Cover Image for Workers Compensation Insurance: The Ultimate Guide

Workers Compensation Insurance: The Ultimate Guide

Many jobs come with the risk of physical injury. The states have worked to lessen this risk by requiring employers to carry workers compensation insurance, or workers comp.

Most states require some form of workers comp insurance if you have any employees, though the policies available to you may differ. This can get complicated if you have people working for you who you don’t consider employees, such as independent contractors, but who the state would deem an employee for purposes of insurance. Below we have compiled everything you need to know about workers comp insurance.

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What is an employer required to provide by law?

Under the common law system (the legal system used by many states) , an employer has five obligations to their employees.

The first is a reasonably safe place to work. This term “reasonable” is very flexible and ultimately just means taking every precaution possible. Obviously, some jobs come with inherent risk and will never be completely safe. For example, if you are an underwater welder, your work environment can’t be completely devoid of risk. However, your employers must take every precaution to prevent risks that are within their control.

The second requirement is reasonably safe tools. Like the jobs example above, some tools are inherently dangerous. As an example, maybe your job requires you to carry a gun. A firearm is dangerous and can’t be made completely safe. However, your employer shouldn’t give you a defective gun that will regularly misfire—it needs to be safe. This has nothing to do with the quality or cost of the tools, and cheap tools can still be safe tools.

The third requirement is competent fellow employees, and while there may be plenty of people you have worked with that you think are less than competent, the law doesn’t require that they have to be good at their job; they just can’t put fellow employees at risk. For example, if you are a flight attendant and walk into work and have a pilot who has never flown a plane before, he would not be considered competent. That is putting your safety at risk. Conversely, if you work as a secretary and your coworker never shows up to work on time and regularly misspells words in her writing, you may deem that incompetent, but that isn’t what the law is aiming to prevent. The law is aimed at ensuring safety for workers, not ensuring ease of the work performed.

The fourth requirement is an established set of safety rules that are enforced. How these rules look will depend on your workplace. If you own a bank, your safety rules will be focused on robberies or forged items being brought to your establishment. If you own a construction company, your safety rules will focus on protective clothing and what actions must be followed to avoid serious bodily injury.

The fifth requirement is to warn workers of any known dangers. This is something most business owners would do even if it wasn’t required. If you know that there is a danger in your workplace, you want to make sure your employees avoid it and stay on the job.

If you are sued for violating one of these five requirements, you have three common law defenses you can use. They are:

  1. Assumption of the risk;
  2. Contributory negligence;
  3. Fellow-servant rule.

There are many legal distinctions within these defenses, but in essence, assumption of the risk is the argument that the employee knew of the possible dangers and assumed the risk of the task anyway.

Contributory negligence is the argument that you were negligent, but the employee was also negligent, which lead to the accident.

The fellow-servant rule is the argument that the employee was injured as a result of a fellow worker, not any work conditions you put in place. This makes the other worker liable.

What is the purpose of workers comp?

In order for most people to successfully sue you, they must prove you violated a law. Previously, employees had to prove their employer was negligent and didn’t follow one of the five requirements of employers. Currently, that is not the case. Workers comp provides prompt and reasonable payment of benefits based on the workplace injury.

Additionally, workers comp is the sole remedy for workplace injury, meaning that if you have workers comp insurance, the worker must go through the workers comp system rather than a general civil suit. This helps protect you from tort actions and provides you with a predictable amount that you will spend on workplace injuries each year—the amount you spend on workers comp insurance.

Which states require workers comp insurance?

We mentioned above that most states require you to carry workers comp insurance. More specifically, every state requires workers comp insurance except for two: New Jersey and Texas. While New Jersey doesn’t require workers comp insurance, the state has so many laws and obligations regarding workers comp insurance and work conditions, that it almost makes it a requirement. Texas, on the other hand, has requirements that both protect the employee and employer, and the employer can choose to subscribe to the law and gain those protections, or not subscribe to the law and relinquish any protections they would have received.

What are my options for getting workers comp insurance?

Depending on your state, there are three options: private carriers, state funds, and self insurance.

  1. Private carriers are the most common type of insurance. This is when you go to a broker and have get quotes from companies to find the right fit for your business. You pay the broker each month for insurance.
  2. A state fund is a little different. This is where the state handles the insurance for you; how it looks will vary by state. Some states make it obligatory, meaning you must go to them for your workers comp insurance, while others make it optional.
  3. The third option is self insurance. This is most often found with very large corporations, such as Wal-Mart. These companies have their own insurance fund and handle the payment of claims themselves with the money they set aside.

