What is Workers' Comp Insurance?

Workers' compensation is a form of liability insurance required under state laws. It pays medical costs and replaces wages when employees are injured at work.
What is workers' compensation insurance and how does it work?

Workers' comp insurance coverage is the exclusive remedy.

Workers' compensation insurance is a coverage designed to protect both business owners and their employees from potential financial disaster. The average cost of a claim is over $40,000. Many families and employers would be unable to cover these costs without this insurance.

When an employee gets injured on the job, workers' compensation insurance provides what's known legally as an exclusive remedy. A business that has coverage under an active policy will not be held liable for job-related injuries except under narrow legal circumstances whereas the employer intended to cause injury to the employee or they were willfully negligent.

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Understanding Workers' Compensation

Workers' Compensation History Lesson

Prior to federal and state workers' compensation laws in the United States, employees who were injured on the job had no formal process to compensate them for injuries sustained while working for an employer. The only recourse for the injured employee was to sue the business owner under civil or tort law.

Furthermore, the employee would have the burden of proving malice or negligence against the owner in order to receive compensation for the cost of medical expenses and lost income due to injuries. Even though the business' potential liability was limitless, most U.S. courts ruled in favor of the business owner. This left employees to cover their own expenses including lost wages, medical costs, and lost future earnings.

Originally, the federal government assumed that workers' compensation laws should be left to individual states to enact; but in 1908, President Taft signed the first legislation requiring mandatory employer coverage for employees working in multi-state commerce. During the next 40 years, each state enacted their own state-specific programs and workers' compensation laws. Wisconsin was the first state to establish a formal workmans comp program and Mississippi was the last state.

What is the Purpose of Workers' Compensation?

Legally requiring workers' compensation coverage brings advantages to both employers and employees alike. The basis of the work comp legal system is built around the Prussian concept of "no fault" insurance. This concept generally means that on the job injuries are an accepted fact and a part of doing business. The purpose of our workers' compensation system is to help manage the financial consequences of accidents in the most efficient and judicious manner possible. The concept of no-fault was later applied to auto insurance as a means of limiting litigation for car accidents.

The primary benefit for business owners participating in a states' workers' compensation program is that they have tort exemption, or legal protection, from injuries that are covered under a workers' comp policy. The insurance company will pay for the cost of medical care and it will replace lost wages for employees injured on the job.

Employees benefit when a business has coverage because they do not have to prove that the an employer was negligent. Employees receive financial compensation for injuries that occur through their own carelessness or occupational exposure without the burden or expense of filing a a lawsuit against their employer. Under the current workers' compensation system, employees receive compensation more quickly and more often than employees without access to workers' comp coverage.

Who Pays for Workers' Compensation?

The business owner, or employer, pays the cost of providing coverage for employees. The cost of a policy is based on payroll and the class code the job duties fall under. A policy lasts for one year. State insurance regulations dictate each states own workers' comp requirements. Most state laws require coverage as soon as the business hires its first employee. Their are allot of additional rules associated with when and how owners and employees must be covered in each state. They can purchase it through private insurance companies or through state insurance funds. Most states also have additional injury funds established to pay for injuries of uninsured employees under certain circumstances.

Is Employers Liability Insurance the Same as Workers' Compensation?

Employers liability is a coverage that is generally included under a workers' compensation policy. There are two parts to the contract under a workers' comp policy. Part 1 is workers' compensation and Part 2 is employers liability. Employers liability provides additional legal protection to businesses that have coverage. In the event an employer is sued by an employee or there family, the policy wll pay for legal defense costs and court judgments against the employer. The insurance company may also negotiate and pay settlements

Employers liability insurance steps in to protect business owners when employees, or other related parties, sue the employer for work related injuries.

Employers Liability is very seldom utilized in most states. It makes up a very small part of the cost of coverage because its seldom needed. The minimum employers liability limits in most states is:

  • $100,000 per occurrence for bodily injury or illness
  • $100,000 per employee for bodily injury or illness by occupational disease
  • $500,000 policy limit for bodily injuries or illness by disease

Many business pay a small amount of additional premium in order to increase these limits. This is typically due to contractual requirements or in order to satisfy their umbrella insurance carrier.

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What is Employers Liability Insurance?

Workers' Comp Includes Employers Liability Coverage
Employers liability insurance.
  • Employers Liability coverage not included in all monopolistic states.
  • All NCCI and other states' coverage includes Employers Liability Insurance.

Does Workers' Comp Coverage Vary From State to State?

Yes. Workers' compensation laws and coverage requirements vary significantly from state to state. Since each state administers their own workers compensation systems, there may be important differences in how each state interprets theirs own laws and statutes with regard to both coverage requirements and insurance benefits for injured workers. The federal government also has its own system for federal employees and utilizes its own rules and requirements for federal employees.

The primary differences between each states' workers' comp rules include:

The number of employees a business can have before coverage is required

The number of employees a business can have before coverage is required will range from the very first employee hired up to 5 employees. In some states construction companies can be required even when they don't have employees.

When and how owners and family members can be exempt or excluded

The treatment of owners and family members will be affected by whether the business is an individual, sole-proprietor, partnership, LLC or corporation. Some owners will be automatically excluded and others will be included by default. Some states have strict requirements and documentation rules for owners who choose to opt-in or opt-out of coverage.

