So many businesses lease employees that it’s hardly given a second thought. Yet I cannot think of one single insurance policy that doesn’t include the word “Employee” in there somewhere – even (and especially) the ones you may not think about, like Cyber. This is relevant because, typically, when a carrier defines a term it’s to limit coverage in some capacity.
Because of this, it’s very important to understand your clients’ employee situations. Are there “standard” employees, are there independent contractors, is there seasonal or temporary help, are there volunteers, etc. etc. All of this plays into the various insurance policies and sometimes in completely different ways. Here are three tips to handle leased employees but these should be thought of as the start of your investigation, not the end of it.
1: Always, always, always check the definition of “Employee” because it’s usually used to exclude something.
This may seem like common sense but it bears mentioning. Policies, especially non-standard ones like Professional Liability, define “employee” very differently. For example, a Professional Liability policy might not include “leased employees” as employees since such individuals are expected to have their own coverage (perhaps from the leasing firm).
Or, even when certain classes of individuals (like “leased employees”) are granted coverage, very strict limits can apply. For example, sometimes the coverage your policy offers is limited to whatever that leased individual has elsewhere – so your $2M limit could only $500K if that’s what the leased employee brings for themselves. It’s also common to restrict coverage only for your vicarious liability for that leased individual and not their individual/direct liability.
Another extreme example of where the definition matters is in Crime policies. Insuring Agreement I (“Employee Theft”) is almost always the broadest coverage available, covering basically any dishonest act by an employee not otherwise excluded. Many crime policies are written with only this insuring clause and this is usually the Crime coverage you see added into Package policies. If a client operates on a permanent-contractor basis, where a good portion of staff are all independent contractors, they need a fitting definition of “employee” because otherwise that entire insuring agreement is useless.
To digress a bit: on Crime policies this can cut both ways. While “Employee Theft” is usually very generous coverage there are sometimes qualifications. For example, many policies require that an employee be identifiable for a theft to be covered under Insuring Agreement I. Thus there can exist a situation where technically not having someone considered an employee could be beneficial, assuming you’ve got coverage for the theft under another Insuring Agreement. But this is really a quirk only and definitely not a mark in the favor of exempting people from the definition of “Employees”.
Sometimes Employee is undefined in a policy. This is typically a good thing since undefined terms are construed in the insured’s favor. However, I’ll take a broad, inclusive definition of employee (e.g. one that simply states what “Employee” includes, like “Employee includes a leased worker, temporary worker, and contract worker”) over an undefined definition any day. This is only a personal preference, but I am much happier when I can point to policy language itself to show that a “leased employee” is an “employee” rather than relying upon assumed interpretive benefit.
2: Make sure your definitions/coverage are consistent and complimentary.
Just as important as knowing who is an employee is making sure that flows across your entire insurance program. For example, does your Umbrella define employee in the same manner?
This question becomes crucial if you’ve amended the underlying at all, such as to specifically include/exclude particular individuals as employees or if you’ve amended the underlying to include/exclude injury to these employees. A cautionary tale comes from the Business Auto side: Employees as Insureds.
Employees as Insureds allows you to have a BAP cover an employee-driver directly in situations where (e.g.) they use their personal auto in the business. You do this by adding an endorsement specifically including “Employees” as insureds. This is a great deal for individuals such as executives who both constantly use their vehicles for business and have significant assets to protect.
The problem arises if you don’t also pay attention to your Excess/Umbrella. All Umbrellas, yes even “Follow Forms” have their own terms and conditions. Often these mirror unendorsed standard wording. For example, take a look at ISO’s wording (pg. 10 of 17): it specifically excludes employees driving their own auto, just like an unendorsed BAP (emphasis added):
[Who is an Insured is…]
- Anyone else while using with your permission a “covered auto” you own, hire or borrow is also an insured except:
…
(2) Your “employee” if the “covered auto” is owned by that “employee” or a member of his or her household.
Now some comprehensive “additional insured” type wording might do the trick, but again look at ISO:
- Any additional insured under any policy of “underlying insurance” will automatically be an insured under this insurance.
If coverage provided to the additional insured is required by a contract or agreement, the most we will pay on behalf of the additional insured is the amount of insurance required by the contract, less any amounts payable by an “underlying insurance”.
Additional Insureds are usually just that – those persons or entities listed, specifically, as an “Additional Insured”, not those parties who fall under the “Who Is an Insured” section. Remember, we’re adding Employees as Insureds, not as Additional Insureds. Insureds get primary coverage; AIs don’t. They are separate and distinct entities for good reason. I don’t think ISO’s language cuts it when we add Employees as Insureds to an underlying Auto policy.
The argument can be made that this wording is vague, and to be construed in the insured’s favor and that additional insured here (undefined) means any party for whom you’ve added any sort of coverage for on the underlying.
While I don’t buy that argument I’d certainly make it if it were my client’s assets on the line. But this goes back to my point about preferring a definition in black-and-white rather than relying on interpretive benefit. I’m not sure if there’s case law on the specific matter of what constitutes an Additional Insured in ISO’s umbrella, and maybe it is meant to include situations like this, but I don’t want to find out the hard way. Further, most Umbrella policies you see will NOT be ISO-standard; one little word change and the whole situation is different.
Long story short on point 2 – each policy will define “employee” differently and you need to make sure they play nice together.
- Having only leased employees does not mean you can skip Work Comp (really).
For reasons best put in its own article, having only leased employees does not allow one to forego Workers Compensation coverage. For the curious, I’d suggest this IRMI article on the topic. The “too long; did not read” version is this you can be held civilly liable for injury to leased employees (n.b. you can be held liable under Work Comp statutes as well but we’re assuming the leasing company provided this).
This means three things: (1) you can get sued for their injury, (2) the “Exclusive Remedy” of Work Comp doesn’t apply to you, and (3) your CGL won’t cover it due to the Employer’s Liability exclusion.
There is an ad hoc solution in that ISO has the following endorsement: CG 04 24 – “Coverage for Injury to Leased Workers”. This amends the definition (Remember point #2! Check your excess!) of “employee” on the CGL to not include leased workers for the purposes of the Employer’s Liability exclusion. Since leased worker is no longer an employee, the employer’s liability exclusion will not apply to leased workers. Thus, you get Employer’s Liability coverage, under the CGL, for injury to leased workers.
Even with the bargaining power to secure this, it is a stop-gap for a very specific situation only. The only other option, as silly as it sounds, is for your client who does not have “employees” to buy a Workers’ Compensation policy. This might be equally hard to accomplish, and may mean a minimum premium state “Pool” policy, but is probably the better option.
With a standalone Comp policy you get Work Comp coverage in additional to Employer’s Liability. Sure, if your leased employees are actually not “employees”, and if the leasing company has their own coverage, and if you’re named as an Alternate Employer, then you probably don’t need true Work Comp coverage. But “probably” is not “definitely”.
Second – when you have a standalone Work Comp policy you can also schedule it to the excess and it will work like you think it will. Whereas if you’re amending underlying coverage you again run into the lack of congruity between your underlying and excess. It’s just the more elegant solution.
Conclusion.
These are by no means the only things to look out for when dealing with leased employees but I will say they are probably some of the most important. Even a minor situation can turn real ugly simply because someone is or is not considered an “employee”. Don’t rely on 1099s, don’t rely on the client – read the language and see how the policy interacts with employees.
And “leased” employees aren’t the whole picture by any stretch. For further reading, this article (“The Law of ‘Leased Worker’ and ‘Temporary Worker’ Under a CGL Policy”) offers a good in-depth legal interpretation of “Leased” vs. “Temporary” in the CGL.