Workers’ Compensation Insurance is a form of liability insurance that provides financial benefits to employees who suffer work-related illnesses or injuries while working for your business. In many states, businesses that have employees are required to carry workers’ compensation insurance.
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.
Examples of situations in which Worker’s Compensation Insurance would come into effect include:
- An employee is making deliveries for a business using her personal car. The employee rear-ends another vehicle on the road, injures himself, and is unable to work. Workers’ compensation insurance would pay benefits to the worker for her medical expenses and partial lost wages.
- An employee in a warehouse is lifting boxes and injures her back. Workers’ compensation insurance covers the cost of her doctor’s bills, physical therapy, and medication.
- A worker is mopping the floors of a retail store. The worker trips and falls on the slippery floor, and is out of work for several weeks. Workers’ compensation insurance would pay for medical bills and a portion of the employee’s lost wages.
- A software engineer suffers a repetitive stress injury in his hands from too much typing on the computer keyboard. Workers’ compensation insurance pays for his medical bills and physical therapy costs.
What does Workers’ Compensation Insurance cover?
Workers’ Compensation Insurance covers employees who suffer a work-related injury or illness. An employee is defined as anyone who provides services at the direction of an employer. This definition may include 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. This includes most injuries that occur while an employee is working, as well and injuries that occur while traveling for work reasons. However, driving to and from work is not covered by workers’ compensation.
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.
States regulate the kinds of illnesses or injuries that workers’ compensation insurance covers. However, there are illnesses or injuries where coverage is not required by the states. For these illnesses or injuries, employees may still sue your company. Workers’ compensation insurance will cover legal defense costs and damages from these illnesses or injuries which are not defined in state workers’ compensation regulations.
What does Workers’ Compensation pay for?
When an employee is injured at work, Workers’ Compensation Insurance will pay for the 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 income replacement offered by workers’ compensation depends upon whether the employee’s impairment is total or partial, and whether it is temporary or permanent. The impairment is defined as the reduction in earnings capacity. Most states require that benefits be paid for the duration of the disability. Some 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.
When is Workers’ Compensation 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. Some states do not require employees who are paid only on commission to be covered.
Many states exempt very small businesses from the requirement to buy workers’ compensation insurance. In these states, the threshold that obligates companies to buy this insurance is usually when they hire their third, fourth or fifth employees. Texas is the only state in which workers’ compensation insurance is fully optional.
In some states, immediate family members such as a parent, spouse or child may not have to be counted as employees towards the workers’ compensation requirement. This exception does not usually apply to extended family members such as siblings or in-laws.
Most states allow sole proprietors to cover themselves under workers’ compensation insurance if they want to.
Under some areas of employment law, such as social security taxes, independent contractors are not considered to be your employees. However, for the purposes of workers’ compensation, most states treat an uninsured contractor, subcontractor, or their employees as your employee. 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. To avoid unintended liability, many large companies require contractors and subcontractors to provide proof of workers’ compensation insurance.
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 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.
State Regulation of 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 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 towards the frequency of claims over the severity of claims. Thus, 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 is a marker 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 kinds of risks, private insurers may decide that the risks are too high to insure and refuse to issue a policy.
For these businesses, state regulators set up assigned risk pools, where these companies are assigned to insurance companies which are required to issue policies. For these assigned risk pools, premiums are generally significantly higher than obtaining insurance through a regular private insurer.