State special class codes

Most states use standard NCCI class codes. A few states, like California and Pennsylvania, utilize their own classification systems and codes. All states have other unique variations known as state special codes. These are either unique class codes to the state or a variation of how job duties are applied to another class code.

Whether or not private insurance companies can offer coverage

Most states allow private insurance companies. Carriers must apply for approval and file their rates with the state for each class code. There are four monopolistic states that prohibit private insurance companies: Ohio, North Dakota, Washington and Wyoming.

How state fund, or assigned risk, coverage is administered

Most states utilize NCCI to place state fund coverage with a pool of insurance companies operating in the state. Other states, like New York and Florida, operate their own state funds. A few states like Missouri contract with a specific insurance company to administer the state fund.

The amount of credits and debits that can be applied to adjust premium

Workers' compensation is more complex than most business owners realize. Most states allow insurance companies to apply credits and debits to adjust premium. The typical range is 25% deviation with regard to a policy credit or debit.

Required payment amounts for disabilities or death

Each states mandates the award schedules and maximum time for disability payments in order to standardize how insurance companies must compensate employees, or families, when they become disabled or die from workplace injuries. In Virginia for example a thumb-related injury could pay disability payments for up to 60 weeks. A severed pinky finger could result in a cash settlement of $10,500 for permanent loss of use.

What States Require Workers' Compensation?

Every state in the U.S. requires workers compensation with the exception of Texas. Requirements are based on the number of employees and vary between 1 and 5 employees. Texas allows business owners to opt out of workers' compensation, but employers may still be held liable for uninsured claims and employee injuries.

Penalties for not Having Workers' Compensation Insurance

Business owners that do not carry workers' comp, when it is required by law, often face stiff fines and penalties by the state. They may also be held liable for replacing employees' lost wages and paying medical expenses for workplace injuries.

Failing to provide workers' compensation is a criminal offense in most states. Fines range from $1,000 to over $100,000 depending on the state and circumstances. An owner may also serve up to 7 years in jail for failure to comply with state laws.

Why Workers' Compensation Insurance is the Best Alternative

Workers' compensation is not a perfect system. In fact, it can be somewhat confusing because of individual state laws and statutes. It is still an American success story. It is a much better system than the United States had prior to modern workers' compensation legislation and reform. Business owners receive relief from employee related lawsuits (also known as exclusive remedy) and employees get a fast and equitable, no-fault program to compensate them workplace injuries.

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Workers' Compensation Definition

Workers' compensation insurance is a property and casualty insurance product legally required for most business owners when they hire one or more employee(s). A policy will protect a business from lawsuits related to employees who become injured or ill on the job. It will also pay for medical care and replace a portion of missing payroll wages when employees are unable to work due to an accident.

The cost of this insurance is always paid for by the business. A policy helps keeps your business compliant with state regulations. Premium and rates are based on gross employee payroll and the class codes used to classify job duties and the nature of the business.

Each state has their own laws and requirements that guide the legal system and define how coverage works. State insurance regulators establish the rules and determine how much and how long insurance companies must pay for claims related to workplace injuries.

Exclusive Remedy

The exclusive remedy provision protects business owners from being sued by an employee for work-related injuries when business provides coverage under a workers' comp insurance policy. This doctrine limit the legal options of an employee except under narrow circumstances where the business was grossly negligent. All states now have exclusive remedy provisions that apply to their workers' compensation statutes.

The meaning behind the exclusive remedy clause is to force a compromise between employers and employees. Employees give up the ability to win large suits against employers in order to receive fast and limited financial return. Employers exchange liability regardless of fault, for legal protection from potentially devastating tort judgments in court.

In some instances where gross negligence is likely, most states will allow legal proceedings against employers regardless of exclusive remedy rules in the state.

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Who Pays for Workers Comp Claims?
The insurance company pays all the costs for all claims unless the policy specifically lists a deductible. Most policies are first dollar cost which means deductible do not apply. There are no limits to the amount of money an insurance company may have to pay for medical costs and rehabilitation. Wage-related payments are capped around 66% of the employees' average wages. Each state has payment schedules associated with long-term disabilities and death benefits.

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  • Business details, locations, FEIN or SSN
  • Estimated annual payroll and job duties- class codes
  • Claims info or loss history- if applicable
  • Experience Modification Rate- if applicable

How Does Workers' Comp Work in Each State?

Workers' compensation is managed separately by each state. Our agency helps business owners find more affordable employers liability and workers' comp insurance by shopping your coverage with companies that offer lower rates and more policy credits for your business class codes.

Private insurance companies have different appetites and underwriting guidelines depending on their performance in each state. Workers' comp rates and pricing can vary tremendously from one carrier to the next. We're here to help you find the very best deal on coverage in your state.

If you have questions about your coverage or you think you might qualify for lower rates, contact one of our Specialist for a free no-obligation policy review. Talk to an expert at 1-888-611-7467 M-F, 8-5 CST.

Visit NCCI for more resources and information about workers' compensation class codes. Visit United States Department of Labor for more information about government agencies managing workers compensation insurance rates.

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