13.5 Workers Comp Exclusions and Endorsements

Part Two exclusions

Part One has essentially no exclusions because it pays whatever the statute requires. The exclusions live in Part Two (Employers Liability), which is liability coverage and therefore has the typical liability carve-outs. Memorize these commonly tested Part Two exclusions:

• Liability assumed under contract (no contractual liability).
• Punitive or exemplary damages arising from employing workers in violation of law (e.g., illegal employment of minors).
• Bodily injury to an employee employed in violation of law with the insured's knowledge.
• Injury intentionally caused or aggravated by the insured (intentional acts).
• Obligations under unemployment, disability, OASDI/social security, or similar laws.
• Injury occurring outside the United States, Canada (and certain territories) unless the employee is temporarily out of the country.
• Damages for discrimination or termination of employment (employment practices).

Key endorsements

The WC policy is customized almost entirely through endorsements. The high-yield ones:

Reading the foreign-injury exclusion

Part Two excludes bodily injury occurring outside the United States, its territories, and Canada — unless the injured employee is a U.S./Canada resident temporarily out of the country. So a sales rep on a two-week trip to Mexico is covered; an employee permanently assigned to a Mexico plant is not.

For genuine overseas operations the employer buys a Foreign Voluntary Compensation and Employers Liability policy or endorsement, which provides state-equivalent benefits abroad, repatriation expense (returning an injured worker home), and endemic disease coverage. Assuming the standard policy follows employees anywhere in the world is a frequent wrong answer.

Subrogation and the second-injury fund

• Subrogation: if a third party caused the worker's injury (e.g., a defective machine), the insurer pays benefits and then subrogates against the third party to recover. A Waiver of Subrogation endorsement gives up that right for a named entity — a contractor often must provide one to its general contractor.
• Second-Injury (Subsequent-Injury) Funds: these state funds encourage hiring workers with a prior disability. If a pre-existing condition combines with a new injury to cause a greater disability, the employer's insurer pays only for the second injury, and the state fund pays the excess. This protects employers from being penalized for hiring the partially disabled.

Why waivers of subrogation matter in construction

General contractors routinely require subcontractors to provide a Waiver of Our Right to Recover From Others (WC 00 03 13) naming the GC. Without it, the sub's WC insurer — after paying an injured sub-employee — could subrogate against the GC, dragging the GC into the loss it thought it had pushed downstream.

The waiver can be specific (one named party) or blanket (any party the insured is contractually required to waive). Because the insurer is giving up a recovery right, it charges additional premium for the waiver, often a small percentage of the related payroll. Producers should confirm the certificate of insurance actually reflects the waiver the contract demands — a mismatch is a common claims and contract dispute.

Sole proprietors, officers, and coverage elections

By default, the policy covers employees. Owners and executives are treated differently:

• Sole proprietors and partners are usually excluded automatically (they are not employees) but may elect to be included by endorsement.
• Corporate officers are usually included automatically but may elect out (subject to state rules and minimums).
• Independent contractors are not employees — but a worker misclassified as an IC who is really an employee will be picked up at audit, generating additional premium.

Trap: the default flips between entity types. Sole proprietor = excluded unless elected in; officer = included unless elected out.

Worked second-injury fund example

A worker who already lost sight in one eye is hired; on the job he loses sight in the second eye. He is now totally blind — a far greater (permanent total) disability than losing one eye alone.

• The employer's insurer pays benefits for the second eye injury as if it were the only loss.
• The second-injury fund pays the difference between that and the much larger permanent-total-disability award.

Without the fund, employers would avoid hiring anyone with a prior impairment for fear of full PTD liability.

Exam-day decision checklist

When a WC question appears, route it quickly:

1. Is it a benefit owed by statute? → Part One (no dollar limit; match the four benefit categories and four disability types).
2. Is the employer being sued outside the statute? → Part Two (apply the three limits; accident = one each-accident limit, disease = aggregate + per-employee).
3. Is the work maritime, railroad, or federal? → federal act (USL&H/Jones/FELA/Defense Base) added by endorsement.
4. Is it an owner/officer question? → sole proprietors out unless elected in; officers in unless elected out.
5. Is premium involved? → payroll/100 x rate x mod, trued up at audit.

Running this checklist prevents the classic mistakes: applying a dollar limit to Part One, multiplying the accident limit per employee, or swapping the Jones Act and USL&H.