WORKERS' COMPENSATION INSURANCE

Workers' Compensation is a safety net for people who get hurt or sick because of their work. Its benefits can cover medical bills and replacement wages during the time an employee can't work.

Modern Workers' Compensation emerged in the early 20th century as part of a "grand bargain" between business owners (who were tired of being sued by injured workers) and workers (who were tired of being injured).

At its core, it works like this:

  • Employers pay into a fund.
  • If an employee gets hurt, they're eligible for benefits from that fund.

Nobody gets sued, nobody gets blamed, and the employee is able to get healthy and return to work — everybody wins!

Of course, that's just the big picture. The nitty gritty is a little more complex.

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What Is Workers' Compensation Insurance?

Think of Workers' Compensation as an airbag for your business. When something goes wrong, it deploys to minimize the damage. Specifically, when an employee gets hurt or sick because of their job, Workers' Compensation benefits can pay for medical expenses and replacement wages.

If that sounds like a luxury your business can't afford, take note: Workers' Comp is the only type of business insurance that businesses are legally obligated to carry. While the specifics vary by state, nearly every state requires businesses with employees to have this coverage.

In the long run, that's probably a good thing for your business. We all like to think nothing bad will happen, but a single slip-and-fall accident or case of carpal tunnel syndrome can lead to thousands of dollars in medical expenses. It's much easier to pay for those with an insurance policy than your business bank account.

When an employee gets hurt or sick because of their job, Workers' Compensation benefits can pay for medical expenses and replacement wages.

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What Does Workers' Compensation Insurance Cover?

Workers' Compensation Insurance may cover…

  • Medical bills for employees hurt or sickened at work.
  • Ongoing care, including rehabilitation.
  • Wages missed while recovering (often partial).
  • Employee lawsuits over injuries (through Employer's Liability Insurance).
  • Funeral expenses, if an employee is killed on the job.
  • Death benefits to support the deceased's family.

It does not cover…

  • Third-party lawsuits.
  • Lawsuits over professional errors.
  • Wages for a replacement worker.
  • Parental leave benefits.
  • OSHA penalties.

Here's an idea of how your Workers' Comp coverage might work:

Say an employee is hurt when a shelf collapses in your stockroom. Your Workers' Comp policy could cover her medical bills and the wages she misses while she's recovering.

It could not cover…

  • The cost of hiring someone to replace her while she's out.
  • OSHA fines, if your stockroom wasn't up to code.
  • Repairs and updates to bring your facility up to code.

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What Is Employer's Liability Insurance?

Also known as "part two" of Workers' Compensation, Employer's Liability Insurance comes in handy if an employee sues your business over their injury.

"But wait," you're thinking. "Workers' Comp benefits exist so employees don't have to sue me… right?" Essentially, that's correct. But remember: Workers' Comp laws differ from state to state. This matters because…

  • Workers' Comp benefits only cover what the state requires them to cover.
  • In some states, certain types of workplace injuries and illnesses may not be eligible for Workers' Comp benefits.
  • For ineligible injuries, employees may sue employers to cover their medical bills.
  • Employer's Liability Insurance may pay for the cost of those lawsuits.

Curious about what the laws are where you live and work? Check out our guide to Workers' Compensation state laws.

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How Much Is Workers' Compensation Insurance?

Because coverage requirements vary by state, the cost of Workers' Compensation depends on where your business operates. Other factors that affect your rates include…

  • The number of employees you have.
  • The type of work your employees do.
  • Your claims history.
  • Your industry.

Like all insurance, Workers' Comp is priced based on risk: riskier industries and jobs are more expensive to insure than less risky ones. To make sure prices are as fair as possible, they're determined by classification codes: each type of work has a unique code.

One way to save money on your Workman's Comp policy is to make sure you've classified every employee correctly. The secretary for a construction firm, for example, will have lower rates than the bricklayers.

For a breakdown of Workers' Comp costs in the United States, see our Workers' Comp Insurance Quote Analysis.

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Who Needs Workers' Compensation Insurance?

Not to sound like a broken record, but Workers' Comp requirements are outlined by state law, so your needs depend on where you operate. Generally, though, business owners are required to carry coverage when they hire their first full- or part-time employee.

In most states, business owners aren't required to carry coverage for independent contractors, freelancers, or consultants. But keep in mind that an auditor might use the "duck test New browser window icon." to determine whether someone you consider an independent contractor is, in practice, an employee.

This becomes a problem because, if you don't carry Workers' Compensation when you're supposed to, you could face fines. For more on the employee / contractor distinction, see the SBA's page Hire a Contractor or an Employee? New browser window icon.

One final note: In some states, Workers' Compensation Insurance can only be purchased from a state-run fund. Insureon cannot quote you a Workers' Comp policy if your business is based in North Dakota, Ohio, Washington, or Wyoming.

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