Workers’ compensation insurance is defined as small business insurance that provides protection for employee injuries and illnesses, and limits liabilities for business owners.
How workers’ compensation protects your business
Workers’ compensation insurance provides a nonjudicial alternative for employees seeking compensation for their work-related injuries or illnesses. Instead of having to defend yourself in court, you can use workers’ compensation insurance to pay for the costs resulting from an employee job-related illness or injury. These include:
- Hospital and physician services
- Prescription drugs
- Rehabilitation therapy
- Lost wages (when a disability prevents employees from returning to work)
- Legal expenses (if an employee sues you for the incident)
- Death benefits for surviving family members if the employee dies
However, workers’ compensation insurance does not cover injuries or illnesses resulting from an employee:
- Attempting to commit suicide
- Deliberately violating company policy
- Engaging in non-work activities
- Participating in illegal activities at work, such as drug use or embezzlement
Small businesses in almost every state must have workers’ compensation insurance if they have any employees. By definition, they are eligible for coverage within their state.
Firms that work in risky industries, especially those with a high number of workplace injuries or illnesses, will likely be considered undesirable underwriting risks. This means the workers’ compensation insurers or state workers’ compensation funds will charge a higher premium to cover what likely will be a large number of future claims.
Small businesses that are uninsurable can turn to a state workers’ compensation placement facility or pool, whose losses are then subsidized by the state’s insurance industry.
Who needs workers’ compensation insurance?
States have different requirements for workers’ compensation coverage. All states except for Texas require their small businesses to carry workers’ compensation insurance, but some firms are exempt from this rule.
How do the exemptions work? Some states tie their requirements to the number of employees. California and Illinois, for instance, make small businesses buy workers’ compensation insurance when they hire their first employee. Others, such as Florida and Tennessee, mandate coverage when a business hits a higher employee threshold. In other states, the requirement kicks in at a certain payroll dollar value.
In most states, sole proprietors and general partners within a partnership are exempt from buying workers’ compensation insurance unless they want to for themselves.
The following industries have an especially strong need for workers’ comp protection if they have employees:
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