Question concerning the Monopolistic States

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[Irish_Friar]

We audit many large companies that have payroll exposure in multiple states. Quite often on the standard WC and Employer's Liability policy, in addition to providing WC coverage to the non-monopolistic states, monopolistic states such as Ohio, Washington etc appear on the policy and are included for Employer's Liability.

My question concerns what is considered includable payroll. Some at my firm argue that Gross Wages should be billed for these monopolistic states while others argue that Executive Officers should be capped, premium overtime handled in accordance with the rules for that state, severance should be excluded etc.

Is there any written rule that addresses this question.

Thanks!

[AuditorBob]

Welcome to AuditBible, Irish_Friar

Good question!  First, for the benefit of all, some background...

Workers' Compensation Insurance provides payments to employees who sustain work-related injuries or occupational illnesses. Unlike other liability insurance policies, it doesn't have a maximum dollar limit to its primary coverage referred to as Part One (it used to be called Coverage A).  Part One is what auditors are most familiar with, and most workers' compensation claims come under this part of the coverage.  According to part One, the policy transfers liability for statutory workers' compensation benefits of an employer to the insurance company. 

Employers' Liability Insurance is the section of the policy that has a set dollar limit.  It insures the employer’s business against lawsuits due to employment-related injuries or illnesses that aren't subject to the statutory benefits imposed by state or federal regulations.  For example, a lot of states exclude certain employees from the statutory benefits covered by Part One or Part Three of the policy.  Employers' liability coverage would insure the employer for liability to such employees.

The lawsuits can come from the employee, his/her family members, relatives and third parties.  The Employers' Liability portion is usually offered under Part Two and provides additional coverage included in Workers' Compensation policies.  Employees who are injured due to an employers' negligence can pursue their employer for compensation even in cases when the business goes into liquidation.  Employers' Liability will not cover an employer against claims such as wrongful dismissal, sexual discrimination etc.

Employers' liability also insures an employer in cases such as third-party over suits, where an injured worker files suit against a third party and that third party then seeks to hold the employer responsible.  For example, an employee injured by a piece of machinery at the workplace might file suit against the manufacturer of the machinery.  The manufacturer might claim that the employer modified the machinery or used it improperly and is thus responsible for the liability.  Since employers' liability has a set limit, it is vital that this limit be correctly coordinated with the excess or umbrella liability coverage that is purchased separately.  If the amount of employers' liability coverage on the workers' compensation policy is lower than the amount that the umbrella or excess policy requires for underlying coverage, there can be an uninsured gap.  So it is vital for employers to make sure that the employers' liability limit on the workers' compensation policy matches what is shown on the umbrella or excess liability coverage that sits on top of the primary workers' compensation policy.

Employers' Liability Stop Gap Insurance
In the monopolistic states (where workers’ compensation insurance can only be purchased from the state fund) workers’ compensation policies do not provide employers liability coverage.  Therefore, employers insured in monopolistic states need to obtain employers liability coverage elsewhere via a stop gap endorsement to an existing policy: 

(1) If the employer has operations in competitive states, the endorsement is attached to the workers compensation policy providing coverage in those states.

(2) For employers operating exclusively in a monopolistic state, the endorsement is attached to the employer's general liability policy.

An employer’s liability stop gap endorsement provides coverage for work-related injuries arising out of incidental operations or exposures in monopolistic fund states.

Conclusion
For policies in competitive states, there is no separate charge for employer’s liability as the suits are rare, so the cost is built into the workers’ compensation rates.  Typically, therefore, workers’ comp auditors pay no attention to Part Two coverage.  But, as in your situation, when auditing policies which provide employer’s liability stop gap coverage for operations in monopolistic states…unless endorsed or instructed otherwise, the payroll should be audited according to the rules of those respective state(s) where the employer’s operations take place - just as if you were auditing for Part One coverage.

For an excellent treatment of this subject, please dowload You must login to view links.
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Employer’s Liability (Stop Gap) Coverage

by James J. Marks at Legacy P&C Partners, Inc.
 
Other helpful resources:

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  For an overview of the workers compensation and employers liability insurance policy, form WC 00 00 00 A
  
  
  
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  STOP GAP COVERAGE: What is it? … Who needs it?
  (pdf file)
  
  
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  Sample Stop-Gap endorsement
  (pdf file)
  
  
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  What is stop-gap liability?
  (especially, regarding Ohio)
  
  
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  Insurance Coverage For Mandolidis-Type Claims
  (pdf file - especially, regarding Ohio)