It’s a good feeling to know that you have a comprehensive workers’ compensation policy protecting your business and its employees. There’s no replacement for compliance. You either carry the required coverage or you don’t.
Read on for the top myths about workers' compensation insurance, and mistakes that small businesses tend to make.
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.
The mistake: Just because you consider someone a contractor doesn’t make it true. It’s important that you properly classify every worker, as this impacts workers’ compensation coverage and taxes among other details.
The fix: From a workers’ compensation perspective, you must accurately classify employees as employees and contractors as contractors.
Generally speaking, independent contractors are responsible for securing their own workers’ compensation policy. Conversely, it’s the responsibility of the employer to purchase a policy that covers employees.
The mistake: Assuming an owner (or family member) doesn’t need to be covered.
The fix: Every state has its own list of exemptions. These are workers who are not required to be covered by a company’s workers’ compensation policy.
For instance, in Georgia:
This is why it’s important to check your state’s requirements. Workers’ compensation is regulated at the state level, so you must have a clear idea of the regulations and requirements in the state in which you do business.
Classification codes are usually a 3- or 4-digit number followed by a brief description of the business type. The primary purpose of these codes is to allow insurance companies to provide the appropriate coverage based on the risk of specific job responsibilities.
The mistake: A receptionist and roofing professional don’t have the same level of risk. And for that reason, they don’t share a classification code — or the same workers’ comp insurance rate.
The fix:
The mistake: Submitting total payroll when employees do different kinds of work.
The fix: Payroll should be tallied for each classification code separately. This can impact premium amounts significantly.
The formula is:
(Payroll x Workers’ Comp Rate) x (Credits or Debits) = Insurance Quote
Jobs like sales personnel and clerical workers pay notably lower rates than skilled trades. So if the business's total payroll is multiplied by the highest rate, this will significantly increase the cost of the insurance premium.
A small business owner should submit total payroll for each role so that the appropriate rate is assigned, bringing total premium down.
When calculating payroll, small business owners should also:
The mistake: Googling “workers compensation rate Georgia.” In reality, there are dozens of rates for workers’ comp insurance in Georgia. But the only one that matters is yours — for your classification code(s).
The fix: Use a work comp calculator — or better yet, get a real quote to find out your actual rate and estimated premium.
Other things you need to know include:
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:
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.
Need more help? What Limits of Liability Are and How to Choose What's Right for You
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.
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:
Always check the rules in your state to make sure your business is compliant.
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:
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 in 2022 for accuracy and comprehensiveness.