Workers Compensation Insurance

Workers Compensation Insurance

Workers Compensation Insurance

Workers compensation insurance, often referred to as Workers Comp, is an insurance policy designed to cover employees who are injured or become ill on the job. Although the medical benefits mandated by each state can vary, it is a requirement in just about every state for businesses that have employees. 

What is Workers Compensation Insurance?

Workers comp is basically a contract between management and labor wherein the insurance protects the business owner from lawsuits if their workers become injured or ill on the job by paying claims associated with the injury or illness.

Without workers compensation coverage, the business owner could be civilly liable for work-related injuries or illness. The insurance is designed to help pay for medical costs or lost wages.

How Does Workers Compensation Insurance Work?

Workers comp is purchased by employers, underwritten by insurance companies and sometimes supported by state funds (in some states). It’s intended to protect both employers and their employees. Each state has its own regulations to make sure employers carry the proper coverage. Your insurance agent should be able to tell you what the required coverage is, or you can reach out to the state where you do business.

Employees can only file claims for things that occurred on the job and are caused by their duties while on the job. For example, if you own a machine shop and an employee is injured while doing his job, that would be covered. The same injury, if it took place in his garage after hours and off the clock, would not.

What does Workers Compensation Insurance Cover?

If an employee injures his or her back lifting a box at work, slips on a wet floor in a warehouse, falls off a ladder, or any other work-related injuries, coverage would include a necessary ambulance ride, to medication, doctor visits, and physical therapy.

Workers comp will cover:

  • Medical expenses
  • Lost wages
  • Lawsuits related to work-related injuries
  • Ongoing care costs
  • Repetitive injuries like carpal tunnel syndrome
  • Disability
  • Compensation for a fatal injury
  • Funeral expenses

There are also a number of things workers comp will not cover. They include:

  • Injury or accidents caused by intoxication (either alcohol or drugs) 
  • Injuries claimed after an employee was fired or laid off
  • Injuries that resulted from violating a company policy
  • Wages for a replacement worker
  • Injury to an independent contractor
  • Any OSHA fines

In most states, business owners, sole proprietors, and business partners would not be covered by workers compensation. Volunteers are not considered employees and would also not be covered.

Who Needs Workers Compensation Insurance?

With a few exceptions, most business owners that have employees are required to have workers compensation insurance. Requirements could vary though, depending on where the business and the employees are located. Your insurance agent will be able to help you with the requirements in your state.

There are some states that don’t require workers compensation for:

  • Farm workers
  • Insurance agents
  • Family members (under a certain age)
  • Casual or temp workers
  • Business owners or partners
  • Real estate agents
  • Sole proprietors
  • Freelance workers

How Much Does Workers Compensation Insurance Cost for a Small Business?

Because regulations vary by state and are calculated by the number of employees you have along with the nature of your business, how much workers comp will cost could vary. You’ll want to make sure you get more than one quote before you sign on the dotted line, but if you have several employees, you should expect to pay a few thousand dollars a year for coverage.

How is Workers Compensation Calculated?

Your workers compensation insurance premium is based on a calculation that will be different for every business and looks something like this:

Employee Classification Rate X Employer Payroll (Per $100) X Experience Mod Rate (Mod) = Your Workers Comp Premium

  • Employee Classification Rate: A rate is assigned to your 4-digit employee classification for the type of work they do. The rate is based upon the risk associated with their job role.
  • Employer Payroll: For each employee class code, the employer will pay on every $100 of payroll.
  • Experience Mod Rate: This is a rate that compares your business to other similar businesses in your industry. It also takes into account the age of the business and the number of workers comp claims. The rate starts at 10, but if your business is doing better than the average, that number will go down.

How to Get Workers Compensation Insurance

Depending on the state where you do business where you get the coverage could be different. Most states require workers comp insurance and it is offered either through private insurance companies or through state funded workers comp. Because this varies from state to state you will want to investigate the workers compensation laws where you do business. Your accountant, insurance agent, or other trusted advisor will likely be able to point you in the right direction.

If your state uses private insurance companies, these companies will set their own rates and approve or reject potential customers. They are regulated by the state, but you may be able to shop rates and actually find prices less expensive than a state-funded insurance.

If your state uses a state-funded plan, there are a couple of variants you should be aware of. Some states offer coverage from a private insurance company and a state program. Meaning, the state competes with private insurance companies for customers. 

Other states, like North Dakota, Ohio, Washington, and Wyoming have workers compensation insurance through an exclusive state-funded program. In other words, no private insurance companies are involved at all.

Additionally, if you do business in a state that offers coverage through an insurance company, some companies don’t offer workers compensation insurance directly to customers, but use a network of agents or brokers. 

If You Have Employees, You’ll Likely Need Workers Compensation Insurance

Texas and Oklahoma are the only states that don’t require employers to provide workers compensation for their employees. It’s voluntary in Texas, but not carrying the insurance puts businesses at greater risk and they lose some defenses in a lawsuit that would be available if they had the insurance coverage.

Oklahoma allows employers to opt out of workers comp if they require benefits to injured workers through some other plan, however in 2016 this was determined to be unconstitutional. The future of Oklahoma’s exemption is uncertain.

This article was originally written on February 4, 2021.

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Ty Kiisel

Ty Kiisel is a Main Street business advocate, author, and marketing veteran with over 30 years in the trenches writing about small business and small business financing. His mission at Nav is to make the maze of small business financing accessible by weaving personal experiences and other relevant anecdotes into a regular discussion of one of the biggest challenges facing small business owners today.

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