If you own a business (or are thinking of starting one) it’s important to research the various types of insurance you need. One of the most important types of small business insurance is workers’ compensation insurance.
If you’re at the beginning of your research, the question, “what is workers’ comp insurance?” might be crossing your mind right now. In short, workers’ comp is a system that was originally established during the early 1900s. It’s designed to protect company employees who get injured or become ill on the job.
Almost every state in the US requires business owners to carry workers’ comp in order to protect employees in case of injury, as well as safeguard businesses from lawsuits. It’s considered a “social” insurance because it depends on a social contract between management and workers. Business owners are protected from lawsuits from injured workers in exchange for purchasing insurance on their behalf.
In this article, we’ll be discussing in greater detail what’s involved in workers’ comp insurance, whether you really need it for your business, and how to get insurance coverage.
What is workers’ comp insurance?
As a small business owner, it’s your responsibility to protect your workers from injuries and health risks while performing duties on the job. However, you can’t completely mitigate risk. Accidents happen, that’s why workers’ compensation is so important.
When the American workers’ compensation program was established more than a century ago, the purpose was for it to serve as a cooperative arrangement between employers and employees. Workers’ compensation provides protection for business owners and for their employees, thereby reducing conflicts that can arise between the two parties when accidents happen.
Since both employers and employees benefit from workers’ compensation, it has historically been referred to as “the grand bargain.”
What is a workers’ compensation policy?
A workers’ compensation policy is typically designed to provide comprehensive coverage to employees who get injured while doing company work, whether it’s on- or off-site. It covers medical expenses and loss of income for employees who are injured on the job. It also pays death benefits to the families of employees who are killed at the workplace.
Workers’ comp serves two purposes:
- It helps ensure that injured workers get medical care and compensation for income lost while they are recovering, and
- It helps protect employers from lawsuits claimed by the injured worker. It’s often called a “no-fault law” because it kicks in no matter who is at fault for the injury or illness, as long as it’s sustained on the job.
Workers’ comp shouldn’t be confused with disability insurance or unemployment benefits. It only pays workers who are injured while doing their job. Disability insurance pays people regardless of when or where the injury or disability occurs. Workers’ comp also doesn’t cover unemployment, and is always tax-free, unlike disability insurance or unemployment benefits.
What does workers’ comp insurance do?
Workers’ comp insurance helps provide medical, rehabilitation, and disability benefits for employees who become injured as a direct result of their job. Workers’ comp may also pay death benefits to an employee’s dependents if the worker is killed in a work-related incident.
In addition to helping employees and their families, workers’ compensation insurance can also help cover business owners. Workers’ compensation helps protect businesses from liability for employees’ workplace injuries, and it keeps employers from having to pay directly out of pocket for those injuries. This coverage may reduce the risk of significant financial loss if an employee is harmed while performing work duties.
What does workers’ comp insurance cover?
Workers’ comp covers injuries from work-related accidents, workplace violence, natural disasters, and terrorist attacks. According to a report by the Bureau of Labor Statistics, the highest number of workers’ comp cases (30%) comes from sprains and strains, which typically occur while lifting something heavy. The second most common reasons for injuries resulting in workers’ comp claims are slips and falls.
Workers’ comp also covers illnesses and occupational diseases (as per state statutes) contracted during the course of work. For example, employees who get sick at work due to exposure to toxic chemicals are covered by this insurance.
Injured workers receive coverage for all necessary medical treatment, subject to certain conditions defined by the state. These conditions are essentially management guidelines that describe acceptable diagnostic tests and treatment protocols for various injuries.
The specific coverage of workers’ comp depends on state regulations and policies, but there are some common exceptions to what is covered, including:
- Self-inflicted injuries
- Injuries sustained while committing a crime
- Injuries sustained when the worker violates company policy.
How are workers’ comp insurance premiums calculated?
The workers’ comp premium that a business pays is usually determined by three factors:
- Employee job classification: Each state has distinct coding systems that classify jobs based on the risk they pose to workers. More employees and a higher risk level mean a higher premium.
- Employee wages: Your premium is based on how much you pay your employees. The higher your employees’ salaries, the more you’ll have to pay for the insurance.
- Employer experience rating: This assesses your risk level of working at your company. It’s calculated based on the number and amount of past workers’ compensation claims made by employees, as compared to the industry’s state average. The higher the risk, the higher your premium.
Who needs workers’ comp?
Nearly all states require that businesses with employees carry workers’ comp insurance, but requirements and regulations vary by state. If you’re an employer, you’ll probably be required by law to cover all of your employees. However, you may not be required to have coverage for yourself.
Of course, regardless of the laws in your state, paying out of pocket for work-related injuries can be financially devastating for a company. Getting appropriate coverage for your business and employees may cost you in the short term, but it will help you avoid potentially significant financial loss in the future. Getting workers’ comp may be one of the best financial decisions you ever make for your company.
How to get workers’ comp insurance
Every state has its own rules as to where you can buy workers’ comp coverage. In some states, there is a state monopoly insurer or a state fund from whom all business owners must buy their workers’ comp policies. In other states, you may purchase the insurance from private insurers or the state fund.
Before you purchase workers’ comp for your business, talk to your local insurance agent about your state’s workers’ comp requirements.
Thanks for reading our educational resource! Any above reference to a specific company, method, or product is meant for educational purposes only and is not specifically endorsed by Pie.