What happens if I don’t get worker comp insurance?

The state can take many actions if you fail to obtain workers comp insurance.  The first is a stop work order. This is most common with labor-intensive jobs like construction. The state will force you to stop working until you have obtained the proper workers comp insurance. The second action is issuing a large fine for violating the workers comp law.

Depending on your state, you can be charged criminally and can face jail time if you fail to obtain the proper workers comp insurance. Additionally, if an employee sues you for the payment of their benefits and you do not have insurance, you lose all your common law defenses to their claim.

What if all of my employees are independent contractors?

This is a question we get asked all the time. As employer/employee laws become more difficult for business owners to keep up with, many businesses are choosing to categorize their “employees” as independent contractors. However, regardless of what you call the person working for you, your state has laws in place to determine what type of employee you have and whether you are required to carry workers comp insurance on them.

Here are the different types of relationships with different requirements:

Primary or direct employer:

  • Traditional employer/employee relationship.

De facto employer:

  • Means “in fact employer.”
  • Has an employer/employee relationship regardless of the classification of the employee (for example, even if the employee is called an independent contractor).

Statutory employer or de jure employer:

  • Determined on statute or common law as to whether they are an employee.

Regular/general employer:

  • A person/organization is referred to as a regular or general employer when they lend, rent, or lease an employee to another employer. The other employer is referred to as the “special employer.”
  • This can be seen in staffing agencies, or even with subcontractors.

All of these employment relationships require you to carry workers comp insurance for your employees.

Is everyone required to get workers comp insurance?

Some types of employment are considered exempt. These exemptions can vary by state or even industry, so be sure to check with your insurance broker before you decide the exemption applies to you.

The first exemption is a numeric exemption. This means you aren’t required to have workers compensation insurance unless you have a certain number of employees. The total required number is different in each state, and not all states have a numeric exemption. Additionally, this exemption doesn’t apply to the construction industry.

The next exemption is the general exemption. This covers certain types of work that don’t require workers compensation insurance. The first type is called “domestic employees,” or those hired to perform duties in or around a residence, such as a maid, babysitter, or lawnmower. If you hire your 14-year-old neighbor to come babysit your child for the night, you are employing her, but it would be silly to take out a workers comp policy for just one evening. This exemption prevents you from having to do that.

Within the general exemption is an exemption for agricultural or farm workers. This one can be a bit complicated, because not every type of agricultural worker qualifies, and a multitude of factors are considered before determining who falls into this category. Those factors include family members, seasonal workers, part-time workers, full-time workers, the total number of workers on the farm, their average pay, how they are paid, etc.

The most complicated of the general exemptions is the casual laborer. This generally means a worker that is hired to perform work that is not in the usual court of furtherance of the business. This is not the same as seasonal or part-time workers. If you have questions about whether this position applies to you, talk to a broker to insure you are following the workers comp laws correctly.

If you have one of these exempt employees, you can still obtain a policy to keep them protected, which could provide an incentive to continuing working for you rather than a competitor.

If I own the business, do I need workers comp on myself or the other owners?

While you are welcome to get insurance for yourself or your other partners, it usually isn’t required. There is a workers comp exemption for specific positions within a company. These positions include:

Sole proprietors and partners

While there are exceptions to this, sole proprietors or their partners are not normally considered employees and you do not need workers comp insurance on them.

This does not include C-level officers of a corporation; it is specifically for partners in a formal partnership with ownership in the business.

Independent contractors

Many businesses consider their workers “independent contractors” in order to avoid compliance with employment laws (such as the requirement for workers comp). However, regardless of what you call your employee, you may be required to provide workers comp benefits.

A true independent contractor will have multiple employers or clients and will provide services to all of them. If you are the sole employer for an individual, they are NOT an independent contractor, even if you refer to them as one.

The laws on determining an independent contractor can vary, but typically, if you dictate what time they come to work, what tools are utilized for that work, or how they go about doing that work, they are not an independent contractor.

If you have a true independent contractor, you are not required to get workers compensation insurance for them.

Volunteer workers

Volunteer workers in the private sector are usually not entitled to workers comp benefits.

With non-profits, this can vary. Many nonprofits have full-time employees, and those individuals ARE entitled to workers comp benefits. However, if you run a nonprofit that feeds the less fortunate each day and individuals volunteer to serve food, then you do not need workers comp on those volunteers.

Leased workers

These are parties in a leasing agreement (such as a professional employment organization or labor contractor, employee leasing company, lessor, or regular employer).

The employer with the exclusive remedy protection is typically responsible for providing the worker comp benefits to the leased worker.

