Workers' Compensation 101

Understanding Your Policy

The Standard Workers' Compensation insurance policy is a unique insurance contract in many respects. Unlike other liability insurance policies, it doesn't have a maximum dollar amount limit to its primary coverage. Your auto insurance policy, for example, has certain specified maximum amounts the policy covers per accident; if the cost of a particular accident exceeds that limit, you'll need to look elsewhere for those additional dollars (either your own pocket or an excess or umbrella liability policy). Workers' compensation insurance policies have a dollar limit also, but only for Part Two of the coverage, employers' liability. But Part One, the part that responds to an employer's statutory workers' compensation liability, has no set limit. Once the policy is in force, the insurance company is responsible for all that employer's claims that arise for workers' compensation benefits in the states covered by the policy.

That's the really beneficial aspect of workers' compensation insurance from the employer's point of view. It's impossible to know in advance how great an employer's liabilities may be in a year due to workers' compensation obligations and thus impossible to budget ahead of time with any certainty. A company might run several months with almost no claims and then be hit with a claim that ultimately costs hundreds of thousands of dollars. But an insurance policy has a predictable cost for which a company can plan and budget-at least in theory. Sometimes in practice, this isn't the case.

Part One of the standard workers' compensation insurance policy (what used to be called Coverage A, for us old-timers) transfers liability for statutory workers' compensation benefits of an employer to the insurance company, whether that liability turns out to be small, medium, or crushing. If a state increases benefit levels during the term of the policy, the employer doesn't have to make any adjustments to the policy-the policy automatically makes it the responsibility of the insurance company to pay all claims due for workers' compensation insurance for the named employer in the particular states covered by the policy.

Employers' Liability Coverage
We've already made reference to Part One of the coverage provided by the workers' compensation insurance policy. But we haven't talked in detail about Part Two-employers' liability coverage. Most workers' compensation claims come under Part One of the coverage-the statutory state benefits for injured or ill workers. But don't ignore Part Two, as it can be very important to make sure this sometimes overlooked area of the policy is set up correctly.

This is the section of the policy that does have a set dollar limit. But employers' liability coverage is not always well understood by employers (or even by some insurance people). Employers' liability insures the employer for liability to employees for work-related bodily injury or illness that isn't subject to the statutory benefits imposed by state or federal regulations. For example, a lot of states exclude certain employees from the statutory benefits covered by Part One or Part Three of the policy. Employers' liability coverage would insure the employer for liability to such employees.

Employers' liability also insures an employer in cases such as third-party over suits, where an injured worker files suit against a third party and that third party then seeks to hold the employer responsible. For example, an employee injured by a piece of machinery at the workplace might file suit against the manufacturer of the machinery. The manufacturer might claim that the employer modified the machinery or used it improperly and is thus responsible for the liability. But since employers' liability has a set limit, it is vital that this limit be correctly coordinated with the excess or umbrella liability coverage that is purchased separately. If the amount of employers' liability coverage on the workers' compensation policy is lower than the amount that the umbrella or excess policy requires for underlying coverage, there can be an uninsured gap. So it is vital to make sure that the employers' liability limit on the workers' compensation policy matches what is shown on the umbrella or excess liability coverage that sits on top of the primary workers' compensation policy.

Steps to Take to Evaluate Your State-by-State Workers' Comp Exposures

  1. Examine your company's possible exposures to workers' compensation claims from different states. If you have employees who live and work or who travel to other states, you need to make sure you are properly covered in each state. Remember, many states treat uninsured independent contractors or subcontractors the same as if they were your employee.
  2. If you have workers in monopoly-fund states, you'll need to arrange coverage through those state funds. Private insurance cannot satisfy coverage requirements for monopolistic states.
  3. If you're based in a monopoly-fund state but have workers based elsewhere, you will need to arrange coverage for those states separate from your state fund.
  4. If you're self-insured in your primary state of operations but have employees or uninsured contractors in other states, you'll need to arrange coverage for those other states.
  5. If you're operating in multiple states, check into possible different classification definitions that apply in different jurisdictions for your operation. Make sure you're properly classified in each state, to avoid either hidden overcharges or an unpleasant audit surprise of an additional premium.
  6. A few states do not use the interstate experience modification factor system, but instead calculate a modifier only for use within that state, based on prior losses and payrolls within that state.These "stand-alone" states are California, Michigan, Pennsylvania, Delaware and New Jersey. If you have operations in these states but also operate elsewhere, make sure proper experience modifiers are used for the stand-alone states.
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