What Is Workers Compensation Insurance? Employers are legally obligated to take reasonable care to assure that their workplaces are safe. Nevertheless, accidents happen. When they do, workers compensation insurance provides coverage. Workers compensation insurance serves two purposes: It assures that injured workers get medical care and compensation for a portion of the income they lose while they are unable to return to work and it usually protects employers from lawsuits by workers injured while working.
Workers receive benefits regardless of who was at fault in the accident. If a worker is killed while working, workers comp (as it is often abbreviated) provides death benefits for the worker’s dependents.
Each State Is DifferentWorkers compensation systems are established by statutes in each state. State laws and court decisions control the program in that state and no two states have exactly the same laws and regulations.
States determine such features as the amount of benefits to which an employee is entitled, what impairments and injuries are covered, how impairments are to be evaluated and how medical care is to be delivered. In addition, states dictate whether workers compensation insurance is provided by state-run agencies and by private insurance companies or by the state alone. States also establish how claims are to be handled, how disputes are resolved and they may devise strategies, such as limits on chiropractic care, to control costs.
To learn about the requirements where you live, visit your state’s workers compensation department Web site.
If your business expands to another state, you may have to deal with very different rules in the new state. The discussion here covers the general features of workers compensation programs.
What Injuries Are Covered?Injuries employees sustain on the workplace premises or anywhere else while the employee is acting in the “course and scope” of employment are covered if their employer has workers comp insurance. For example, the leading cause of workers comp death claims is traffic accidents that occur when the employee is in a vehicle for work purposes, whether the trip is made in the company’s car or the employee’s own vehicle. Accidents driving to and from work are not covered.
In addition to injuries from accidents, workers comp covers injuries employees may sustain from other events that may occur while they are working, including workplace violence, terrorist attacks and natural disasters.
Workers comp insurance also covers certain illnesses and occupational diseases (defined in the state statutes) contracted as a result of employment. For example, employees who work with toxic chemicals can be made ill by exposure to the chemicals.
What Treatment Do Injured Workers Receive?Injured workers receive all medically necessary and appropriate treatment. With medical costs soaring, many states have adopted measures designed to rein in expenditures. These include utilization management guidelines, which describe acceptable treatment protocols and diagnostic tests for specific injuries.
What Benefits Do Injured Workers Receive?Income replacement benefits are based on whether the disability is total or partial and whether it is permanent or temporary. Impairment is generally defined as a reduction in earnings capacity, sometimes using the American Medical Association’s criteria.
Most states require that benefits be paid for the duration of the disability, but some specify a maximum number of weeks, particularly for temporary disabilities. The benefit amount is a percentage of the worker’s weekly wage (actual or state average).
Do I Have To Buy Workers Compensation Insurance?In most states sole proprietors and partnerships aren’t required to purchase workers compensation unless and until they have employees who aren’t owners. Most states will allow sole proprietors and partners to cover themselves for workers comp if they choose to. Some states don’t require employees to be covered if they are paid solely on commission.
Employees are generally defined as people performing services at the direction of the employer, for hire, including minors and workers who are not citizens.
Many states exempt employers with only a few employees from mandatory coverage laws. The threshold number of employees that triggers mandatory insurance is either three, four or five, depending on the state. Texas is the only state in which workers comp insurance is truly optional.
In some states, businessowners' immediate family members—parents, spouse and children—who work for the firm may not have to be counted as employees for purposes of determining whether you must have workers comp insurance. These exceptions usually do not apply to other family members, such as sisters, brothers or in-laws.
Under some laws, independent contractors are not considered to be your employees. However, for the purpose of workers comp insurance, most states will treat an uninsured contractor or subcontractor or employees of an uninsured subcontractor as your employee—meaning you may be liable if he or she is injured while working for you. To avoid any unintended liability, larger companies often require any contractors or subcontractors doing work for them to provide proof they have workers comp insurance.
Regardless of whether insurance is required and regardless of how few employees you have, if an employee protected by the state statute is injured or killed in the course of working for you, you may be legally liable. One claim for a serious employee injury could bankrupt many small businesses. Insurance, through the payment of premiums for workers comp coverage, provides a predictable cost for handling this risk.
Who Sells Workers Comp Insurance?Workers comp insurance is not part of your Businessowners Policy (BOP). It must be purchased as a separate insurance policy.
Each state has its own rules about where employers may buy workers comp insurance. In a few states all employers must buy their workers comp insurance from a state monopoly insurer, known as a state fund. In a number of other states, insurance may be purchased from the state fund or from private insurers. In the states that have them, state funds may serve as an insurer of last resort for businesses that cannot find coverage from a private insurer.
How Are Premiums Set?Premiums are based on the employer’s industry classification code and payroll. Premiums for the most dangerous enterprises, such as trash hauling or logging, may be much higher than premiums for an accounting firm.
Location has also become a factor in workers comp premiums. Since the terrorist attacks of September 11, 2001, workers compensation insurers have been taking a closer look at their exposures to catastrophes, both natural and man-made. For businesses located in an area at high risk of catastrophe, premiums may be higher, regardless of the nature of the business itself. Employers with an annual premium above a certain amount are usually eligible for experience rating, which adjusts the premium up or down depending on the claims history of the company relative to other companies in that industry category. Businesses with higher than average claims will pay a higher premium and those with lower claims will generally pay less.
Experience rating is more sensitive to the number of claims (loss frequency) than the dollar value of claims (loss severity). This is because of the insurance industry maxim, “frequency breeds severity.” Insurers know from experience that where more accidents occur, there is a greater likelihood of big losses. A greater number of accidents indicates that overall in working conditions are not as safe as an environment where fewer accidents occur, even if in a given year the few accidents that occurred were more costly.
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