Imagine one of your employees accidentally falls down the stairs at work and breaks a leg. Or another employee accidentally throws their back out lifting heavy office equipment.
Subject to state law, workers compensation insurance (also known as “workers comp”) protects your business from the costs that result from incidents of workplace injury or illness. Specifically, it covers claims from injured employees, including medical expenses, death benefits, lost wages, and rehabilitation.
The coverage is a win-win for both the business and the employees.
In most instances, employees give up the right to sue their employer over a workplace injury, knowing they will be compensated for any workplace-related injuries under the workers compensation insurance coverage their employers have purchased.
Covers employee medical expenses, wages for lost work, and any rehabilitation services following a workplace injury/illness.
Can pay for employee funeral expenses in the event of a fatal accident.
Covers defense costs, should an employee decide to sue.
Injuries that occur when commuting to and from work
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Generally speaking, businesses need workers comp insurance because even the best safety precautions sometimes fall short and injuries and illnesses occurring at the workplace or resulting from work are all but inevitable.
No one likes to imagine one of their employees being injured on the job but it’s a reality that can’t be ignored. Accidents can happen anywhere — even after the most comprehensive safety training and in the most low-risk environments.
Should an employee be injured on the job, your legal expenses would be completely covered by your insurance. Plus, your employees would be completely covered for their medical expenses, wages for lost work, and any rehabilitation services. In the case of fatal accidents, funeral expenses are paid out to the remaining family members of the deceased.
Each state has its own unique set of requirements and rules on how workers compensation functions and how to purchase it. For instance, four states are considered monopolistic when it comes to workers comp: North Dakota, Ohio, Washington, and Wyoming.
Businesses operating in monopolistic states can only buy workers comp insurance from the state fund. Other states will allow you to purchase coverage from private insurers or several competing state funds.
Another important distinction is that states will differ in which workers need to be covered and which are exempt. If you want to learn more about how each state’s rules and regulations, you can check out Guide to Workers Compensation by State.
In short, workers compensation insurance is the foundation for a quality insurance program for any company with employees.
If you own or run a small business or big corporation that interacts with people on a regular basis, or employs more than one person, you should secure adequate workers compensation insurance.
In terms of risk by industry, this study on workplace safety cited the top four injury and illness-prone industries like construction, education & health services, agriculture, forestry, fishing and hunting, and transportation & warehousing.
The top five fatal injury and illness-prone industries are construction, transportation and warehousing, retail, and manufacturing.
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Solopreneurs without employees are typically not required to purchase workers compensation insurance. However, in certain situations it could be a good idea to secure the coverage. For instance, certain businesses may require those performing work for them to carry workers comp.
Additionally, securing the right workers compensation insurance policy may prove to be a prudent idea if you get injured while working. Even if you have personal health insurance, most policies will exclude work-related injuries.
Workers compensation insurance has limits — basically, the maximum amount that can be paid out for a claim. These limits are clearly defined in your policy and vary by state.
Here’s a simple breakdown:
Need more protection? You can usually increase these limits, but keep in mind that higher limits mean higher premiums.
Settling a workers compensation claim can be a very long and drawn-out process. And while filing a claim is pretty easy and quick, waiting for it to be settled can certainly take a while.
Let’s take a quick look at what the entire process entails.
If an employee is hurt, make sure that you try to provide them with the proper medical attention as soon as possible. Once the employee has been taken care of, you can begin an investigation into what happened. This will include documenting any possible safety issues and getting photos of the area in which the injury occurred, as well as reports and statements from workers who witnessed the injury.
In some cases, the claim can simply be closed if the worker is completely recovered, back at work, and there are no more medical bills or benefits to be paid.
However, in some states, the process of closing the claim will involve a settlement that needs to be negotiated between the insurer and the injured worker.
In this process, the insurance company and employee will make an offer to cover future treatments or unpaid medical bills and benefits. If the employee accepts the offer, they will be paid either via a lump sum or structured payment.
Check out this blog post if you’d like a more detailed and in-depth explanation of the entire workers compensation settlement process.
When an employee is injured at work, both the employer and the worker need to follow procedure and be prompt to avoid the claim being rejected — most insurers will require a report to be submitted within 30 days.
The injured employee should provide their supervisor with detailed information on the injury, including the date, time, and nature of the injury. After that, they should submit a formal workers comp claim.
The employer should provide the employee with proper legal guidance and paperwork and then file the claim to the insurer. During this process, it’s on the employer to ensure that the process is compliant with the state legislation for reporting at work injuries.
Once you have filed the claim, you wait to see whether it will be approved or denied.
In most cases, the insurer will accept the claim and offer an amount they feel is appropriate compensation. If the employee doesn’t agree with this estimate, they may decide to sue the insurer to get a higher payout.
Yes, a claim can be denied if the insurer concludes that the injury was caused by horseplay or fighting, occurred while the employee was under the influence of alcohol or other substances, occurred during the employee’s commute, occurred while the employee was committing a crime, or if it turns out that the injury was self-inflicted.
The employee will be able to appeal the denial and can even hire a lawyer independently to represent them in the appeal.
An approved claim means that the insurance company will pay for all medical expenses related to the injury. The employee will receive a portion of their wage as a weekly benefit. These disability benefits usually total two-thirds of the employee’s regular weekly pay.
Once the employee returns to work, these benefits stop. However, the claim can still be open even if the employee has returned to work.
For example, your employee might be able to return to work after a couple of weeks after suffering a sprained ankle. However, if the ankle still needs to receive therapy in order to successfully heal, the insurer will continue to pay all medical bills related to the claim, even though the employee is already back at work.
“Is it expensive?” might be the first question most business owners have about workers compensation insurance. The answer varies greatly from state to state (since each state has different workers compensation laws) and the insurance company from which you purchase your policy.
Generally, there are five factors that will determine your workers compensation premiums:
The formula that the insurers use to calculate your workers comp rate can be simplified as:
Employee Classification Rate X Employer Payroll (Per $100) X Experience Mod Rate = Your Workers Comp Premium
The biggest single driver of workers compensation premium fluctuations is the Experience Modification Rates, also known as XMods. The XMod is a mathematical formula that insurance carriers use to compare similar businesses.
An insurer compares a company’s estimated losses to actual ones over a three-year period, then assigns a number rating, with the hypothetical “average” being 1.00.
If a company has more losses than average, the score climbs above 1.00, thereby “taxing” the business for past claims. If a company outperforms its peers in safety, with fewer claims, the score drops below 1.00 and counts as a “credit.”
The Inspection Bureau, which promulgates experience modifications, does occasionally make mistakes. It’s advisable to review the worksheet yearly to confirm accuracy. This is yet another reason why working with an experienced and knowledgeable broker who’s committed to protecting your business from excessive costs is highly recommended.
For more information, read our full guide on workers comp cost and how to calculate premium cost per employee.
Explore real-world scenarios of how this coverage has supported businesses
The gig economy is growing and employees are paid through a 1099-MISC tax form as an individual contractor. However, in several incidents, courts ruled that employees who were paid as individual contractors are misclassified and should be compensated through the workers' compensation fund.
A former SpaceX worker claimed that he was exposed to toxic chemicals that caused a brain aneurysm.
The estate of an Intel contractor sued the company alleging its negligence resulted in him being crushed to death inside a manufacturing tool last year. His mother and daughter sought $995,000, plus unspecified medical and burial services from Intel.
New York Mets pitcher Matt Harvey had to have right elbow surgery. A partly torn ulnar collateral ligament is considered a workplace injury, just as if he were a truck driver hurt on a loading dock. Therefore, the surgery and recovery were paid for through workers' compensation insurance.
