A Guide To Workers’ Compensation Insurance
Workers’ compensation insurance (also called workman’s comp and workers’ comp insurance) provides financial protection for employees who are injured, become ill, or die on the job. In doing so, it also protects businesses.
Why was workers’ comp insurance created? How do you get coverage? What does it cost? The answers to these and other questions can be found in this guide.
What Types of Businesses are Required to Have Workers’ Compensation Insurance?
Workers’ comp insurance for a small business protects employees who are injured, get sick, or die as the result of a work-related incident. It can cover medical costs, legal fees, and lost wages for employees. It can also pay what’s called a death benefit to a worker’s family if an employee dies as a result of an on-the-job accident.
Workers’ compensation insurance requirements vary by state. However, nearly every business that has employees—full-time, part-time, or seasonal—is required to carry workers’ comp coverage.
There are few exceptions to this rule. Consequently, if your business employs anyone, you should assume that you’re required to have a workers’ comp policy unless you receive information from the workers’ comp authority in your state specifically stating that you don’t have to have a policy. (You can also learn more about insurance requirements for your state on our website.)
You should also be aware that some states require workers’ comp insurance for construction industry sole proprietors or those who pay subcontractors.
The Origins of Workers' Compensation Insurance
The U.S. workers’ compensation system was created in the early 1900s and modeled after principles already in place in Europe. Before the development of this system, employees who were injured at work had the right to sue employers for the cost of their medical care, lost wages, and other costs. However, to receive compensation they had to prove that the company’s negligence was the cause of their injury, and that was no easy task.
Typically, it required a long, expensive court battle. And because employers generally had greater resources for fighting this battle, they had an advantage.
Workers’ Compensation Insurance and the Industrial Revolution
As the Industrial Revolution gained momentum and greater numbers of employees were working with and around machinery, the risk of injury or death at work increased. As it did, two forces were catalysts for the workers’ comp system. One was the voice of employees and their families, who faced financial ruin if the main breadwinner was severely injured or killed in a work accident.
The second was the recognition by employers that a large number of lawsuits from injured employees could hurt their profits. Companies also began to compare the costs associated with having to hire and train new employees as compared to the cost of supporting well-trained workers until they could get back their jobs. They found that keeping good employees made financial sense.
Ultimately, the workers’ compensation system and supporting laws were developed, with all stakeholders finding it to be a more collaborative and humane way to address worker injuries, illnesses, and fatalities.
What Does Workers’ Comp Cover?
Workers’ comp insurance is an important employee benefit. It provides four main types of financial protection:
The goal of these benefits is to ensure that employees and their families aren’t left with a large financial burden following an on-the-job injury.
It’s important to note that workers’ comp policies don’t provide benefits in all instances. For example, if the person who files the claim injured themself intentionally or suffered an injury as a result of intoxication or substance abuse, their claim may be denied. And those are just a few examples of exclusions. Employees and employers need to understand what’s covered by workers’ compensation insurance and what’s not covered.
What's Involved in Purchasing Workers' Compensation Insurance?
biBERK makes buying a workers’ comp policy easy. A good place to start is getting an instant online workers’ compensation insurance quote. The cost of a workers’ comp policy is based on several factors, most notably your company’s gross annual payroll. The higher your payroll is, the higher your premium will be.
Specifically, the cost is calculated as a rate (which is determined based on the type of work your company performs) that is then multiplied by your payroll. What’s called an experience modification or ExMod is also applied if your company has one. It’s a figure used to compare your loss history to the average in your industry.
Once you have your workers’ comp quote and decide to make your purchase, you can do that online, too. Insurance can be purchased in a matter of minutes, with coverage active soon after the transaction is completed—within a day or two in most cases.
Business owners should be aware that at the end of a workers’ comp insurance policy period, the insurer performs what’s called an insurance audit (see below) to ensure that the right amount was paid for the coverage, taking into account any changes that occurred during the policy period, such as increasing or decreasing employee payroll.
What’s a Workers’ Comp Exemption?
Particularly for a small business, workers’ comp insurance is vital. However, there are certain people you may not want to cover with your policy.
If that’s the case, you can request what’s called a workers’ compensation insurance “exemption.” If the request is granted, you aren’t required to provide insurance for the person or people covered by the exemption.
A workers’ comp exemption may be granted in some states for people like:
- Self-employed individuals
- Independent contractors
- Business owners and officers
- Domestic workers
- Farm workers
- Government workers
- Railroad employees
- Longshoremen and other maritime workers
Each state has its own workers’ compensation requirements, so you must understand the regulations that apply to your business.
It’s also important to be aware of the risks associated with not covering someone, especially yourself. If you’re a sole proprietor, are granted a workers’ comp exemption, and decide not to get workers’ comp insurance, you may be faced with paying your medical costs out of pocket if you suffer a work-related injury and your health insurance doesn’t cover them.
Workers’ comp for business owners can be a crucial part of a company’s overall insurance protection.
What’s a Workers’ Comp Insurance Audit?
In a workers’ comp insurance audit, an auditor reviews your records to determine your total payroll for the policy period. The pay for some employees—like owners and officers—may be excluded from a company’s total payroll if the business owners/officers elected to be excluded properly at or before the inception of the policy. If owners/officers are included, their payroll may be adjusted to meet state-required annual minimums/maximums per owner/officer.
A workers’ comp audit doesn’t change the rate in your original policy. Rather, it calculates the actual payroll amount to which the rate is applied. The auditor also checks to see if all independent contractors/subcontractors you used during the policy period had their own coverage in place. If not, you may be charged additional premium for the independent contractors/subcontractors.
