Almost every business in the United States that has employeeshas to handle the problem of workers’ compensation. Most states(with a few important exceptions) essentially require employers topurchase an insurance policy to handle their statutory obligationsto workers who are injured or made ill due to a workplace exposure.Whether your business is small or large, handling the expense andeffort of meeting those statutory obligations is an ever-presentchallenge.
Workers’ compensation requirements in the United States beganearly in the 20th century, back in 1911. Before then, workers who’dbeen injured or made ill on the job had to take legal actionagainst their employers, resulting in a system that simultaneouslymade it difficult for workers to obtain compensation for suchinjuries and yet exposed employers to potentially devastatingfinancial penalties under the tort system.
But beginning in 1911, an historic compromise solution wasdevised by the various states. Wisconsin was the first, but otherstates quickly followed, enacting a “no fault” system intended tomake sure workers received fair and prompt medical treatment andfinancial compensation for workplace injuries and illness. Thiscompromise system also established limits on the obligations ofemployers for these workplace exposures, so that the costs could bemade more predictable and affordable.
Today, modern workers’ comp laws provide fairly comprehensiveand specific benefits to workers who suffer workplace injury orillness. Benefits include medical expenses, death benefits, lostwages, and vocational rehabilitation. Failure to carry workers’compensation insurance or otherwise meet a state’s regulations inthis regard can leave an employer exposed not only to paying thesebenefits out of pocket, but also to paying penalties levied by thestates.
In most jurisdictions, employers can meet their workers’compensation obligations by purchasing an insurance policy from aninsurance company. However, five states and two U.S. territories(North Dakota, Ohio, Puerto Rico, the U.S. Virgin Islands,Washington, West Virginia, or Wyoming) require employers to getcoverage exclusively through state-operated funds. If you’re anemployer doing business in any of these jurisdictions, you need toobtain coverage from the specified government-run fund. These arecommonly called monopoly state funds. A business cannot meet itsworkers’ compensation obligations in these jurisdictions withprivate insurance.
Since workers’ compensation is primarily regulated by theindividual states and territories, there’s no single cohesive setof rules governing benefits, coverage or premium computation. Evenif you have considerable experience in dealing with one state’sworkers’ compensation system, if your business expands to adifferent state, you can easily find yourself dealing with verydifferent rules.
So who needs workers’ comp insurance? That may be the firstimportant question that a business needs to address, because notevery business is required to purchase workers’ compensationinsurance. Generally speaking, sole proprietors and partnershipsaren’t required to purchase workers’ compensation insurance unlessand until they have employees who aren’t owners. Most states willallow sole proprietors and partners to cover themselves forworkers’ compensation if they choose to, but it isn’t required. (Animportant note, though-these rules vary from state to state and canchange over time. So it’s always a good idea to check with yourparticular state’s regulatory agency to make sure what the rulesare for your state jurisdiction.)
Some states don’t require an employee to be covered if he or sheis paid solely by commission. Again, check with the workers’compensation regulators in your particular state to see how theyhandle this.
A general rule is that if you have employees who aren’t ownersof the company, you probably need workers’ compensation insurance.Speaking of employees, here’s a potential trap to be aware of andavoid: Under most state’s workers’ compensation laws, you mighthave employees you don’t know about. That’s because most stateswill treat an uninsured contractor or subcontractor as youremployee if he or she is injured while doing work for yourcompany.
The standard workers’ compensation insurance policy is a uniqueinsurance contract in many respects. Unlike other liabilityinsurance policies, it doesn’t have a maximum dollar amount limitto its primary coverage. Your auto insurance policy, for example,has certain specified maximum amounts the policy covers peraccident; if the cost of a particular accident exceeds that limit,you’ll need to look elsewhere for those additional dollars (eitheryour 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. ButPart One–the part that responds to an employer’s statutoryworkers’ compensation liability–has no set limit. Once the policyis in force, the insurance company is responsible for all thatemployer’s claims that arise for workers’ compensation benefits inthe states covered by the policy.
When it comes to controlling workers’ comp costs, here are someparticular areas you may want to focus on to make sure yourinsurance costs aren’t out of control:
Determine if you’re in an assigned risk plan. Sometimesan insurance agent handling the workers’ compensation insurance fora small employer doesn’t make it clear that the policy procured isan assigned risk policy. And in many states, the rates and premiumfor an assigned risk policy are much, much higher than for the samepolicy written through the voluntary market. An assigned riskpolicy doesn’t look different from any other workers’ comp policy,except for some subtle differences. So make it a point to insist onknowing if your policy has been written through an assigned riskplan.
If you’re in an assigned risk plan, check with your state’sinsurance regulators to see if assigned risk policies in your statehave higher rates and premiums. If this is the case, then doeverything in your power to find coverage outside the assigned riskplan. Talk with other agents, talk with direct-writing insurancecompanies, talk with employee leasing companies, investigate groupself-insurance programs available in your state-but don’t let it beyour agent’s responsibility to get you out of the assigned riskplan. Your agent just may not have a viable alternative for you,but that doesn’t mean that such an alternative doesn’t exist.
Check what credits may be available to you in your state.If you’re not in an assigned risk plan, make sure your policy givesyou whatever credits you might be eligible for in your state. Ifyour state offers credits for a drug- and alcohol-free workplace,find out if you’re eligible. If your state offers merit rating, seeif you’re eligible for that from an insurer. If your premium isappropriate, make sure you’re getting the proper experiencemodification factor. If your state offers a small-deductiblecredit, look into obtaining it.
Insist on getting audit workpapers after any audit. Ifthe insurance company sends out an auditor to determine your finalpremium, make sure to request a copy of the audit work papers soyou can review them carefully and make sure payroll computationadjusts overtime properly and allocates payroll of differentemployees correctly.
Check into alternative sources of workers’ compensationinsurance. Many business and trade associations sponsorinsurance programs that include workers’ compensation insurance.Check into all organizations to which you belong or that you mightbe eligible to join; they may offer sponsored insurance programsthat could reduce your rates or premium.
Workplace safety is also a necessary part of any program tocontrol the cost of workers’ compensation insurance. Here are sometried and true steps that employers can take to improve theirworkplace safety:
Discuss safety at every opportunity. Make workplacesafety efforts an important part of every meeting. Don’t just makeit a part of your managers’ meetings-make it a constant topic atmeetings with workers. Make sure you communicate to them why safetyis so vital, and how it affects the cost of workers’ compensationcoverage and thus the bottom-line of the company. You might beamazed at how many of your employees don’t really understand howexpensive workers’ compensation coverage is for the company-or eventhat it’s a cost for the company at all. Some employees think it’sjust some kind of government program that doesn’t really translateback to direct costs for the company. So share information aboutthe cost of the company’s workers’ compensation insurance and howthe cost of claims drives up that cost. Post the company’s safetygoals, and how well the company is doing in regard to meeting thosegoals. Compare current injury information (without disclosingconfidential information about injured workers) with information onrecent years.
Examine trends in workplace injuries. You can’t relysolely on your insurance company to analyze this data and alert youto trends you need to address. Get all the information you canabout what kinds of claims are occurring and in what part of youroperations. Only by understanding what’s causing your claims canyou begin to address the causes. It’s a terribly overworked cliché,but it’s also very true: Safety is no accident. It takes planning,effort and thought.
