Workers' Compensation Insurance

Almost every business in the United States that has employees has to handle the problem of workers' compensation. Most states (with a few important exceptions) essentially require employers to purchase an insurance policy to handle their statutory obligations to workers who are injured or made ill due to a workplace exposure. Whether your business is small or large, handling the expense and effort of meeting those statutory obligations is an ever-present challenge.

Workers' compensation requirements in the United States began early in the 20th century, back in 1911. Before then, workers who'd been injured or made ill on the job had to take legal action against their employers, resulting in a system that simultaneously made it difficult for workers to obtain compensation for such injuries and yet exposed employers to potentially devastating financial penalties under the tort system.

But beginning in 1911, an historic compromise solution was devised by the various states. Wisconsin was the first, but other states quickly followed, enacting a "no fault" system intended to make sure workers received fair and prompt medical treatment and financial compensation for workplace injuries and illness. This compromise system also established limits on the obligations of employers for these workplace exposures, so that the costs could be made more predictable and affordable.

Today, modern workers' comp laws provide fairly comprehensive and specific benefits to workers who suffer workplace injury or illness. Benefits include medical expenses, death benefits, lost wages, and vocational rehabilitation. Failure to carry workers' compensation insurance or otherwise meet a state's regulations in this regard can leave an employer exposed not only to paying these benefits out of pocket, but also to paying penalties levied by the states.

In most jurisdictions, employers can meet their workers' compensation obligations by purchasing an insurance policy from an insurance 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 get coverage exclusively through state-operated funds. If you're an employer doing business in any of these jurisdictions, you need to obtain coverage from the specified government-run fund. These are commonly called monopoly state funds. A business cannot meet its workers' compensation obligations in these jurisdictions with private insurance.

Since workers' compensation is primarily regulated by the individual states and territories, there's no single cohesive set of rules governing benefits, coverage or premium computation. Even if you have considerable experience in dealing with one state's workers' compensation system, if your business expands to a different state, you can easily find yourself dealing with very different rules.

So who needs workers' comp insurance? That may be the first important question that a business needs to address, because not every business is required to purchase workers' compensation insurance. Generally speaking, sole proprietors and partnerships aren't required to purchase workers' compensation insurance unless and until they have employees who aren't owners. Most states will allow sole proprietors and partners to cover themselves for workers' compensation if they choose to, but it isn't required. (An important note, though-these rules vary from state to state and can change over time. So it's always a good idea to check with your particular state's regulatory agency to make sure what the rules are for your state jurisdiction.)

Some states don't require an employee to be covered if he or she is paid solely by commission. Again, check with the workers' compensation regulators in your particular state to see how they handle this.

A general rule is that if you have employees who aren't owners of the company, you probably need workers' compensation insurance. Speaking of employees, here's a potential trap to be aware of and avoid: Under most state's workers' compensation laws, you might have employees you don't know about. That's because most states will treat an uninsured contractor or subcontractor as your employee if he or she is injured while doing work for your company.

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.

When it comes to controlling workers' comp costs, here are some particular areas you may want to focus on to make sure your insurance costs aren't out of control:

Determine if you're in an assigned risk plan. Sometimes an insurance agent handling the workers' compensation insurance for a small employer doesn't make it clear that the policy procured is an assigned risk policy. And in many states, the rates and premium for an assigned risk policy are much, much higher than for the same policy written through the voluntary market. An assigned risk policy doesn't look different from any other workers' comp policy, except for some subtle differences. So make it a point to insist on knowing if your policy has been written through an assigned risk plan.

If you're in an assigned risk plan, check with your state's insurance regulators to see if assigned risk policies in your state have higher rates and premiums. If this is the case, then do everything in your power to find coverage outside the assigned risk plan. Talk with other agents, talk with direct-writing insurance companies, talk with employee leasing companies, investigate group self-insurance programs available in your state-but don't let it be your agent's responsibility to get you out of the assigned risk plan. 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 gives you whatever credits you might be eligible for in your state. If your state offers credits for a drug- and alcohol-free workplace, find out if you're eligible. If your state offers merit rating, see if you're eligible for that from an insurer. If your premium is appropriate, make sure you're getting the proper experience modification factor. If your state offers a small-deductible credit, look into obtaining it.

Insist on getting audit workpapers after any audit. If the insurance company sends out an auditor to determine your final premium, make sure to request a copy of the audit work papers so you can review them carefully and make sure payroll computation adjusts overtime properly and allocates payroll of different employees correctly.

Check into alternative sources of workers' compensation insurance. Many business and trade associations sponsor insurance programs that include workers' compensation insurance. Check into all organizations to which you belong or that you might be eligible to join; they may offer sponsored insurance programs that could reduce your rates or premium.

Workplace safety is also a necessary part of any program to control the cost of workers' compensation insurance. Here are some tried and true steps that employers can take to improve their workplace safety:

Discuss safety at every opportunity. Make workplace safety efforts an important part of every meeting. Don't just make it a part of your managers' meetings-make it a constant topic at meetings with workers. Make sure you communicate to them why safety is so vital, and how it affects the cost of workers' compensation coverage and thus the bottom-line of the company. You might be amazed at how many of your employees don't really understand how expensive workers' compensation coverage is for the company-or even that it's a cost for the company at all. Some employees think it's just some kind of government program that doesn't really translate back to direct costs for the company. So share information about the cost of the company's workers' compensation insurance and how the cost of claims drives up that cost. Post the company's safety goals, and how well the company is doing in regard to meeting those goals. Compare current injury information (without disclosing confidential information about injured workers) with information on recent years.

Examine trends in workplace injuries. You can't rely solely on your insurance company to analyze this data and alert you to trends you need to address. Get all the information you can about what kinds of claims are occurring and in what part of your operations. Only by understanding what's causing your claims can you 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.