Getting hit with a work comp claim without a policy isn’t just costly—it’s illegal. Misunderstanding your state’s work comp laws and how coverage works can cause legal and financial headaches for your business.
Read on for the top myths about workers' compensation insurance, and mistakes that small businesses tend to make.
1. They think work comp is the same as general liability.
While commonly confused, a general liability policy will never cover a workers’ compensation claim, or vice versa. General liability covers third parties who suffer bodily injury or property damage as a result of your business operations. General liability insurance, also known as business liability, will also cover medical expenses and attorney fees that result from claims caused by a business’s products, services or operations. This could include bodily injury, property damage or personal injury to customers, vendors, partners or other people who may come into contact with your business.
Work comp exclusively covers your employees for injuries that occur in the line of work. And unlike general liability, workers’ compensation insurance is regulated by state law and often legally required for businesses that have employees.
In nearly all cases, businesses of any size should carry both general liability and workers’ compensation policies. Both protect the employer and business assets in a lawsuit brought by another party.
2. They misunderstand workers’ compensation limits.
“Limits of liability” may be a familiar insurance term, but it doesn’t apply to work comp. In a way, there are no limits to a work comp policy. Why?
A work comp policy has two parts:
- Employee benefits: Part A covers medical expenses, rehabilitation expenses and lost wages as a result of being unable to work. Or, it pays out death benefits to the employee’s dependents. Employee benefits generally have no limits and no exclusions, and claims cannot be declined or denied, unless proof of fraud can be established.
- Employers liability: If the employee believes their injury was the result of the employer’s negligence, they might choose to sue their employer for damages in addition to receiving work comp benefits. In this case, the policy would cover the employer’s legal defense for the employer, in addition to any monies awarded to the employee. This portion of the policy, called Part B, does have limits, which you can choose when you purchase the insurance.
Workers' compensation insurance is not meant to replace the employer's responsibility to maintain a safe workplace, so there are limits to Part B of the policy.
Limits are often represented as three numbers, such as:
100 / 500 / 100
500 / 500 / 500
1,000 / 1,000 / 1,000
These numbers represents the maximum amount the policy will pay out. The amounts are in U.S. dollars and 100x the number shown on the policy. For example, "100 / 500 / 100" is actually $100,000 / $500,000 / $100,000. Likewise, "1,000" is actually $1 million.
The first number is the amount paid out per accident; the second, the maximum per disease per policy year; and the third, the amount paid out per employee.
Once you've reached your limits of liability, the additional expense would fall on another policy (such as umbrella policy) or an out-of-pocket expense. In many cases, you can increase your limits of liability for minimal added cost to your premium.
3. They try to put “Additional Insured” status on their policy.
Similarly, business owners cannot put “additional insured” status on their work comp policy, or have another company put its employees on theirs.
“Additional Insured” status is a term used for liability insurance, which applies to policies like general liability and auto insurance. It denotes that you are offering your policy benefits to another party you’re engaging in business with, and is commonly used (and in some cases, contractually required) by businesses. However, it does not apply to workers’ compensation, because work comp can only cover your direct employees.
4. They don’t check their state’s requirements.
Workers’ compensation laws are regulated at the state level, which means that depending on what state you work in, expect differences regarding:
- Who needs to be covered: The definition of an employee, and at what employee limit the state requires coverage.
- Where you can buy it: Most states allow businesses to purchase coverage from a licensed insurance carrier, but a few require purchasing through the state-run fund.
- How much it costs: The relative cost of worker wages, medical care and work comp claims can affect premium rates.
- Where it provides coverage: All work comp policies provide coverage within state lines. Some states allow reciprocity with other states, or honor an All States Endorsement for temporary work or business-related travel.
Tip: Your business must comply with the states where your employees perform work—not necessarily where the business was founded or is based. If your business operates in multiple states, or employees travel across state lines to work, you may need to modify your policy to guarantee coverage.
5. They wait until it’s too late.
Don’t wait until your coverage has lapsed, you need to provide proof of insurance, or—worst of all—you face a claim. Keeping your business covered with a work comp policy can be easy and affordable.
Need work comp? Get a Quote in 5 Easy Steps with WorkCompOne.
Editor’s note: This post was originally published in October 2017, and has been updated for accuracy and comprehensiveness.