What are the limits on a typical small business workers’ compensation policy?
C. $1 million
D. No limit
The answer is actually “all of the above.”
Confused? We’ll explain.
All commercial liability insurance policies have “limits of liability,” or a cap for what the policy will pay out to a claimant. But workers’ compensation limits aren’t structured in the same way as other commercial policies.
Because of this, small business owners commonly misunderstand their limits when buying a workers’ compensation policy. Which could mean that you think you’re buying one thing, but learn after a claim that you don’t have the coverage you thought.
Here’s what you should know before you buy workers’ compensation insurance.
Workers’ compensation is a unique system designed to protect employees from disease or injury resulting from the course of the employee’s work.
Unlike other commercial policies, the state government legislates the requirements for its work comp system. This includes which employers are legally obligated to carry insurance, fines for not having coverage, reporting requirements for workplace injuries, medical care requirements and more.
The limits on a workers’ compensation insurance policy are divided into two parts: employee benefits and employer liability.
Part A of the policy 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. The insurance carrier will pay out the claim to cover any medical bills necessary to treat the employee’s injury, illness or rehabilitation. Additionally, claims cannot be declined or denied, unless the employer presents proof of fraud.
The state’s governing body may set a limit on amounts paid out for lost wages.
Part B of the policy addresses the employer’s liability in the case of a lawsuit. If the employee claims the employer was negligent, they might choose to sue the employer for damages in addition to receiving work comp benefits. In this case, Part B would cover the employer’s legal defense for the employer, plus any monies awarded to the employee.
This portion of the policy does have limits, or the maximum amount the policy will pay out, which the employer can choose when purchasing insurance.
The employers liability under a workers’ compensation policy addresses a lawsuit related to a workers’ compensation claim and only applies if the claim is covered under the workers’ compensation policy.
Important Note: Don’t confuse the employers liability section of a workers’ compensation policy and Employment Practices Liability Insurance. EPLI policies cover personnel-related disputes, such as wrongful termination lawsuits; discrimination in hiring, firing or management; and sexual harassment claims.
Limits are often represented as three numbers; the most common limits are:
100 / 500 / 100
500 / 500 / 500
1,000 / 1,000 / 1,000
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" would pay out a maximum of $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.
If the employer reaches any of these limits, the additional expense would fall on another policy (such as umbrella policy) or would be an out-of-pocket expense. This is why it’s important to understand the types of small business insurance policies that are available, as well as which ones to purchase.
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Let’s recap. For a policy with liability limits of 100 / 500 / 100:
Maximum amount paid out for employee benefits: Unlimited*
*Based on what is approved by the insurance carrier as reasonable and necessary medical care or rehabilitation. The state’s governing body may set a limit on amounts paid out for lost wages.
If you rent or contract work with other companies, you likely want a $1 million limit. Landlords and work contracts often require the highest threshold of coverage.
Fortunately, higher limits on small business work comp policies are typically very affordable, and worth the additional expense. For example, a workers’ compensation policy with $1,000 in premium may pay less than $100 for essentially 10x the coverage.
Now that you better understand workers’ compensation limits of liability, review your policy to ensure that it meets your company’s needs and industry requirements.
Regardless of what limits you chose in the past, you can often endorse, or update your policy limits, mid-year.
Need work comp? Get a quote in as little as two minutes with WorkCompOne.
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Editor's note: This post was originally published in April 2019 and has been updated for accuracy and comprehensiveness.