Workers’ comp helps to cover medical expenses and lost wages associated with these injuries. In the contracting world, where occupational injuries may occur more frequently, workers’ comp can be a critical component to preventing excessive financial burdens on your business.
In the contracting world, where occupational injuries may occur more frequently, workers’ comp can be a critical component to preventing excessive financial burdens on your business.
Consider these examples of situations where workers’ comp would come into effect:
- One of your workers is climbing a ladder and falls off, breaking his arm.
- An employee is lifting bricks for a construction job and injures his back, leaving him unable to work.
- On a service visit to a client home, one of your plumbing employees trips and falls, injuring his leg.
In exchange for accepting workers’ compensation benefits, an injured employee agrees to not sue your business for the injury. Workers’ compensation insurance is no-fault, which means that it pays benefits regardless of whether the employer or employee is at fault for the injury.
Most states require businesses that hire employees to have workers’ compensation insurance. While some states exempt very small businesses from this mandate, businesses in the construction industry are often required to have workers’ comp, regardless of how many employees they have.
In some states, if your contracting business hires subcontractors, your business may be legally liable if the subcontractors do not have workers’ compensation insurance. If you hire subcontractors for your business, it is important to require that they provide proof of workers’ compensation insurance.
If you are a solo contractor with no employees, you may not have a legal obligation to buy workers’ compensation insurance. However, if you do work as a subcontractor, the general contractor or client may require you to have workers’ compensation insurance.
What does workers’ compensation insurance for contractors cover?
Workers’ compensation insurance for contractors covers your employees who suffer a work-related injury or illness. The definition of an employee includes workers who are not U.S. citizens, as well as minors.
A work-related injury is an injury that is related to a worker’s job duties, which includes most injuries that occur while an employee is working. The range of injuries and illnesses covered is broad and may include accidents from slipping and falling, involving heavy machinery, repetitive stress injuries, and many others. Other types of injuries that occur while working that would be covered include workplace violence and natural disasters. Illness and occupational diseases caused by an employee’s job, such as exposure to toxic chemicals or dust, are also covered by workers’ compensation.
Injuries that occur on a job site, client site, or outside of your office are covered. Injuries that occur while traveling for work reasons, such as driving from the office to a client site or driving between work sites are also covered, even if driving a personal vehicle. However, driving while commuting to work is not covered by workers’ compensation.
Each state regulates the kinds of illnesses or injuries that workers’ compensation insurance covers, so coverage may vary from state to state. There are illnesses or injuries where coverage is not required by states. For these illnesses or injuries, employees may still sue your company. Workers’ compensation insurance will cover legal defense costs and damages from illnesses or injuries which are not defined in state workers’ compensation regulations.
What does workers’ compensation insurance for contractors pay for?
When an employee is injured at work, workers’ comp will pay for an employee’s:
- Medical expenses as a result of the injury
- Rehabilitation and physical therapy costs
- A portion of lost wages (usually around two-thirds, but it varies by state) during the time the employee is unable to work
The amount of income replacement offered by workers’ compensation depends upon whether the employee’s impairment is total or partial, and whether it is temporary or permanent.
Most states require that benefits be paid for the duration of the disability. Some states specify a maximum number of weeks for the lost wages to be paid, especially for temporary disabilities.
If an employee dies while at work, workers’ compensation insurance will pay for:
- Funeral costs
- Death benefits for surviving close relatives, such as a spouse or children
Death benefits for surviving relatives are based upon an employee’s weekly wages. The benefit is a portion (commonly two-thirds but it varies by state) of the worker’s wage at the time of death. Rules vary by state, but for a surviving spouse, the benefit may be paid until their own death or remarriage. For children, the benefits may be paid until the children reach age 18.
Is workers’ compensation insurance for contractors required?
Each state has different regulations on when workers’ compensation is required. In most states, coverage is not required until a business has employees who are not owners or partners in the business. However, many states have special requirements for all construction businesses to carry workers’ compensation insurance, even if the business has only a single owner and no employees.
As a contractor, you may find that many of your potential clients will require that you are covered by workers’ compensation insurance.
As a contractor, you may find that many of your potential clients will require that you are covered by workers’ compensation insurance. This is due to the client’s desire to remain protected from any liability that may arise in an accident or injury. If a client hires a contractor without workers’ comp, and the contractor or one of the contractor’s employees is injured on the job, the client could be liable for the injured person’s medical bills and lost wages.
If your business hires subcontractors, you should require proof of workers’ compensation insurance from all of your subcontractors in order to avoid any unintended liability.
If your business hires subcontractors, you should require proof of workers’ compensation insurance from all of your subcontractors in order to avoid any unintended liability. Most states treat an uninsured contractor, subcontractor, or their employees as an employee of the hiring company. This means you may be legally liable for the injuries of your contractor or subcontractor if they are injured while doing work for your company.
Regardless of whether you have a legal requirement to purchase workers’ compensation insurance, it is a good idea to carry the coverage if you have any employees. If an employee working for you is injured or killed on the job, you may be legally liable. A single claim by an injured employee can easily bankrupt an uninsured employer.
What doesn’t workers’ compensation insurance for contractors cover?
Although workers’ compensation insurance covers most work-related injuries and illnesses, there are some exclusions. Injuries suffered in the following situations would not be covered by workers’ compensation:
- Injuries while commuting to and from work
- Drug or alcohol-related injuries
- Injuries sustained while not at work
- Fights or violence initiated by the employee
- Injuries that are purposefully self-inflicted
- Horseplay or violations of company policy
How do states regulate workers’ compensation insurance?
Workers’ compensation insurance is regulated by each individual state, and each state has slightly different regulations and requirements for employers and insurance companies. The states determine:
- Benefit amounts for each employee
- Which illnesses and injuries are covered
- Diagnostic tests for impairments and injuries
- Protocols for delivery of medical care
States also have different regulations for providers of workers’ compensation insurance. States generally have one of three systems:
- Insurance provided solely by a state-run insurer
- Businesses can choose between insurance provided by a state-run insurer and private insurers
- All workers’ compensation insurers are private companies
Workers’ compensation insurance pricing
Pricing for workers’ compensation insurance is based upon a number of factors, including:
- Location of the business
- Number of employees
- Nature of the business, which is based on the industry classification code
- Dollar amount of payroll
- Claims history
For all but the smallest businesses, insurance companies apply an adjustment to premiums called the experience rating. This rating is based on the claims history of a business compared with other businesses with the same industry classification. The higher your experience rating, the higher your workers’ compensation premiums will be.
The experience rating is weighted more toward the frequency of claims rather than the severity of claims. If you have many smaller claims, you’ll have a higher experience rating than a company with only a single large claim. Insurance companies believe that a high number of small claims indicates that a company will face larger claims in the future, so they raise premiums for businesses with many claims.
The best way to control your workers’ compensation costs is to create a work environment that is safe for your employees. By reducing workplace safety risks, you’ll reduce the number of workers’ compensation claims and also reduce your premiums.
Assigned risk pools
It may be difficult for some types of businesses to obtain workers’ compensation insurance through private insurers. This may include businesses in high-risk industries, businesses with a history of many workers’ compensation claims, and businesses in new industries without previous claims history. For these businesses, private insurers may decide that the risks are too high to insure and refuse to issue a policy.
Because of the potential difficulty for these businesses to receive private insurance, state regulators set up assigned risk pools, where these companies are assigned to insurance providers who are required to issue policies. For these assigned risk pools, premiums are generally significantly higher than obtaining insurance through a regular, private insurer.
» Up next: Learn about property insurance for contractors.