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. Workers’ compensation insurance is different than general liability.
The mistake: New business owners buying small business insurance for the first time might purchase general liability or a business owners policy (BOP) and assume their business is covered. But these policies won’t cover employee injuries.
The fix: While commonly confused, a general liability policy will never cover a workers’ compensation claim, or vice versa. General liability insurance covers third parties who suffer bodily injury or property damage as a result of your business operations.
Also known as business liability, general liability will 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. Workers’ compensation liability limits aren’t set like other small business policies.
The mistake: Small business owners assume workers’ compensation coverage limits are set by the employer when you buy a policy. Unfortunately, it’s not as straightforward with work comp.
The fix: You do choose liability limits when buying workers’ comp, but you need to understand what each limit means.
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. You cannot have an “Additional Insured” on a workers’ compensation policy.
The mistake: Business owners cannot put “additional insured” status on their work comp policy, or have another company put its employees on theirs.
The fix: Determine whether your business needs to carry a workers’ compensation policy and how your state handles contractors and subcontractors.
“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.
Naming an additional insured often comes up in the case of contractors and subcontractors. Look up your state to see how it handles contractors and subcontractors. State law may require the hiring company to include the contractor on its workers’ compensation policy (in this case, contact your insurance carrier and ask to modify your existing policy). Or, contractors may need to show proof of insurance (for themselves or any subcontractors) before beginning work.
4. Workers’ comp requirements are different in every state.
The mistake: Assuming that the rules in one state apply in another, or that a workers’ compensation policy protects workers crossing state lines.
The fix: 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.
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.
5. Don’t wait until it’s too late.
The mistake: Like any insurance policy, coverage cannot be put into place after a claim has occurred.
The fix: 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.
Here’s how to buy a workers’ compensation policy:
- Check your state requirements. Find out what your state requires, so you know whether you need to carry a policy and which employees must be covered by law.
- Calculate your payroll. Requirements for carrying workers’ compensation insurance depends on number of employees, but premiums are based on total payroll. Specifically, the payroll for each type of job employees do.
- Find a commercial insurance agency or carrier. Also check that your selected insurer is licensed to write in all states where employees work.
- Contact the insurer to request a policy quote. Independent agencies can shop multiple carriers, and deliver the best quote.
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Editor’s note: This post was originally published in October 2017, and has been updated for accuracy and comprehensiveness.