This can get really complicated and could be impacted by your state’s law on joint employers. If you have questions about this, you may consult your broker or attorney to determine if you are considered a joint employer who must comply with workers comp laws, or if you would fall into this exemption.

What does workers comp insurance cover?

In essence, workers comp applies to bodily injury or death by accident or disease. There are four categories of benefits that can be paid in the workers compensation policy:

  1. Medical benefits;
  2. Compensation for lost wages;
  3. Rehabilitation expenses;
  4. Death or survivorship benefits.

In addition to making these payments, workers compensation insurance comes with a promise to pay as well as defend. This means the insurance will include a promise to promptly pay benefits when due as required by law. Additionally, your policy will pay to defend you in the event of a lawsuit.

Just because insurance covers your costs doesn’t mean the insurance company won’t sue someone else who may have been responsible. If your employee is injured on the job, but that injury results from someone else’s negligence, your insurance may cover the costs to aid your employee, but they will go after the person responsible for the injury in an attempt to recover the associated costs.

What is employer’s liability insurance?

Employer’s liability insurance covers bodily injury or death that arises out of an accident or disease. This coverage is almost always provided under your workers compensation insurance policy. In fact, the limits that you choose to purchase are employer’s liability limits. Unlike workers comp coverage, employer’s liability covers certain situations where the employee sues you as a result of a workplace injury.

Usually, in order for the employee to sue, injury must arise out of the scope of employment and must be caused by the work conditions. This covers four different types of claims:

Third party:

  • These are lawsuits filed by a third party seeking recovery from the insured because it was held liable for an insured’s employees injury.
  • If there is an “insured contract” between the third party and employer and the third party is asking to be indemnified in accordance with a contract provision, look to the commercial general liability policy (CGL) for coverage.
  • If there is no contract between the third party and the employer, and the third party is alleging negligence of the employer, then your employer’s liability insurance will provide the coverage.

Care and loss of services:

  • This protects against lawsuits filed by an injured employee’s spouse and/or children for loss of the services resulting from injury to the employee in the course of employment.
  • Services may include sexual relations, companionship, help in performing household tasks, and so on.

Consequential bodily injury:

  • Protects against a lawsuit filed by a family member for an injury or disease suffered as a consequence of the employee’s injury.

Dual capacity:

  • Protects against lawsuits brought by an injured employee against the employer when the injury arises from the activities of the employer in a capacity other than as an employer.
  • This means, if you are responsible for an injury to one of your employees, but it isn’t specifically within the scope of the employment.
  • In such a case, the employer is liable not only as an employer for workers compensation benefits, but also as an entity acting in a different capacity.

Are there any exclusions with employers liability coverage?

Yes, there are exclusions to this coverage. While this is not an exhaustive list, here are the exclusions that apply to most businesses:

Contractual liability

If you enter into a contract agreeing to take the liability of another individual, your insurance company will not cover the cost of that additional liability.

Punitive or exemplary damages

Punitive damages are fines issued by the court which are designed to punish the wrongdoer of particularly egregious behavior. As these damages are designed to be a punishment, your policy will not cover them. Note that you can buy insurance to cover punitive damages in some states, and in some states it is prohibited to buy insurance to cover punitive damages.

Bodily injury in violation of the law

If you commit a crime, such as assaulting someone, and they are injured as a result, your policy will not cover that.

Intentional injury

This tends to look the same as bodily injury in violation of the law. If you harm someone on purpose, your policy will not cover that.

Injury outside the U.S.

Your policy only covers injuries inside the policy territory. This territory is normally the United States and Puerto Rico. If an injury occurs outside of this territory, your policy will not cover it.

Employment-related practices

Excludes damages arising out of coercion, criticism, demotion, evaluation, reassignment, discipline, defamation, harassment, humiliation, discrimination against or termination of any employee, or any personnel practices, policies, acts, or omissions.

The Bottom Line

More often than not, you will be required to have workers comp insurance on your employees. You may believe that you only have independent contractors instead of employees, but make sure you speak to your attorney or insurance professional to determine whether those individuals are deemed independent contractors under the law.

While workers comp provides both the employee and employer with certain protections, it comes with a set of guidelines and standards the employer must follow to ensure compliance with the law. If you have any questions regarding your policy and want to ensure you are complying with your local laws, give us a call to discuss your individual business needs.

Austin Landes, CIC

About The Author: Austin Landes, CIC

Austin is an experienced Commercial Risk Advisor specializing in property & casualty risk management for religious institutions, real estate, construction, and manufacturing.

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