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Our Comprehensive Guide to Help You Understand Workers' Compensation Insurance

What Is Workers’ Compensation Insurance?

Workers’ Compensation—often referred to as Workmans’ Comp, Workers’ Comp, or even shortened to Work Comp—is coverage for an employee who may be injured or become ill on the job. Business owners need to consider this insurance coverage as part of their business insurance.

Workers’ Compensation insurance serves two functions; the first is that the insurance protects your employees, and the second function is to protect you as the small business owner. When an employee agrees to the Work Comp coverage, they are waiving their right to sue you in the case of an accident or illness. 

While specifics will vary from state to state, check with your state department of insurance for your area’s requirements, many laws concerning workers' compensation insurance protect the business in question from being sued by the injured employee for benefits beyond what the policy provides.

What is Covered Under Workers’ Compensation Insurance?

Injuries and conditions typically covered by Workers' Compensation Insurance include:

  • Workplace injuries/accidents that occur in the scope of the employees work
  • Repetitive stress injuries (such as surgery for carpal tunnel)
  • Work-related illness (i.e. lung or breathing issues associated with exposure)
  • Medical and rehabilitation costs for work-related health issues
  • On the job disability, dismemberment, or death

Lost wages of the injured employee is also generally a standard component of Workers' Compensation Insurance.

What Accidents or Workplace Injuries are Excluded from Workers' Compensation? 

There are some exclusions from Workers' Comp Insurance policies, including but not limited to:

  • Accidents while the employee is not at work
  • Negligence on the part of the employer or employee
  • Injuries that are incurred due to use of alcohol or illicit drugs
  • Injuries that occur while breaking company policy
  • Injuries that are self-inflicted

If an employee is injured or become disabled, workers’ compensation no longer covers the claims and long-term disability comes into play. 

Examples of Covered and Non-covered Workers' Compensation Claims

  • Example #1: An employee is climbing a ladder to place merchandise on the top shelf in a grocery story. They lose their balance and fall off the ladder, breaking their arm in the process. Workers' Comp Insurance will cover medical expenses for the employee as well as lost wages.
  • Example #2: Multiple doctors and nurses at your facility were exposed to the Coronavirus. Of the employees tested, 3 were diagnosed with COVID-19 and required to quarantine at home for 2 weeks so they don't further infect others. Workers' Compensation Insurance will step-in and cover the medical expenses associated with this work-related illness and cover lost wages.
  • Example #3: One of your construction workers falls off scaffolding on a job-site. After rushing the employee to the hospital, you find out they were working under the influence of an illicit drug. An insurance company will exclude their workers' comp claim because they were breaking the law—and company policy—when the accident occurred.

Who Needs Workers’ Compensation Coverage?

If you are a small business that has hired one or more employees, or are considering hiring employees, you are required to obtain Workers’ Compensation insurance in almost every state. Workers' Comp Insurance requirements differ from state to state with varying options.

For example, in five US states Workers' Compensiation Insurance is required to be obtained through state-operated funds: North Dakota, Washington, West Virginia, Wyoming, and Ohio. Puerto Rico and the U.S. Virgin Islands also operate funds for Workers’ Comp. If you purchase Workers’ Compensation from a state fund, they often don’t include employer’s liability insurance.

California, Illinois, New York, and Pennsylvania all charge hefty fines if you do not comply with their work comp standards. In some of the states you can face misdemeanor or felony charges and jail-time for non-compliance.

Even in states where employers aren’t required to offer Workers' Compensation Insurance—Texas is one example—they may find their opportunities limited if they don’t have it; some potential clients may require small businesses or contractors that they work with to carry Workers' Compensation Coverage for their employees.

Failure to purchase the required Workers' Compensation Insurance coverage can be extremely costly. A business can be held to pay all the medical expenses associated with the employee injury or illness, while also facing large fines and penalties. If you own a small business, you cannot expose your business to this type of risk.

What Businesses Don’t Need Workers’ Compensation Insurance?

There are a few small businesses that are exempt from the requirement to obtain Workers' Comp Coverage (again, this varies state to state so be sure to verify with your agent). This includes:

  • Sole proprietors
  • Partnerships 
  • A business that only employees contractors
  • Inland Marine Insurance
  • Cyber Liability Coverage

Talk to your insurance agent to determine what coverages you may want to bundle together for your business insurance.

Other Types of Insurance Coverage to Consider

If you own a small business, there are policies other than Workers' Compensation that you should consider, and it varies by business:

General Liability Insurance

Professional Liability Insurance/Errors and Omissions

Property Insurance

Commercial Vehicle Insurance

How Much Does Workers’ Compensation Insurance Cost?

An average cost for Workers' Compensation Insurance coverage is hard to nail down due to the numerous factors being taken into account. However, an insurance company can charge as low as $85 a month. The average cost of coverage is around $2,000-$3,000 a year. 

The cost of a Workers’ Compensation insurance policy varies depending on a few factors, such as:

  • Location of your business
  • Number of employees
  • The industry/risk hazard
  • Past Work Comp claims

A particular system is used that was implemented by the National Council on Compensation Insurance (NCCI). Each industry is assigned a particular code based on the work that they complete. The calculation that’s used to decide on premiums is rather complex. We recommend talking to an agent experienced with Workers' Comp Insurance to help you land on the right insurance—at the right cost for you. 

What are the Limits on a Workers' Compensation Insurance Policy?

The monetary limit that is due to injured employees isn't one-size-fits-all. It's typically determined by the Workers' Comp board in the state the employee works in. A very basic policy typically has a $100,000 limit for Employer Liability Insurance. If you have a large staff or increased likelihood of multiple claims due to the nature of the business, it is encouraged to opt for a policy that has a higher limit (but typically higher cost).

How can I Reduce my Worker’s Compensation Premium?

Your individual business will have no real effect on the industry rating you are subject to within your state. It is possible to reduce your worker’s compensation premiums. Workplace safety has evolved and overall, workers' compensation claims are on the decline. Still, certain businesses and trades will continue to tick up in terms of claims and costs associated with those claims.

Business Owners can begin the process of trying to lower your worker’s compensation premium by developing a risk management program for your business. Starting out, utilize the risk management staff at your carrier, the company which issues your worker’s compensation insurance. As you grow, consider adding this task to an employee at your company.

At some point, you may consider hiring a professional risk manager for your business. Developing a risk management program means adding a safety program. Implementing a safety program and developing a procedure manual as part of the risk management process can help reduce premiums.

You must also make sure your employees are classified correctly as part of your program. Grouping all employees under the business classification can greatly increase your premiums. Check with the state and your insurance company to determine the appropriate classifications and how they need to be reported.

You could also implement a back-to-work program for injured employees, even if you never have had an employee lose time. Other things you want to consider include insuring your payroll reporting is accurate. Overtime and bonuses may not have to be factored into the reporting and push your premium up.

Review your worker’s compensation annually. Work with your licensed insurance professional to manage the costs of your worker’s compensation insurance. Ask if group participation and ratings are available to your business through associations or state programs. Document risk management programs and keep your agent and insurance company updated.

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