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Workers’ compensation insurance provides medical and financial benefits for workers who fall ill or are injured on the job. Each state regulates workers’ compensation differently, with some states allowing workers’ compensation to be purchased from private insurers, and others providing a government-backed workers’ compensation state fund.
What is a Workers’ Compensation State Fund?
A Workers’ Compensation State Fund is a state-owned and run organization that provides workers’ compensation insurance to businesses in a specific state. Not every state has a Workers’ Compensation State Fund, with some states allowing an open market of private insurers to provide workers’ compensation insurance, a few states allowing only state funds to provide workers’ comp, and other states allowing a mix of both.
Workers’ Compensation State Funds have historically been created in various states in order to address rising costs in workers’ compensation insurance. By providing a government-backed option, state legislatures have attempted to exert some control over workers’ compensation pricing.
State Funds also provide an option for employers who are unable to secure workers’ compensation insurance through private insurers. For businesses that may be more high-risk, there may be little to no appetite from private insurers to provide coverage. State Funds generally must cover all businesses that apply for coverage.
While not every state offers a Workers’ Compensation State Fund, the ones that do are generally categorized into two groups: monopolistic state funds and competitive state funds. While monopolistic state funds require employers to purchase workers’ compensation insurance exclusively through the state fund, competitive state funds allow private insurers to compete for an employer’s business.
What is a monopolistic state fund?
A monopolistic state fund is a state-owned and run fund for workers’ compensation insurance that the state has a monopoly on. This means that the state requires businesses to purchase workers’ compensation insurance exclusively through the state’s designated Workers’ Compensation State Fund. Employers do not have the option of purchasing workers’ compensation insurance through the private market.
There are only four monopolistic states:
- North Dakota
- Ohio
- Washington
- Wyoming
If your business is located in a monopolistic state, pay special attention to the different rules and regulations around securing workers’ compensation in your state, as it may be quite different from a non-monopolistic state. There are a few common issues your business should watch out for:
- Monopolistic state funds may not follow national standardizations for employee work classifications. For example, Wyoming uses the North American Industry Classification System (NAICS), while most non-monopolistic states use the National Council on Compensation Insurance (NCCI) system. The difference in worker classifications could result in higher costs of coverage for workers of the same job type that are simply classified according to a different system.
- In general, businesses that operate in multiple states are able to secure a single multi-state workers’ compensation policy. If, however, one of the states your business operates in is a monopolistic state, you will need to purchase a separate policy from that state’s Workers’ Compensation State Fund.
- Employers liability insurance, which protects employers if an employee is injured on the job and decides to sue their employer for damages beyond what is already covered by workers’ compensation, is not included in a monopolistic state’s workers’ compensation policy. This coverage can be secured separately through stop gap coverage, which is typically an endorsement on a commercial general liability policy.
What is a competitive state fund?
A competitive state fund is a state-owned and run fund for workers’ compensation insurance that competes with other private insurers in an open market. Employers have the option of choosing to purchase workers’ compensation insurance either through a private insurer or the state-backed fund. This may benefit employers by providing them with more choice, allowing them to choose a policy that fits their business needs best, and also providing a fallback option to employers who are not able to secure coverage through a private insurer.
Which states have state-run Workers’ Compensation Funds?
There are currently 25 states that offer Workers’ Compensation State Funds, with four of them being monopolistic state funds.
What is stop gap coverage?
Stop gap coverage refers to insurance that addresses the gap in coverage left by workers’ compensation policies provided by monopolistic states. Typically, workers’ compensation insurance provides employers liability coverage, often known as “Part 2” of a workers’ compensation policy. This coverage protects your business if an employee sues your company for a work-related injury or illness, outside of what is covered under workers’ comp. This may include third-party over action suits or negligence lawsuits over an occupational injury. In monopolistic states, however, workers’ compensation coverage excludes employers liability coverage.
If your business operates in a monopolistic state, you’ll need to secure employers liability coverage elsewhere. This can be done through stop gap insurance from a private insurer, which is often sold as an endorsement to a commercial general liability policy.
Final Word
If your business has employees, it’s likely you’ll be required to secure adequate workers’ compensation insurance. Depending on which state your business operates in, you may be required to purchase this coverage through a Workers’ Compensation State Fund, which is a state-backed organization that provides workers’ compensation insurance for employers and employees in the state. It’s important to understand how workers’ compensation insurance is administered and offered in your state, as it may have an impact on pricing and coverage options.