How Does a Workers’ Comp Insurance Audit Work?
A workers’ comp audit is a very straightforward process in which you provide requested information to the auditor. However, you can further streamline the process by finding certain information in advance, including:
How Does a Workers’ Comp Insurance Claim Work?
Like much about workers’ comp, the claims process varies from state to state. However, in general, it flows as follows:
- An incident occurs.An employee suffers an on-the-job injury.
- The incident is reported.The employee reports the injury to their supervisor and/or the company’s human resources (HR) department. This must be done within a certain time frame or the employee may forfeit their benefits under the policy.
- A claim is filed.The company or injured worker files a claim with the insurance company.
- Payment is approved.The insurance company evaluates the claim and determines the payments based on the statutory workers’ comp regulations for the state in which the incident occurred.
- OSHA is notified.The company must also report the incident to the Occupational Safety and Health Administration (OSHA) in 8-24 hours, depending on the severity of the injury.
How Much Does Workers’ Comp Pay for Wage Replacement?
The amount that a workers’ compensation insurance policy pays for wage replacement if an employee can’t work due to an on-the-job injury is based on several factors, including:
- The employee’s pay rate
- The type of injury or illness
- Whether they suffered a temporary or permanent injury
- In the case of a disability, whether they are partially or totally disabled
- The workers’ comp laws in their state
In addition, hourly wage indemnifications are subject to state set minimums and maximums.
Frequently Asked Questions About Workers' Comp Insurance
My Employee Gets Hurt at Work—What Should I Do?
Having workers’ compensation insurance in place before anyone gets hurt is important and required in most instance. Then, if someone gets injured at work, the most important thing is to address the injury promptly and correctly, and to ensure that no other employees are at risk.
Once you’ve dealt with the crisis, it’s important to gather all the available information about the incident. This includes talking with witnesses, taking photos of the injury site, obtaining security camera footage, etc.
Next, as soon as possible, you should work with the employee to file a workers’ comp claim. After you’ve done that, it’s important to stay in contact with the employee as the claims process progresses. Open lines of communication are essential for getting the injured employee the care and compensation they need.
How Long can Employees be Paid by a Workers’ Comp Policy?
An individual’s injury is given a rating based on what’s called an Impairment Rating Evaluation (IRE). Independent professionals use this rating scale to quantify an employee’s level of impairment. The rating they assign helps the worker, their employee, and the workers’ comp insurance provider stay on the same page regarding ongoing compensation for the employee’s injury.
For example, an employee’s rating may reflect that they have a temporary partial disability and will be able to return to work at some point. In that scenario, the person’s workers’ comp benefits will be temporary. If a rating indicates that a worker has a permanent total disability, they may receive permanent benefits.
Each state has its own impairment guidelines. Consequently, you shouldn’t assume that the way a particular type of injury was handled and compensated in one state will be the same in another state.
What is Worker Classification and Why Does It Matter?
For the purposes of workers’ compensation insurance, people who perform work for you can be classified as employees or independent contractors/subcontractors. This distinction is important because you’re required to provide workers’ comp coverage for employees in virtually all instances, but that’s not the case with independent contractors/subcontractors.
Independent contractors/subcontractors must have workers’ compensation coverage, but you can require that they have their own workers’ comp policy as a condition of you hiring them. Then you must obtain proof that they have coverage in the form of a Certificate of Insurance.
What Happens if I Misclassify Workers?
If you misclassify an independent contractor as an employee or vice versa, that mistake can be costly. It will almost certainly affect your insurance cost when the workers’ compensation insurer conducts your workers’ comp audit.
In some cases, it may mean that you have to pay an additional premium at the end of your policy period. Consequently, it’s important to be sure that you and your workers are clear on what type of business relationship you have.
Do I Need Workers’ Compensation Insurance if I’m Self-Employed?
The rules regarding workers’ comp insurance and self-employed people vary by state. However, having coverage for yourself may be helpful for a few reasons.
One is that your health insurance may not cover the cost of injuries that occur while you’re working but workers’ comp coverage typically will. Another is that a workers’ comp policy may pay for some of your lost wages while you recover from an injury.
In addition, the companies you do work for may require that you have workers’ comp coverage. Consequently, getting a workers’ comp policy generally is a wise business decision.
Does Workers’ Compensation Insurance Cover Employee Lawsuits?
Workers’ compensation insurance includes employer’s liability coverage. That means it protects the business if an employee sues for certain reasons outside of workers' compensation claims. For example, what’s called employer's liability may apply if a non-employee is injured indirectly by a workers' compensation claim, such as a spouse who is taking care of a temporarily disabled worker and is injured in the process, or if a spouse sues for loss of consortium.
However, this isn’t blanket coverage for any type of lawsuit. It’s important to talk with your workers’ comp insurer about the parameters of the protection offered.
Does Health Insurance Cover Work-Related Injuries?
Health insurance policies vary. However, many won’t pay the medical bills resulting from an on-the-job injury. That’s why it’s so important for employers to have workers’ compensation insurance—not to mention that it’s the law in most cases.
Workers’ comp coverage gives workers and employers the confidence of knowing that the costs of work-related injuries, illnesses, and fatalities can be addressed by the policy. With coverage in place, no one will end up with a large financial burden as a result of an incident.
When it comes to getting the different types of small business insurance your company needs, workers’ compensation coverage should be at the top of your list!