Workers’ Compensation Insurance Definition – Entrepreneur Small Business Encyclopedia

Almost every business in the United States that has employees
has to handle the problem of workers’ compensation. Most states
(with a few important exceptions) essentially require employers to
purchase an insurance policy to handle their statutory obligations
to workers who are injured or made ill due to a workplace exposure.
Whether your business is small or large, handling the expense and
effort of meeting those statutory obligations is an ever-present
challenge.

Workers’ compensation requirements in the United States began
early in the 20th century, back in 1911. Before then, workers who’d
been injured or made ill on the job had to take legal action
against their employers, resulting in a system that simultaneously
made it difficult for workers to obtain compensation for such
injuries and yet exposed employers to potentially devastating
financial penalties under the tort system.

But beginning in 1911, an historic compromise solution was
devised by the various states. Wisconsin was the first, but other
states quickly followed, enacting a “no fault” system intended to
make sure workers received fair and prompt medical treatment and
financial compensation for workplace injuries and illness. This
compromise system also established limits on the obligations of
employers for these workplace exposures, so that the costs could be
made more predictable and affordable.

Today, modern workers’ comp laws provide fairly comprehensive
and specific benefits to workers who suffer workplace injury or
illness. Benefits include medical expenses, death benefits, lost
wages, and vocational rehabilitation. Failure to carry workers’
compensation insurance or otherwise meet a state’s regulations in
this regard can leave an employer exposed not only to paying these
benefits out of pocket, but also to paying penalties levied by the
states.

In most jurisdictions, employers can meet their workers’
compensation obligations by purchasing an insurance policy from an
insurance company. However, five states and two U.S. territories
(North Dakota, Ohio, Puerto Rico, the U.S. Virgin Islands,
Washington, West Virginia, or Wyoming) require employers to get
coverage exclusively through state-operated funds. If you’re an
employer doing business in any of these jurisdictions, you need to
obtain coverage from the specified government-run fund. These are
commonly called monopoly state funds. A business cannot meet its
workers’ compensation obligations in these jurisdictions with
private insurance.

Since workers’ compensation is primarily regulated by the
individual states and territories, there’s no single cohesive set
of rules governing benefits, coverage or premium computation. Even
if you have considerable experience in dealing with one state’s
workers’ compensation system, if your business expands to a
different state, you can easily find yourself dealing with very
different rules.

So who needs workers’ comp insurance? That may be the first
important question that a business needs to address, because not
every business is required to purchase workers’ compensation
insurance. Generally speaking, sole proprietors and partnerships
aren’t required to purchase workers’ compensation insurance unless
and until they have employees who aren’t owners. Most states will
allow sole proprietors and partners to cover themselves for
workers’ compensation if they choose to, but it isn’t required. (An
important note, though-these rules vary from state to state and can
change over time. So it’s always a good idea to check with your
particular state’s regulatory agency to make sure what the rules
are for your state jurisdiction.)

Some states don’t require an employee to be covered if he or she
is paid solely by commission. Again, check with the workers’
compensation regulators in your particular state to see how they
handle this.

A general rule is that if you have employees who aren’t owners
of the company, you probably need workers’ compensation insurance.
Speaking of employees, here’s a potential trap to be aware of and
avoid: Under most state’s workers’ compensation laws, you might
have employees you don’t know about. That’s because most states
will treat an uninsured contractor or subcontractor as your
employee if he or she is injured while doing work for your
company.

The standard workers’ compensation insurance policy is a unique
insurance contract in many respects. Unlike other liability
insurance policies, it doesn’t have a maximum dollar amount limit
to its primary coverage. Your auto insurance policy, for example,
has certain specified maximum amounts the policy covers per
accident; if the cost of a particular accident exceeds that limit,
you’ll need to look elsewhere for those additional dollars (either
your own pocket or an excess or umbrella liability policy).
Workers’ compensation insurance policies have a dollar limit also,
but only for Part Two of the coverage, employers’ liability. But
Part One–the part that responds to an employer’s statutory
workers’ compensation liability–has no set limit. Once the policy
is in force, the insurance company is responsible for all that
employer’s claims that arise for workers’ compensation benefits in
the states covered by the policy.

When it comes to controlling workers’ comp costs, here are some
particular areas you may want to focus on to make sure your
insurance costs aren’t out of control:

Determine if you’re in an assigned risk plan. Sometimes
an insurance agent handling the workers’ compensation insurance for
a small employer doesn’t make it clear that the policy procured is
an assigned risk policy. And in many states, the rates and premium
for an assigned risk policy are much, much higher than for the same
policy written through the voluntary market. An assigned risk
policy doesn’t look different from any other workers’ comp policy,
except for some subtle differences. So make it a point to insist on
knowing if your policy has been written through an assigned risk
plan.

If you’re in an assigned risk plan, check with your state’s
insurance regulators to see if assigned risk policies in your state
have higher rates and premiums. If this is the case, then do
everything in your power to find coverage outside the assigned risk
plan. Talk with other agents, talk with direct-writing insurance
companies, talk with employee leasing companies, investigate group
self-insurance programs available in your state-but don’t let it be
your agent’s responsibility to get you out of the assigned risk
plan. Your agent just may not have a viable alternative for you,
but that doesn’t mean that such an alternative doesn’t exist.

Check what credits may be available to you in your state.
If you’re not in an assigned risk plan, make sure your policy gives
you whatever credits you might be eligible for in your state. If
your state offers credits for a drug- and alcohol-free workplace,
find out if you’re eligible. If your state offers merit rating, see
if you’re eligible for that from an insurer. If your premium is
appropriate, make sure you’re getting the proper experience
modification factor. If your state offers a small-deductible
credit, look into obtaining it.

Insist on getting audit workpapers after any audit. If
the insurance company sends out an auditor to determine your final
premium, make sure to request a copy of the audit work papers so
you can review them carefully and make sure payroll computation
adjusts overtime properly and allocates payroll of different
employees correctly.

Check into alternative sources of workers’ compensation
insurance. Many business and trade associations sponsor
insurance programs that include workers’ compensation insurance.
Check into all organizations to which you belong or that you might
be eligible to join; they may offer sponsored insurance programs
that could reduce your rates or premium.

Workplace safety is also a necessary part of any program to
control the cost of workers’ compensation insurance. Here are some
tried and true steps that employers can take to improve their
workplace safety:

Discuss safety at every opportunity. Make workplace
safety efforts an important part of every meeting. Don’t just make
it a part of your managers’ meetings-make it a constant topic at
meetings with workers. Make sure you communicate to them why safety
is so vital, and how it affects the cost of workers’ compensation
coverage and thus the bottom-line of the company. You might be
amazed at how many of your employees don’t really understand how
expensive workers’ compensation coverage is for the company-or even
that it’s a cost for the company at all. Some employees think it’s
just some kind of government program that doesn’t really translate
back to direct costs for the company. So share information about
the cost of the company’s workers’ compensation insurance and how
the cost of claims drives up that cost. Post the company’s safety
goals, and how well the company is doing in regard to meeting those
goals. Compare current injury information (without disclosing
confidential information about injured workers) with information on
recent years.

Examine trends in workplace injuries. You can’t rely
solely on your insurance company to analyze this data and alert you
to trends you need to address. Get all the information you can
about what kinds of claims are occurring and in what part of your
operations. Only by understanding what’s causing your claims can
you begin to address the causes. It’s a terribly overworked cliché,
but it’s also very true: Safety is no accident. It takes planning,
effort and thought.