injury lawsuits brought by employees (or third parties) that fall outside the scope of the statutory Workers' Compensation exclusive remedy framework.

Covered Claim Types under Part 2

• Third-Party Over Claims: An injured employee sues a third party (e.g., an equipment manufacturer), and the third party files a cross-claim against the employer for indemnification or contribution.
• Loss of Consortium Claims: Lawsuits filed by an injured employee's spouse or family members for loss of companionship, services, or affection.
• Dual Capacity Claims: Claims brought against the employer acting in a capacity other than employer (e.g., as the manufacturer of a defective product that injured the employee).
• Consequential Bodily Injury: Claims brought by family members who suffer injury (e.g., severe heart attack) as a direct consequence of witnessing or caring for the injured worker.

Standard Part 2 Policy Limits

Part 2 coverage is subject to three specific monetary limits stated in Item 3.B:

• $100,000 Bodily Injury by Accident (Each Accident)
• $500,000 Bodily Injury by Disease (Policy Aggregate Limit)
• $100,000 Bodily Injury by Disease (Each Employee)

Higher limits (e.g., $500k/$500k/$500k or $1M/$1M/$1M) may be purchased by endorsement.

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Part 3: Other States Insurance

Part 3 provides automatic workers' compensation coverage for employees working in states not listed in Item 3.A, accommodating unexpected, temporary, or expanding multi-state operations.

Operational Rules for Part 3 Coverage

1. Listing Requirement: For Part 3 to apply, the non-listed state must be explicitly named in Item 3.C of the Information Page at policy inception. If Item 3.C states "All states except those listed in Item 3.A and monopolistic state funds," coverage applies broadly.
2. Notification Mandate: If the insured begins work in a state listed in Item 3.C, the insured must notify the insurer immediately (or within 30 days of starting work).
3. Monopolistic States: Monopolistic state fund jurisdictions (North Dakota, Ohio, Washington, Wyoming) cannot be covered under Part 3; coverage in those states must be purchased directly from state funds.

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Part 4: Insured's Duties If Injury Occurs

Under Part 4, the insured employer must fulfill specific contractual obligations upon a workplace injury:

• Provide immediate medical care required by law.
• Report the injury promptly to the insurer, including worker details and witness contact information.
• Promptly forward all legal notices, summonses, and legal papers to the insurer.
• Cooperate fully with the insurer's investigation, defense, and settlement.
• Refrain from making voluntary payments or assuming financial obligations without insurer authorization.

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Part 5: Premium Audit & Payroll Basis

Workers' compensation insurance premiums are not fixed; they are based on actual employee payroll exposure determined through a Premium Audit.

How Premium Audit Works

1. Payroll Basis: Premium rates are expressed as a rate per $100 of gross payroll for each specific occupational classification code (e.g., Code 8810 for Clerical, Code 5403 for Carpentry).
2. Estimated Deposit Premium: At policy inception, the premium is calculated using estimated payroll figures provided by the employer.
3. Final Audit: At policy expiration, an auditor inspects the employer’s payroll records, state/federal tax filings (IRS Form 941), and subcontractor certificates of insurance.
   • Additional Premium Due: If actual payroll exceeds estimated payroll, the insurer issues an audit invoice.
   • Return Premium Due: If actual payroll is lower than estimated, the insurer refunds the overpayment.
   • Subcontractor Risk: If an employer hires uninsured subcontractors, the auditor reclassifies subcontractor payments as payroll, resulting in severe audit premium penalties.

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Workers' Compensation Policy Parts Summary